Privatisation: Mid-Wifing the privatisation revolution

PRIVATISATION
Mid-Wifing The Privatisation Revolution

With the GOI deciding to exit 20-odd PSUs--including MUL, VSNL, & MTNL--this fiscal, the question on everyone's lips is: how will the disinvestment move fare? A BT critique.

By Seetha & Ashish Gupta

Interview with Arun Jaitley

To a casual observer, the Government of India's (GOI) disinvestment effort would seem to be going all over the place. After all, the Department of Disinvestment (DOD) is spread out over three different offices. The articulate lawyer-turned-politician minister of the department Arun Jaitley, who also doubles as the Information and Broadcasting Minister, works out of the I&B Minister's office in Delhi's Shastri Bhavan; three senior officials sit a kilometre away in the North Block; and the Disinvestment Secretary Pradeep Baijal works out of an office 10 kilometres away. But if you think this means the disinvestment process is unfocused, perish the thought. For Jaitley and his three-member team are mid-wifing the most ambitious privatisation programme in the country.

On the block in this fiscal are 20-odd public sector undertakings, including some of the government's blue-chip corporations like India's largest car-manufacturer, Maruti Udyog Ltd (MUL), the long-distance telecom monopoly, Videsh Sanchar Nigam (VSNL) and the basic telephone services giant Mahangar Telephone Nigam Ltd (MTNL). Other profitable companies include IBP, Engineers India, and the State Trading Corporation (STC). Of course, there are others whose fate has been hanging fire for years: Indian Petrochemical Corporation Ltd (IPCL), India Tourism Development Corporation (ITDC) and Bharat Aluminium Co. (BALCO). These are expected to rake in between Rs 9,500 crore and Rs 13,500 crore respectively.

That's Rs 3,500 crore more than Finance Minister Yashwant Sinha's budgetary target of Rs 10,000 crore. It's a daring goal, considering that the GOI has met its disinvestment targets only once in the past five years. And even that was achieved by getting the oil companies to buy into each other (see The Chronology). Last year, the government got a measly Rs 1,479 crore-less than 15 per cent of the targeted Rs 10,000 crore.

Since 1991-92, when disinvestment was first flagged off, the GOI has mopped up only Rs 18,288 crore. The process was marked by creeping sales of PSUs' equity in the domestic and international market. The sale of Modern Foods to Hindustan Lever for Rs 105 crore (no big deal by itself) marked the shift to privatisation through strategic sales.

But can the Disinvestment Minister Arun Jaitley bring in Rs 13,500 crore this year? He won't confirm the figure, preferring to expound on the benefits of privatisation (See ''Divestment Holds The Key To Economic Rejuvenation''). But it's certainly going to be a tough call. Admits Pradeep Baijal, 56, Secretary, Disinvestment Department: ''The trouble is all government departments say it should be done, but leave me out.''

Aware of the enormity of the task, Jaitley and his four-man team are going about their work systematically, charting out the future course of privatisation step by step. Says Jaitley: "Everything must be a part of a pattern.'' Apart from the programme for this financial year, the department is also working on a three-year plan, which is expected to draw up a phased withdrawal of the government from various sectors.

The Empire Strikes Back

That's proving to be a difficult task, with Cabinet ministers refusing to let go, insisting that their fiefdoms are of strategic importance to the country. Perhaps the most ingenious of arguments comes from Petroleum Minister Ram Naik, 66: ''One must not forget the fact that all these private companies were nationalised because they did not co-operate with the government during the 1971 war. Just imagine what would have happened had the oil stocks not reached Kargil during the war.'' The signal is clear: stiff opposition to oil sector disinvestment.

Heavy Industries Minister Manohar Joshi argues that it is the government's responsibility to generate jobs since the private sector cannot always be relied upon to do so. Says Joshi, 66: ''I fully support the government's move on disinvestment so long as the workers' interests are protected.''

Joshi is also expected to block the proposed privatisation of Maruti. Though he won't confirm the news, he's opposed to the idea. ''I will cross the bridge when I come to it,'' he says. Indeed, the Maruti sale will be a highly emotional issue which will see the saffron brigade joining hands with the red army. Says Jagdish Shettigar, 52, the head of the party's economic cell: ''Why do we need to disinvest in Maruti? It is earning profits for the government.'' If you thought privatisation of profitable PSUs was going to be easy, think again.

Compounding the problems are the regional satraps protesting about PSUs in their respective states being sold off. Well-known examples are Andhra Pradesh Chief Minister N. Chandrababu Naidu protesting against the proposed privatisation of Rashtriya Ispat Nigam and Railway Minister Mamata Bannerjee doing the same with BALCO. But another Cabinet minister makes light of this problem: ''It's all posturing, they don't understand the implications.'' Skillful political management is the need of the hour and Jaitley is adopting a two-pronged strategy to defuse the opposition to disinvestment: hammer home the logic of privatisation with incontrovertible facts and sugarcoat the bitter pill with sweeteners.

Spoonfuls of Sugar

Sinha's announcement, in his Budget:2000 speech, that the government could reduce its stake in PSUs to below 26 per cent invited criticism that the GOI was failing to protect public and employee interests. That's when the GOI decided to take a leaf out of Britain's privatisation manual and opt for the golden share route. The proposal involves an amendment to the Companies Act allowing the government to retain a say in privatised psus through the shareholders' agreement.

The departments of disinvestment and company affairs are working on the modalities of the 'golden share'-whether the government should retain a certain percentage of shares in a company or just keep an extraordinary power to modulate the company's future performance. The share will be a purely temporary provision so that it doesn't make the PSU less attractive to potential bidders. Former chairman of the Disinvestment Commission G.V. Ramakrishna, 70, however, feels investors will be suspicious of the share. ''They will wonder which politician will operate the share in the future and be apprehensive about how public interest will be defined to interfere in the management of a company,'' he asserts.

It is to avert this danger that the Department of Disinvestment is also evolving well-defined criteria of 'public interest' to decide on the industries where the golden share will be retained. Says a Department of Company Affairs (DCA) official: ''The golden share will not be used in all privatisations, only in those where strategic or public interest is involved. It certainly won't be used in the case of hotels.''

To break down employee resistance to privatisation, the Department Of Public Enterprises (DPE) has announced an attractive Voluntary Retirement Scheme (VRS) package and is working on an Employee Stock Options (ESOPs) scheme. The scheme reportedly involves offering up to 10 per cent of the stocks to employees. The government is considering setting up a trust to manage ESOPs to avoid heavy selling in the market.

Trade unions, however, aren't too impressed with all this. H. Mahadevan, Deputy General Secretary of the All India Trade Union Congress, says the government must concentrate on retraining workers instead making payouts which are squandered away by employees.

The Bureaucratic Log-Jam

But political opposition may turn out to be the least of Jaitley's worries. Bureaucratic hurdles will prove bigger stumbling blocks. Points out Ramakrishna: ''The implementation machinery is not market-savvy. Things take years to happen.'' Take the case of the appointment of the global financial advisors, who will handle the nitty-gritties of the sale. The file has to pass through several tiers of inter-ministerial consultations, leading to inordinate delays. For the past six months, the Disinvestment Department has been demanding that it be allowed to issue the mandate letter after just one level of consultations but to no avail.

As a result, there are seven cases where global advisors have yet to be appointed. ITDC is the best-known example. Two years back, HSBC had been appointed to handle the sale. It proposed a change in the terms of the sale. Its contract was cancelled and till today, there's no word on another global advisor. Two years after investment bank Jardine Fleming India Securities was chosen as the global advisor for the balco sale, it is yet to get its mandate letter. An executive in another investment bank doubts whether the government can meet its target. Says he: ''Even if mandate letters are given in June-July, the process can't be finished by April, 2001.''

Baijal talks about a 10-month deadline for privatisation. But even officials don't believe it can be done. A Planning Commission official points out that feet-bureaucrats drag feet while giving information on companies, slowing down the process.

Red tape also hampers flotation of shares at the right time. The price has to be cleared by the core group on disinvestment, as a result of which precious time is lost. The history of disinvestment is replete with instances where public issues had to be withdrawn or shares sold cheaply all because of wrong timing. Says Bharti Gupta Ramola, 41, Executive Director, PricewaterhouseCoopers: ''They must develop a programme and divest on a regular basis. They should get generic clearances from the core group.''

The Right Strategy

But even after defusing opposition and eliminating red tape, will the government meet its revenue targets? Experts feel the government should follow a mix of strategic sales and flotations. Asserts Munesh Khanna, 38, Country Head (Corporate Finance), Arthur Andersen: ''It has to be a big-chunk strategy now.''

There's a problem, though, with large flotations of PSU shares. Laments a senior government official: ''No one is interested in PSU shares. The price of PSU scrips is horrifying.'' That's a valid argument. When the government offloaded 39.19 per cent of its shares in 1992, the scrip was traded at Rs 321. It's price is now down to Rs 17. The reverse argument: the prices of certain new-e PSUs like VSNL and MTNL, and even utilities like GAIL, are not representative of their fundamental strengths due to government control.

It doesn't help, in such situations, the government sends out contradictory signals. Take the case of the Indian Oil offering in March, which had to be withdrawn when the price plummeted after Naik publicly ruled out oil sector disinvestment ahead of restructuring. In the case of strategic sales, companies need to be dressed up to get the right value, but the government doesn't seem to have developed a consistent policy. Indeed, in the case of Air India, the Disinvestment Commission had recommended an equity infusion of Rs 1,000 crore, but the government is leaving it to the global advisor to decide. Asserts Ramakrishna: ''Restructuring specific to each company is essential for efficient privatisation.''

With all these problems, there is serious doubt about whether the government can manage to get even the budgeted Rs 10,000 crore, let alone Rs 13,500 crore. But Planning Commission member Montek Singh Ahluwalia holds out some consolation. Says Ahluwalia, 56: ''Even if there's a shortfall in budget targets, the more important issue is to demonstrate that the process of privatisation via strategic sales has actually got off the ground.'' It's advice that Jaitley would do well to heed.

-Additional reporting by Biju Mathew, E. Kumar Sharma, Naagesh Ayyagary, Rakhi Mazumdar, & Suveen K. Sinha

''Divestment Holds the Key to Economic Rejuvenation''

As a lawyer and a spokesperson for the Bharatiya Janata Party (BJP), Minister for Disinvestment, Arun Jaitley, 47, who also holds the Information & Broadcasting portfolio, has handled several difficult situations. But none of his assignments would have prepared him for the convoluted process of extricating the government from sundry businesses. In this interview with BT's Seetha, the normally forthright Jaitley holds forth on the conceptual framework of disinvestment, but clams up on specifics. Excerpts:

Q. The government seems to be getting aggressive on public sector sell-off...
A. Sell-off is a wrong phrase. Disinvestment is a process of revival and rejuvenation. It's a positive process.

It's still not clear what drives disinvestment. Is it the need to plug the deficit or the belief that government should get out of certain businesses?
I don't think plugging the deficit is a reason. The disinvestment proceeds are used for retiring public debt and for the social sector. We privatise to withdraw national resources locked in business, and substitute them with private investment. We privatise to eliminate bureaucratic attitudes. Privatisation also enables sick companies to turn around, thus saving a lot of jobs. It also distributes the holdings of state enterprises among the people.

There is a lot of confusion around the disinvestment process. Companies are identified for disinvestment and then withdrawn.
I don't think there is any confusion. Deferment may also be for commercial reasons, not just political ones.

Are all cases of deferment devoid of politics? What about Rashtriya Ispat Nigam and Indian Oil?
Indian oil (IOC) was a case where one of the principal reasons for holding back the 10 per cent flotation were market conditions. Certainly, disinvestment is a political exercise. You need a consensus. When you have two alternative viewpoints, they may not be about whether to disinvest or not. They may be on modalities and timings.

Has the government got a plan for different sectors?
No. Consultations are on in this regard.

Does the oil sector figure in the consultations?
Well, the government is yet to take a final decision.

Successive governments have faced criticism on valuation of PSUs. How are you planning to address that?
Firstly, the values are dictated by the market. Secondly, there are established methods of valuing shares worldwide. Critics, without understanding these basic facts, start comparing values on the strength of valuation of immovable assets. Asset value is a relevant consideration. But there are other considerations: the liabilities, the Voluntary Retirement Scheme (VRS) benefits payable, the investment required for modernising the plant, the time it will take the company to start earning profits, and the anticipated profitability per share.

The government is working on the golden share concept. Won't that put off interested buyers?
We are examining its possibility and legality. Value is an important consideration, but the best-value principle gives way to the larger public interest in some cases.

Will that not make the PSU less attractive to the buyer?
Well, in countries where it has been tried out, this did not happen.

Are the attractive VRS and ESOP packages merely meant to ward off criticism that employees' interests are not being looked after?
I would look at it in a more positive manner. I think ESOPs are a method of sharing corporate wealth. Additionally, it serves the purpose of adding to the social security net.

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