"Disinvestment is a process of revival

'''Disinvestment Is A Process Of Revival''

Arun Jaitley, the Union Minister for Disinvestment, is quite used to handling tricky problems. After all, he has been a lawyer and a spokesperson for the Bharatiya Janata Party (BJP). But nothing can beat the assignment that he has in his hands now--the disinvestment of 236 Central PSUs. Add to that the thankless job of extricating the government from all the sundry businesses. In an exclusive interview with BT's Seetha, the normally-forthright Jaitley holds forth on the conceptual framework of disinvestment, but clams up on specifics.

Q. The government seems to be getting aggressive on public sector sell-offs...

A. I think sell-offs is a wrong phrase. Because the whole process is really intended to improving efficiency both in the concerned PSU, and also in the economy as a whole. Disinvestment is a process of revival. It's a positive process. Sell-off is not a positive phrase.

Q. It's still not clear what is driving the disinvestment programme. Is it the need to plug the deficit or a genuine belief that government should get out of certain businesses?

A. I don't think plugging the deficit is a reason. The disinvestment proceeds are used for retiring public debt and for the social sector. A non-profitable business creates a budgetary deficit in the first place because you have to plough money into it to get it running.

We privatise to withdraw national resources locked in business, and substitute them with private investment. We privatise to make the economy more efficient. State-run industries, which have functioned in a protected, regulated, and, at times, monopoly environment, find it difficult to respond to the needs of the market. We want our former state enterprises to attract new capital, and modern technologies. We privatise to eliminate bureaucratic attitudes and allow entrepreneurial talents to emerge. We privatise to enable sick companies to turn around and hence save jobs. We also want to distribute the holdings of state enterprises among the people.

Q. There's still a lot of confusion around the disinvestment process. Companies are identified for disinvestment, and then withdrawn.

A. I don't think there is any confusion. Deferment is also for commercial reasons, not political reasons. For instance, we may look at the market at a particular time and find that the market is a little low for a particular share. That may not be the best time to disinvest.

Q. Are all cases of deferment devoid of politics? What about cases like Rashtriya Ispat Nigam and Indian Oil Corporation (IOC)?

A. IOC was a case in point where one of the reasons for holding back the 10 per cent flotation was the market condition. And certainly disinvestment is also a political exercise. You need a larger consensus and therefore you need consultation both inter departmental, as well as between the Centre and the state governments. Sometimes alternative viewpoints may not be about disinvestment but about modalities and timings. Ultimately it is the Cabinet Committee on Disinvestment (CCD) or the Cabinet which is the best judge.

Q. But there are several cases which have been cleared by the Cabinet but nothing much is happening.

A. Once there is a shift in emphasis to strategic sales--the process gets a little long. But it's not fair to say nothing is happening. Global advisors have been appointed in some cases, in other cases they are being appointed, and in some cases the shareholders' agreement is being finalised.

Q. You have been talking about a road-map for disinvestment. What is happening on that front?

A. I have been talking about a road-map for each PSU. This really means that you first determine the eventual destination of the PSU. We ask ourselves the following questions: Is it a strategic area that we don't privatise? Even if it is not a strategic area, is it an area where governmental presence is required as a countervailing force to private sector monopoly? Is it an area where the government can safely withdraw as there are already a large number of private players? How much of it should you give to a strategic partner and how much to employees and the stockmarket? Is it an area where we hold on to shareholding for a reasonable time, watch the performance of a strategic partner before deciding the fate of the residual holding? Or is it an area where we must not go in for a strategic partner but disperse the shareholding, and see to it that there is a professional management in place.

Once you decide on the relative importance of a particular company in a sector and that's the road-map, then you decide the process. This is quite different from just picking up five to ten per cent shares one year, and floating it in the market. All that must be part of a pattern, which in turn, must be dictated by the requirements of that sector.

Q. Has the government worked out a plan for the different sectors? There's no clarity on that.

A. No. Consultations with regard to this are in progress. The March 1999 decision of the Cabinet is very clear that except three strategic areas--nuclear and atomic energy, armaments and railway transport--the government may, at a particular time, pull out of any other.

Q. Is the oil sector one of those areas where consultation is on?

A. Well, the CCD is yet to discuss that. The government is yet to take a final decision.

Q. Successive governments have faced criticism on the valuation of PSUs. How are you planning to address that?

A. Part of the criticism is because of a failure to understand the valuation methodology. Firstly, the values are dictated by the market, everything is sold by a transparent bidding process. In the earlier GDR issues, the prices were determined by a book-building method. Once the prices are determined by a bidding process, there is little scope for discretion. Secondly, there are well known methods of valuing shares, and there are established models worldwide. In order to make sure that the government reaches a value which is equal to or more than the share valuation, the government keeps those values secret after determining them. Thereafter if after the bidding process you reach a higher value then you sell. Otherwise you decide whether to hold it back or sell

Critics, without understanding these basic facts, start comparing values on the strength of valuation of immovable property. They don't realise that you are not selling property, you are selling shares of a running business. Moreover, when you look at property values the important component is the land value. Now, a large part of the land is meant only for industrial use. People always confuse it with commercial or residential use. A bidder will take various factors into consideration, like what are the liabilities, the extent of overstaffing, the Voluntary Retirement Scheme (VRS) benefit that is payable, the kind of investment required to be pumped in for modernising the plant and increasing the capacity, and then how long will it take before the company can start earning profits, and eventually what is the anticipated profitability per share.

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