Selling Off Sick PSUs: Were they Really Family Silver?

In the brouhaha over Prime Minister Manmohan Singh's government reviving the public sector divestment - or partial privatization - process, the old argument about selling the "family silver" has been revived once again. But the problem is much of the so-called "silver" has been tarnished and a large quantity was never silver in the first place.

Most people tend to forget that the government at one time routinely took over companies on the verge of closure that had been bled dry by rapacious private entrepreneurs. In the absence of any other social safety net for workers, the government used to rescue these companies that were later nationalized and converted into "the family silver". This includes the numerous sick textile companies that were banded together into the National Textile Corp as well as many others in the machinery, chemicals and pharma sectors of the economy. 

Most of these companies are now bracketed in the category of sick companies. In fact an official audit report of 218 companies, out of 419 public sector undertakings under the administrative control the central government, reveals that equity investment in 72 of them have been completely wiped out due to successive losses, eroding their net worth by a staggering Rs.78,665 crore (Rs.786.65 billion/$16.1 billion). 

Yet, the government has the potential to virtually become the country's largest real estate player as the potential sale value of these companies lies in the phenomenally high price of the urban land on which they are located. 

There is another segment of the public sector that also does not fall into the category of family silver or valuable sovereign assets. This would include the whole gamut of industries into which the government ventured at a time when it was felt that the public sector companies would form "the commanding heights of the economy". 

These include hotels and bread factories. The previous National Democratic Alliance (NDA) government of prime minister Atal Bihari Vajpayee sold several hotels, inviting considerable controversy and criticism, with allegations that the companies were hived off for a song. It may well be true that the sale price was far lower than the actual real estate value of these hotels. What is interesting, however, is that this again boiled down to real estate and no one has ever argued that these hotels were well run profit-making institutions. 

No one has ever suggested that they should have been allowed to continue operating efficiently and productively in the service of the Indian taxpayer. It was only in the case of Ashok Hotel -- a landmark in the capital despite the many stories of rats scampering through the corridors -- that it was felt the institution deserved to be given another chance for revival. 

It is the third category of public companies that really come into what can be described as the family silver. It is this group that has never been considered for sale. Well, almost never. Former disinvestment minister Arun Shourie did have a brainwave at one stage of splitting up the Indian Oil Corp and selling it off but this idea was quickly shot down. 

The core group of companies include the strategically important ones in oil refining, power generation, fertilizer and food procurement. Finance Minister Pranab Mukherjee has been referring to these companies when he has been talking about the need for public participation. Sale of even a small portion of equity in these firms will not only raise huge resources at a time when the government is cash strapped, it will also bring about greater public accountability in them. 

The fact is that the public sector is a huge entity in this country. The "one size fits all" policy will not do to tackle its problems. The original Disinvestment Commission headed by G.V. Ramakrishna had done a tremendous job in categorizing these companies according to what was needed to be done with them. 

There were companies completely sick and beyond revival that needed to be sold off. Then there were those that had a chance of revival but needed private sector infusion of funds. And there were those in sectors like hospitality from which the government needed to exit. There were also companies in the pharmaceuticals sector that have been ailing for decades for which numerous revival packages were formulated over the years. 

Unfortunately the privatization process became somewhat tainted when some of the public sector hotels were sold at prices lower than the market price of land. In one case a buyer resold the hotel at a much higher price to another hotelier within six months. The sale of Modern Foods to Hindustan Lever and of Balco to Sterlite Industries also created much controversy though the purchases were considered a good fit for the buyers. 

Hindustan Lever finally resold Modern Foods but not before turning the perennially loss-making concern into a profitable enterprise. On the other hand, Sterlite is now reported to be keen to pump in as much as Rs.70 billion ($1.4 billion) to buy the residual government equity in Balco, the aluminium major. This would come as a great relief for the public exchequer at a time when the fiscal deficit is set to widen to 6.8 percent of gross domestic product in 2009-10. 

In any case, for the time being the government is clearly keen to steer clear of any controversy, with the finance minister even chary of charting out in the budget a road map for public sector divestment. But as days pass, it is becoming increasingly evident that a road map will be unveiled and the target, according to finance ministry officials, could be in the region of Rs.150 billion ($3 billion). 

This can easily be achieved through the painless process of selling limited amounts of government equity through various routes to the public. This will meet the twin aims of raising much needed resources to bridge the fiscal deficit and also provide broader public participation in the ownership of these firms. 

As for selling off sick companies, one can certainly argue that there have been inherent defects in the process in the past. At the same time, this is merely an issue of fixing the right prices for real estate and has little to do with the operational efficiency or productivity of these companies. 

It might be wise for the government to dust off the well researched reports prepared by G.V. Ramakrishna and have a look at them while formulating a sell-off plan. The issue remains a political hot potato with the Left parties all set to cry hoarse about the sale of family silver. They forced the previous UPA government to completely stop the process of divestment. 

There is however, only a limited quantity of public sector assets that definitely need to be guarded and these include those in the core oil and gas sector. But other chronically sick segments of the public sector are merely an albatross around the neck of the public exchequer and need to be disposed of in a pragmatic and systematic manner. 

(Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com)  


More by :  Sushma Ramachandran

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