Halfway through fiscal, is privatisation losing way?

There has been a flurry of activity to push privatisation of PSUs. The Railways’ land lease policy has been revamped by (a) cutting down licence fee from 6% to 1.5% of the market value of land and (b) extending the licensing period from five to 35 years. Eight fertiliser PSUs, including Rashtriya Chemicals & Fertilizers (RCF), National Fertilizers (NFL), Fertilizer Corporation India (FCIL) and Hindustan Fertilizer Corporation (HFCL), have been identified by the NITI Aayog, with the help of Ministry of Chemicals and Fertilizers, for privatisation. Central ministries and departments have been directed to speed up closure of sick PSUs and privatisation of PSUs approved by the Union Cabinet (more than 20 of them). Preliminary bids are to be invited for privatisation of IDBI Bank soon.

Though the Railways’ revamped land leasing policy is couched in terms of infrastructure development – “to implement PM Gati Shakti framework (cargo related activities, public utilities & Railway’s exclusive use)” – the real intent is to facilitate privatisation. The Centre has been trying to privatise profit-making PSU Container Corporation of India (CCI) – 26 of its 61 container depots are on the Railways’ land – and the Railways itself, though in a piecemeal manner, for the past several years without success.

Except for FY18, when the disinvestment proceeds, including strategic disinvestment or privatisation, crossed ₹1 lakh crore mark, the Centre has failed to achieve its disinvestment targets. In FY22, for example, the Centre set the goal (BE) of collecting ₹1.75 lakh crore, then brought it down to ₹78,000 (RE), but the “actual” turned out to be ₹13,530.7 crore – a small fraction, despite the boom in stock markets. Even this amount would have to be revised downwards as privatisation of the Central Electronics Limited (CEL) has been reversed.

For FY23, the budget target is ₹65,000 crore. By September 9, 2022 – half-way through the fiscal – the collection stands at 24,543.67 crore (37.8%). The Pawan Hans deal stands cancelled and the BPCL bid has been called off. This may have led to the urgency. But going by the present state of affairs, privatisation seems to be stuck – both that of fertiliser PSUs and IDBI are more likely to miss this fiscal as the former is at the preliminary stage of administrative clearance and for the later the call for letter of intent (LoI) is yet to be issued.

Lack of due diligence: One step forward, two steps backward

The most worrying part of the privatisation of PSUs is improper due diligence and pricing.

The privatisation of CEL in FY22 was reversed when employees went to court to object to gross undervaluation of this profit-making company working at frontier technologies in defence and space (and hence, of strategic importance to India). The buyer was a minor finance company (unrelated to defence and space technologies), controlled by a furniture and furnishing firm run by a few ruling party members.

The Pawan Hans deal (FY23) was also put on hold after an investigative report revealed that the consortium, to which it was sold, is led by a financial company based in tax haven Cayman Islands, which had defaulted in payment in an acquisition case under the Insolvency and Bankruptcy Code (IBC). The National Company Law Tribunal (NCLT) had sought action against this company weeks earlier. This should have made the tax haven-based company ineligible to bid. The Pawan Hans is the “maharaja” of helicopter services in India, with a fleet of 43 helicopters. It was sold off for just ₹211 crore.

Surely, the empowered ministerial committee approving both the deals needed to do its homework.

That planning and due diligence are given a go-bye is also clear from the way the Centre called off its privatisation plans for profit-making oil PSU BPCL in May this year as bidders withdrew at the initial stage. The Department of Investment and Public Asset Management (DIPAM) issued a statement on May 26 to explain this failure, which read: “However, the multiple Covid-19 waves and geo-political conditions affected multiple industries globally, particularly oil and gas industry. Owing to prevailing conditions in the global energy market, the majority of QIPs have expressed their inability to continue in the current process of disinvestment of BPCL.”

Why didn’t the empowered ministerial committee and DIPAM foresee this? The continuation of pandemic and the Russia-Ukraine war raising crude price and supply constraints are known.

Apart from the “bad” timing the Centre puts the blame on for calling off BPCL bids, privatisation of this profitmaking oil PSU with huge market share is questionable. The oil major’s annual report says, its gross revenue stood at ₹4.3 lakh crore in FY22, its profit before tax (PBT) at ₹11,913.4 crore and its market share at 24.65%. In 2018, the last time an oil PSU, HPCL (also profitmaking), was sold off, it was another oil PSU ONGC which was forced to buy it, for which it had to borrow money (₹24, 881 crore) from market.

Missing logic for indiscriminate privatisation

What is the logic of indiscriminate sale of PSUs? The Centre’s answer, given to the Rajya Sabha in 2021 is: “Profitability/loss of the CPSE is not a relevant criterion for disinvestment…Strategic disinvestment of CPSEs is being guided by the basic economic principle that Government should discontinue in sectors, where competitive markets have come of age and economic potential of such entities may be better discovered in the hands of strategic investor due to various factors such as infusion of capital, technological upgradation and efficient management practices; and would thus add to the GDP of the country.”

That’s in question. First, profitability is a relevant point to consider while selling off public assets. Second, private investment is down for years. Private corporate sector’s gross fixed capital formation (GFCF), the measure of private capex, has fallen progressively from a peak of 16.8% of the GDP in FY08 to 9.2% in FY21 (2011-12 series) and has remained below 12% for the entire decade of FY12-FY21. This fact alone makes the argument for private infusion of capital, technological upgradation ill-conceived.

The only successful privatisation in recent years is that of the chronic lossmaking Air India in January 2022. Having failed to find a buyer for years, Air India was finally sold off to its original owner, the Tatas, after writing off Rs 61,000 crore of legacy debts and other liabilities.

But most PSUs are profit making. The Centre told the Rajya Sabha last year that “171 Central PSUs (CPSEs) are profit making and 84 are loss making as on 31st March 2020” – that is, 67% of Central PSUs are profit-making and hence, PSUs can’t be indiscriminately sold to private sector, which is struggling with investment. In fact, India’s credit growth rides on personal loans, not loans to industry and certainly not to large industry – as Fortune India earlier explained (“Is India’s capex cycle on revival path?”

What happens to the proceeds?

What does the Centre do with the proceeds from disinvestment (minority stake sale) and privatisation (majority stake sale) in any case?

There is no way of knowing it since the proceeds are put in the Consolidated Fund of India (CFI), rather than the National Investment Fund (NIF), which its policy mandates. Ironically, the first two mandates of the NIF, of the seven listed, are: “to ensure that 51% ownership of the Government in CPSEs is not diluted” and “Government shareholding does not go below 51% in all cases where the CPSEs desire to raise fresh equity to meet their Capex programme”.

Now, the Centre is incentivising states to sell off state-run PSUs.

In March this year, the Centre told the Rajya Sabha: “Yes…the Government of India have approved the ‘Scheme for Special Assistance to States for Capital Expenditure for 2021-22’…Under Part-III of the Scheme, incentives to States are provided for disinvestment of State Public Sector Enterprises (SPSEs) as well as for monetisation/recycling of assets of States and of SPSEs”.

Whether this is to force states to go for selling their PSUs to overcome the revenue shock arising out of discontinuation of GST Compensation from July 2022 – which contributed 34% to State GST (SGST) during FY18-21 – is not known but shouldn’t surprise anyone.