Strategic disinvestment of PSUs: Are we missing the big picture?

LIC Representational image | Reuters

COVID-19 raises the need for a new approach towards the public sector, at least in the strategic sectors such as the pharmaceutical industry which is of vital importance to public health. India can supply medicines to the US, Malaysia and other countries, mainly due to the strategic role given to the public sector in the pharma industry in the 1970-80s.

The pandemic raises concerns over the ongoing privatisation efforts and highlights the need for substantial public investment and subsidies in the economy. It also warrants a re-look at the move to sell off the public sector units (PSU) to raise resources.

Much of the support for privatisation is based on the argument that the performance of public enterprises can be improved by exposing them to forces in product and capital markets. Globally, the experience with privatsation raised a host of concerns about economic, social/distributional and environmental consequences which have eventually broadened the agenda for state-owned enterprises (SOE) reform in many countries.

In a country like India, it is important to put in place measures to prevent exploitation of monopoly power and wider social costs in the privatisation process. This need to play a significant role in the discussions on how to minimise the economic downturn of COVID-19 lockdown and provide a big push to 'Make in India' efforts.

Since 2014, Modi government’s strategic disinvestment approach was to sell minority stakes in public companies to raise revenue, while retaining management control. During the 2014-2019 period, the government raised Rs. 2,79,622 crore from the disinvestment of public sector enterprises (PSEs), compared to Rs 1,07,833 crore collected during 2004-14. However, this has changed now. Recently, five companies were up for 100 per cent disinvestment, including three large profitable companies such as Bharat Petroleum Corporation Ltd. (BPCL), the Container Corporation of India and the Shipping Corporation.

The government is planning to sell 53.29 per cent stake in BPCL—a large profitable company—to a strategic buyer, basically providing the management control to a private party.

The planned disinvestment of these big three is in addition to the proposed 100 per cent sale of Air India, and Industrial Development Bank of India (IDBI). The move towards divesting ownership in strategic sectors will have long term consequences. A diluted public sector would possibly mean that India missing out on the opportunity to capitalise on the global distrust against Chinese supply lines in the wake of the current crisis.

The Life Insurance Corporation (LIC), a largest company in terms of assets, may become the country’s biggest company which serves the pool and re-distributive risks associated with the death of policyholders in millions of households.

Many may wonder about the objectives of these sales, particularly the LIC. There is an argument that listing of LIC will bring in better governance and investment decisions and provide more value for life insurers and benefit policyholders. LIC is a very large social conditioner which serves to the pool and re-distributive risks associated with the death of millions of policyholders. As a major collective savings institution, LIC is a dominant financial intermediary in the country, channeling investible funds to productive sectors. Furthermore, LIC is one of the remaining profit entities owned by the state, and the government is trying to get maximum out of its brand value. The process of listing of LIC in stock exchange my take some time as it involves fulfilling of the requirements specified by SEBI and amending the Life Insurance Corporation Act, 1956.

At present, because of the crisis presented by the pandemic, it is highly unlikely that more than 10 per cent of the shares of the LIC is subscribed, as the market may not be able to absorb more. Although the government will continue to have its control over LIC, the withdrawal of exemptions under Section 80 of the Income Tax Act may result in fewer salaried people opting for insurance policies for the purposes of saving tax which will adversely affect the business of insurance agents.

The timing of the paradigm shift from the strategic disinvestment policy of the government raises questions on the intention of PSE reforms. Is the shift in policy out of necessity to mop up a good amount of resources by selling both profit and loss-making companies PSEs to meet the widened fiscal deficit targets?

There are also wider questions on how much of the resources would be available to restructure and strengthen PSEs. After all, PSEs is not an abandoned concept, they still exist in many countries and have played an important role in shaping the economy. The restructuring of the PSEs needs to have a clear vision and strategy, and definitely have a major role in our our multi-faceted strategy to achieve a $5 trillion economy. The IEG evaluation of World Bank Group Support for the Reform of State-Owned Enterprises (2018) shows an estimated $8 trillion as SOE global revenues, which is equivalent to the combined GDPs of Germany, France and the United Kingdom.

The economic survey suggested a sovereign investment arm on the lines of Singapore’s Temasek Holdings. This is an investment company which owns and manages assets based on commercial principles to create and maximise risk-adjusted returns over the long run. Their portfolio companies are managed by respective boards, and management is based on sound corporate governance principles. Temasek is very different from Singapore government and has the power to make independent business decisions. Furthermore, their support for community programme reflects their corporate social responsibility profile. This sort of organisation is very much needed to bring professionalism to our PSEs. Such an approach will also strengthen the clarity and coherence of objectives of SOEs and protect them from political interference in business decisions.

According to the economic survey, the functioning of PSEs in India is limited by the need to report to a large number of different administrative ministries. So, the wishful thought of building a sovereign investment arm remains to be a challenging dream in the Indian context.

Even after a long period of reforms, the Chinese SOEs still seem to be highly over-leveraged and structurally less efficient than their private-sector counterparts, although the distinction between the two is not as clear as in many other countries. Nonetheless, they are still the main pillar for China’s growth and its holding company SASAC (State-owned Assets Supervision and Administration Commission) competently manages SOEs. Most of the restructured SOEs are legally separate from the government with high standards of corporate governance fabric. SOEs account for 30 per cent of Chinese GDP and their share in the Fortune Global 500 has grown to 23 per cent in 2015, mainly led by the rapid growth of SOEs in China. The Chinese government continues to support SOEs in strategic sectors such as energy, telecom, aviation and defence. SOEs are critical to the strategy of China for the technology catch-up and to carve out a niche in new technology areas.

The Singapore model has completely moved away from the government for business decisions, which may not be possible in China. But in both cases, public sectors have become globalised in terms of their operations. In India, the real question is that whether do we have a genuine concern to improve the public sector or the interest rests with merely raising revenue. It is obvious that SOE boards have struggled to play a leading role in developing a strategy and appointments among others. Moreover, the inability to exercise the authority limits the functional autonomy of PSEs in India. There is a genuine need to strengthen the independence and professional nature of PSE boards.

PSEs can also be used for achieving public policy objectives. For instance, the Kerala State Drugs and Pharmaceuticals Ltd. (KSDP)—reportedly the only state government-run pharmaceutical PSE in India—which was running into loses, was transformed to become profitable last year. Interventions for a turnaround was made keeping in mind the public policy objectives that KSDP can cater to. KSDP is expected to supply drugs that are used in the post-organ transplant treatment at Rs 28 for a day as compared to Rs 250 for day by other companies. Similarly, the proposed oncology park under KSDP will make cancer drugs more affordable to people. Kerala has the highest number of cancer cases detected in India. In 2016, the incidence of cancer was 135.3 per one lakh population in Kerala against 106.6 for whole of India.

Considering the mammoth infrastructure of PSEs in India, there is a scope for developing start-ups using their unspent resources, a useful starting point for many start-ups. PSEs should open their premises for fresh thoughts and new technology. PSEs such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), BPCL and Oil and Natural Gas Company (ONGC), are using this pathway and are strongly involved in supporting the government's ‘Start up India’ initiative. This type of a collaboration would be mutually beneficial to PSEs and our start-up ecosystem.

It would be better for India to learn lessons from the experiences of China and Singapore in using PSUs strategically than simply selling them off. The draft industrial policy 2019, which is not yet made public, aims transformation of Indian industry to take advantage of new technologies. Unfortunately, this draft policy does not have a clear strategy towards this transformation. A major stumbling block is lack of preparedness of Indian industry, which calls for assigning the leadership task to some entity. As we did in the 1970-80s in the pharma sector, leadership role can be assigned to PSEs in selected strategic areas. Success of Indian Space Research Organisation also shows that PSUs can be as competent and play a lead role.

There is a powerful feeling is that the public sector restructuring is not a priority. Most of the decisions were sudden in nature and were carried out in a hasty manner. People expect more transparency and enough consultation with the social partners. Most importantly, most of the sales will lead to uncertainties in the labour market.

Do we have enough expertise both in policy and practice to facilitate positive labour market transitions? The UK is a pioneer in privatisation. Even after a long period of privatisation, there is enough controversy over poor service, high prices and huge pay-outs to shareholders and in many instances muted regulatory bodies too. Although a strong market economy exists in China, the role of the state planning and state-controlled firms are still dominant. Privatisation may be a magic solution to raise revenues, but it is a tamed tiger—the performance depends on how to tame it in accordance to the sectoral policies, strength and presence of the public sector, competency of regulatory agencies and wider political economy compulsions.

With the COVID-19 pandemic, it is time to reflect how to develop a symbiotic relationship between competent public and private sectors to foster India’s potential as an industrial powerhouse.

Thankom Arun is professor at University of Essex, UK; and Reji K. Joseph is associate professor at Institute for Studies in Industrial Development, New Delhi

The opinions expressed in this article are those of the authors' and do not purport to reflect the opinions or views of THE WEEK