Do or Divest!

With a disinvestment target of raising Rs.72,000 crore this fiscal, the government is all set to rule Dalal Street with Rs.18,000 crore worth of Initial Public Offerings (IPOs).

Prime Minister Modi made a pledge to American investors almost two years ago that ‘the government has no business to do business’. But India still has 235 Central Public-Sector Undertakings (PSUs), of which 7 are ‘Maharatnas’, 17 are ‘Navratnas’ and more than 70 are ‘Miniratnas’ – the crown jewels of India’s socialist legacy. There are also over 1,000 PSUs in state and municipal hands. It is high time we cleaned up this expensive legacy. But how to do this and what approach to take towards them is not so straightforward, given the vast network of vested interests that are keen on their perpetuation.

The UPA-1 government which came to power in 2004, dependent on the communists, did not try to privatise PSUs, but a few were shut down. Erstwhile Prime Minister Manmohan Singh explained his constraints quite clearly, ‘We are a coalition government, and that limits our options in some ways. Privatisation happens to be one such area.’

The UPA-2 regime brought back disinvestment with the intent to raise revenue, and the share of private equity in total equity (in all PSUs combined) jumped from around 4 per cent in 2008-09 to over 9 per cent by 2013-14.

According to a report on Public Sector Undertakings by the National Institute of Public Finance and Policy, almost half the PSUs were making losses in the 1990s, but with the period of high growth from 2002-3 onwards and better MoU’s (performance contracts) applied to many more of them, as well as greater private equity, the number of loss-making PSUs declined to about a quarter of the total. (Refer to ‘Growth of Public Sector Undertakings and Performance Contracts’).

But since then and especially once growth slowed down after 2012, the share of loss makers has increased again to almost one-third of the total. Profitability of the PSUs, measured here by profits over total sales, has also increased from an abysmal level of 2 per cent in 1990-91 to around 3 per cent by 2000-01, then peaked at almost 9 per cent between 2003-4 and 2006-7 and has since fallen to between 5-6 per cent.

Public Spending
Looking back, the year 2016-17 saw the government go on a spending spree. According to numbers from Projects Today, as of December 2016, the Central government has spent Rs 3.88 lakh crore on 2,195 projects (across sectors), contributing 46.08 per cent of the share of countrywide spending.

Various state governments, which own 4,329 projects, have spent Rs 2.53 lakh crore with a total share of 30.13 per cent. Cumulatively, the Centre and states have spent a whopping Rs 6.41 lakh crore, up by 34.61 per cent from the previous figure of Rs 4.76 lakh crore.

Zooming into some key infrastructure segments, from April to December 2016, 275 projects worth Rs 1.27 lakh crore were commissioned in the country. However, a major portion was spent on sectors including electricity and non-conventional energy, followed by utility services (water pipelines, water, sewage effluent treatment, transport, roads, railways, airways and shipping infrastructure).

The former saw spends of Rs 78,000 crore, whereas the latter witnessed Rs 39,957 crore; both contributing heavily to India’s economic growth with a maximum share of 92 per cent. Meanwhile, mining activities have contributed significantly to India¦s economic activities with Rs 4,922 crore.

In terms of fresh investment, the same period witnessed sectors including water pipelines, water, sewage effluent treatment, transport, roads, railways, airways and shipping infrastructure investing Rs 5.04 lakh crore, up by 78.59 per cent from the previous year¦s figure of Rs 3.83 lakh crore. The transport sector attracted major investments worth Rs 3.97 crore, followed by roads with Rs 1.80 lakh crore, railways with Rs 1.68 lakh crore, real estate with Rs 42,748 crore, irrigation with Rs 42,662 crore and shipping infra with Rs 12,000 crore.

In case of state-wise government-led spending, out of Rs 6 lakh crore, nine states have taken the lion’s share of public spending. For instance, Maharashtra has witness an investment of Rs 96,980 crore in 841 projects, leaving behind its biggest competitor Gujarat which has invested Rs 19,000 crore in 241 projects. Southerns states have also had a major say in India’s project spending. Karnataka, with Rs 68,635 crore (350 projects), Andhra Pradesh, with a total outlay of Rs 38,272 crore (319 projects), Telangana ù with a total investment of Rs 37,964 crore in 338 projects and Tamil Nadu with Rs 34,761 (217 projects) were topping the chart.

In the northern region, Uttar Pradesh with an investment of Rs 64,096 crore (629 projects), Rajasthan with Rs 28.623 crore (307 projects) were seen to be in a dominating position. However, in the eastern region, it was only Odisha with an investment of Rs 30,792 crore (345 projects) which saved the situation for the eastern region, despite a strong geopolitical peer presence from states like West Bengal and Bihar.

Project commissioning
As far as the case of commissioning of projects is concerned, most states were not up to the mark. Consider this: Maharashtra has invested Rs 96,980 crore in 841 projects, but managed to commission only 46 projects worth Rs 26,381 crore. However, with a mere Rs 19,000 crore investments in 241 projects, Gujarat managed to complete 56 projects worth Rs 11,402 crore. (Refer to ‘Progress on Disinvestment (Partial Privatization), 1990-2015’).

Now, looking at the performance of the southern states, Karnataka, which was the leading investment state with Rs 68,635 crore has managed to complete only nine projects worth Rs 18,000 crore. Andhra Pradesh managed to complete just 19 projects out of 319 worth Rs 2,389 crore. In Telangana, invest¡ments were to the tune of Rs 37,964 crore, but it has managed to commission only Rs 7,000 crore. In case of Tamil Nadu, the state has commissioned projects worth Rs 17,930 crore as against the total outlay of Rs 34,761 crore.

Past tensed, future perfect
For 2016-17, the government has met only 66 per cent of its revised plans to raise Rs 45,500 crore through disinvestment.

Volatile market conditions have affected the government’s stake sales ù mostly in commodity and oil stocks.

The government revised its target to raise money through strategic disinvestment for financial year 2016-17 to Rs 5,500 crore, nearly one-fourth of what was budgeted. However, the new revised target could still pose a challenge because the government managed to garner only Rs 2,100 crore by divesting 1.63 percent stake in Larsen & Toubro.

Currently, the value of the government’s stake in four of its strategic holdings – Larsen and Toubro, Axis Bank, ITC and Hindustan Zinc ù is worth around Rs 96,610 crore. In 2015-16, the government was able to raise around Rs 18,400 crore by selling stakes in Rural Electrification Corporation Ltd (Rs 1,608 crore), Power Finance Corporation Ltd (Rs 1,671 crore), Dredging Corporation of India Ltd (Rs 53.33 crore), Indian Oil Corporation (Rs 9,369 crore), Engineers India (Rs 643 crore), and NTPC (estimated at Rs 5,050 crore).

According to India Ratings, if the past is any indication, the FY18 disinvestment target of Rs 72,000 crore is quite ambitious.

However, success of the latest round of disinvestment through exchange-traded funds (ETFs) of Central public sector entities provides some hope.

In his Budget 2017 speech, the Finance Minister said the government would continue its disinvestment policy and will also rely on exchange-traded funds to offload shares. Meanwhile, the government is opting for a safer route – IPOs – by strengthening the equity market which has a deep pocket, but yet to dig out.

As much as Rs 18,000 crore worth IPOs are all set to hit the financial market in this fiscal. The process has already begun with Housing and Urban Development Corporation’s Rs 1,200-crore IPO. (Refer to page 72 for HUDCO’s lending strategies) State-owned Cochin Shipyard Ltd has also filed its draft red herring prospectus.

Several other Central PSUs such as General Insurance Corp of India Ltd, New India Assurance Co Ltd, and Indian Railway Finance Corp Ltd (IRFC) have recently mandated investment banks for their initial share sales. Ten other PSUs are in the process of hiring investment banks for their respective IPOs.

The previous time the government raised such a large amount from the capital markets was in fiscal 2010-11, when it raised Rs 17,970 crore, on the back of Coal India Ltd’s Rs 15,200-crore IPO.

A 10 Year Plan
A 10-year plan to divest at least 50 per cent PSU assets is required. The business of the government is public infrastructure, not public companies. One of the biggest disappointments of 2015 has been the inability to move forward on even the modest targets of disinvestment of Rs 69,000 crore ($11 billion) – especially, strategic disinvestment of Rs 28,000 crore ($4 billion) – out of the total assets of public PSUs estimated at over Rs 30 lakh crore ($500 billion); not included here are the state banks, which have also locked in huge amounts of public capital. In 2015-16 further disinvestment, including strategic disinvestment is proposed.

What India needs is a much bolder plan, over the next 10 years, to divest at least half of the government shareholding, largely through strategic disinvestment. The proceeds, roughly $250 billion, could be parked into the strategic investment fund established recently. If these proceeds are used to leverage private funding of the same magnitude, India could be able to invest an additional $50 billion per year, roughly 2.5 per cent of GDP, in public infrastructure for the next 10 years. Such a plan would be essential as India struggle to fund even modest increases of 1 per cent of GDP in public infrastructure in the budget.

For now, the plan could leave the Maharatnas in state hands -whose total assets are around Rs 10 lakh crore ($133 billion), about one-third of total PSU assets. In any case, the Maharatnas-BHEL, Coal India, GAIL, Indian Oil, NTPC, ONGC and SAIL-are collectively doing well. Their return on capital and return on assets have been higher than those of comparable private firms by 4 per cent and 2 per cent, respectively. However, even in this category, the situation has seen a reversal of trends in the last three years; the private sector has shown a surprising improvement in return on capital and return on assets while the Maharatnas are showing a continuous decline in performance. Moreover, more careful audits of their accounts may be needed to review their performance.

Among the Maharatnas, SAIL, BHEL and Indian Oil need serious restructuring and better leadership. The remaining two-thirds of state assets are Navratna and Miniratna companies. The performance of the 17 Navratnas has been consistently worse than that of comparable private privates, with return on capital roughly 2 per cent lower compared to equivalent private firms. This is the group that should be privatised, especially Bharat Electronics, MTNL, NMDC and Oil India.

A bolder roadmap for gradually getting the government out of the business of business, as promised by the Prime Minister, must be prepared with a hard look at the real economic benefits from some of the profit-making state-owned firms as well. The question to be asked is, are these firms locking up scarce capital to provide employment for a few, or can they become strategic world-class companies?

– RAHUL KAMAT