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Business Commentary/ Pritish Nandy

Divesting correctly

Last week in Parliament saw the Leftists arguing passionately against the GAIL (Gas Authority of India Limited) divestment strategy followed by the Bharatiya Janata Party government. So well argued was their case that I found myself, even as I sat in the treasury benches, in complete sympathy with them. For the shabby manner in which the divestment was done would have put any self-respecting government to shame.

I am not arguing against divestment. The entire country appears to have already come to the conclusion that the government must exit those businesses where it does not absolutely need to be in.

This means, it must give up running hotels, flying planes, making watches, producing steel at an unprofitable cost, manufacturing drugs and chemicals, providing telephone and Internet connections, making radios and TVs and delivering gas cylinders to our homes at subsidised prices.

Eventually, it will also have to give up its total hold over nationalised banks, terrestrial television and radio broadcasting stations, its amazing railway network, the nationwide postal system and, of course, the much debated area of insurance. In the conviction that private businessmen (with or without the help of foreign strategic investors) can run these services in a better, cheaper and more efficient manner than the government can.

This perception may or may not be entirely correct but there appears to be a national consensus on this. Spearheaded by the media and supported by various associations of Indian businessmen who see in this the perfect opportunity to enter business areas they were traditionally outlawed from.

Also, the process of divestment allows private entrepreneurs a swift and easy entry into areas that were protected and nurtured by the government for decades. It also allows, for instance, profits to be made because, given the mood of the nation and its perception that the government is this huge, lumbering dolt incapable of running anything sensibly, leave alone profitably. There is also a perception that the moment control passes over to private entrepreneurs, the value of the companies will almost instantly perk up, in the expectation that their performance will now dramatically improve.

In other words, the buyers gain. They gain in three ways.

• One, they get easy entry into companies that have, by and large, excellent infrastructure and huge investments already made into them and need only better quality management to either dramatically improve their profits or simply turn them around.
• Two, most of these companies have low valuations at present and the moment they bring private investors in, their stock values will jump, yielding what you could describe as instant profits for those who have bought into them.
• Three, with marginal investments in technology, many of these companies can be magically transformed into world-beaters.

You can well ask why the government did not do this itself. Why did it not find it appropriate to put in some money and technology and quality management itself? The reason is simple: The way the government functions are not exactly conducive to running business.

Particularly in today's cut-throat competitive environment. The best jobs often go to the least deserving people. Political considerations, not ability nor efficiency, determine recruitments and staff strength. Which is one reason why almost all our public sector undertakings are so hugely overstaffed. Add to this irresponsible trade unionism, wide-scale corruption, lack of accountability among top officers, absence of transparency in crucial decision-making areas and political intervention in almost everything, and you will figure out why our public undertakings are in such a sorry mess, why they need to be privatised.

On the other hand, the government desperately needs more money to fund its profligate lifestyle. The budget deficit has again reached most alarming proportions and, to his credit, Yashwant Sinha has been openly cautioning against this. So now, by selling off the family silver, the BJP-led government hopes to augment its revenue sources and set its books right. It was hoping to pick up at least Rs 100 billion this year itself from such sales.

The target is currently way beyond its ability to realise. Hence the urgency in offloading some of these companies. Even at prices that are so absurdly low that people cannot be faulted for suspecting foul play. The pressure is particularly building up because snowballing expenditures (especially on defence) point to a much higher fiscal deficit than the budgeted level of 4 per cent this year.

If Claude Smadja of the World Economic Forum is to be believed, it would well touch 9 per cent. Quite a few states are already deep in the red, unable to even pay the wage bill of their employees, while Kargil has cost us almost Rs 20 billion and the elections another Rs 4 billion. The devastation caused by the cyclone in Orissa is yet to be ascertained in precise financial terms but it is certainly going to cost a bomb to put the state back on its feet. No wonder Sinha has warned that we could well be on the verge of an internal debt-trap.

But the answer does not lie in a distress sale.

The offloading of PSU stocks must be done within the strictest framework of public scrutiny. No government has the mandate to sell off national institutions, some of them of priceless value, built up by the dedication and efforts of millions of proud Indians (and the taxes you and I have paid, at absurdly high percentages of our income) for a song.

The GAIL divestment is a case in point. The shares were sold at Rs 70 to foreign investors when there were investors in India ready to pay over three times that price. Some of those shares were even bought by GAIL's business rivals, Enron (through an associate company) and British Gas.

Admittedly, the purchases were small, too small for these rivals to have a say in the management of the company but big enough for them to keep track of strategy and pre-empt its future moves.

It is not my intention to attribute motives to this sale. But there is absolutely no doubt in my mind that it has been done in a shoddy and unplanned manner, at a price that is shamefully (and indefensibly) low. The government cannot explain why it sold the shares of a company that made a profit of over Rs 10 billion last year for Rs 70 a share when it had only two years ago refused to sell it for Rs 115 because it expected Rs 125 per share.

The stock market today is much better poised to yield a higher price than it was in 1997 when the original sale was mooted. What was the sudden rush for? The company is not bleeding. In fact, it is hugely profitable. Petroleum Minister Ram Naik's argument in the Rajya Sabha that it would have been embarrassing for the government to back off a second time from the sale is specious and misleading. Will you sell off your family jewels at a fourth of their value simply because you were too embarrassed to say no to the jeweller a second time?

What has happened has happened. It is not possible to turn back the hand of the clock. But it is important that the government ensures that all future PSU divestment takes place in a credible, transparent manner. In a manner that we who are sitting in the treasury benches can defend it without looking like a bunch of fools in the process.

For this, what we need is a watchdog body led by people who know how to assess and respect the value of what we have built up over the years with our blood, sweat and tears so that no one feels the nation is being shortchanged.

No one should suspect that the family silver is being sold surreptitiously at the dead of night to those who are offering us but a fraction of their actual price. In that case, even the alliance partners, of the BJP will have no option but to join the chorus of the Opposition and ask for a parliamentary probe.

Pritish Nandy

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