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Govt can make up to Rs 900 bn by privatising PSUs

The government can raise over Rs 450 billion to Rs 900 billion by selling half of all the shares in the non-strategic profitable public sector units without affecting society at large.

This was stated in a white paper issued recently by the Bombay Chamber of Commerce and Industry on restructuring public sector units. The white paper suggested ways to the federal government to raise resources for achieving the social and economic goals by redeploying and revamping the state enterprises.

Based on a study carried out by a leading management consultancy firm, the Business Consulting Group, the white paper recommends classifying the country's 241 PSUs into 40 strategic and 201 non-strategic units.

A PSU holding company should be set up to nurture the 40 strategic PSUs which shall remain in the government fold. These units have defence implications or focus on technology/processes which the government would like to protect from exposure to foreign/ private firms of governments, says the white paper.

Such strategic firms may be into socially-relevent schemes in which the private sector is not keen to invest in, or may be producing such goods or rendering services where a lack of government ownership may lead to exploitation, or which are essential for the development of the country but is unable to attract private, domestic or foreign, investment.

The holding company suggested is on the lines of Temasek Holdings Pte Ltd of Singapore, fully owning enterprises and utilities like the Development Bank of Singapore and Singapore Port.

The option suggested for non-strategic PSUs is setting up of a Disinvestment Commission having statutory powers and not merely being an advisory body. It should be responsible for divesting partly or wholly the government's investments in profitable non-strategic PSUs and wholly in loss making non-strategic PSUs within a specific period of time and to cease thereafter.

The Commission's role will be to recognise the need for it to restructure the capital of some companies, write-off debt or recapitalise equity, unbundle operations to make these units viable for sale.

The aim will be to privatise the management or ownership or both of these companies. The advantage of privatising management will be to to relieve the government of the responsibility of managing competitive and non-strategic businesses and to enable the PSUs to maximise their performance by providing freedom to adopt effective and flexible management strategies to compete in the market.

Privatising the ownership will enable the government to get back investments in non-strategic businesses made in the past at the full current value for redeploying in priority areas, restructuring or raising capital, besides making the management more accountable for performance.

The restructuring of such units becomes more vital as even Disinvestment Commission Chairman G V Ramakrishna has said the government will lose hundreds of millions of rupees if it does not restructure public sector enterprises prior to selling any stake in them.

According to the paper, privatising can take place by logically unbundling the PSUs into saleable business units. Moreover, 51 to 74 per cent of the stake in well-managed and profitable non-strategic PSUs not dependant on subsidies or administered pricing should be sold through a public issue and the balance be auctioned to a mutual fund or private business group with a track record, the minimum price being fixed on the basis of valuation.

Recently, Ramakrishna has suggested the strategic sale of PSUs implying the transfer of ownership and management of the concerned PSU to private parties.

The Disinvestment Commission should be given enough teeth to carry out its functions without political pressure, the white paper says.

If the government feels that some industry need to be regulated, it is free to set up a regulatory framework applicable to all companies in the concerned industry, the paper adds.

According to the study carried out by the Business Consultancy Group, 95 non-strategic profit-making companies have a net worth of Rs 701.42 billion and an equity base of Rs 336.92 billion, of which the government holds Rs 319.66 billion. The earnings per share of these enterprises stood at Rs 2.63 in 1994-1995.

Assuming that the performance of some PSUs can be improved before sale, resulting in an average earning per share of 4 and a p/e multiple of 7, these shares could be worth Rs 895.04 billion, the study says.

The white paper says that loss making non-strategic PSUs should not be allowed to remain a big drain on the economy and sale of some may raise significant resources and creation of jobs.

According to the study, if 50 per cent of the jobs are terminated as a result of disinvestment and closure, 436,000 jobs will be lost. The study estimates the voluntary retirement scheme will amount to Rs 130.80 billion (Rs 300,000 per head to be paid in instalments).

The study further says that these loss-making enterprises lost Rs 47.75 billion in 1994-95 itself. Assuming the cost of funds to be 12 per cent, the paper opines that this drain can be extinguished once and for all if the one time cost is less than Rs 400 billion.

Paying VRS to the workforce is a cheaper alternative for the government and the unemployed as the result of the closure will be felt elsewhere with new jobs continuously created in a growing economy and the retrenched people being be re-employed.

Fifty per cent of the employees in the loss-making units and 10 per cent of the employees in non-strategic profit making units may have to be displaced during the course of revitalising some of them before disinvestment, adding 85,900 VRS cases to the 436,000 likely to be displaced by disinvestment, hiking the VRS bill to Rs 156.57 billion, which is simply the cost of losses of the loss-making units for 3.3 years.

According to the white paper, the restructuring of PSUs is necessary since even after the government invested Rs 3,000 billion in the equity capital of the PSUs and in the assets of departmental enterprises, the return on capital employed of the 201 non-strategic units is a deplorable low of 8.5 per cent. Besides, these units comprise 65 per cent of the capital employed and 85 per cent of the workforce.

The study arrives at the amazing finding that if there is an improvement on the rate of return on capital employed to a modest level of 20 per cent per annum, it could wipe out the entire annual budgetary deficit.

The resources raised by the government through disinvestment can be directed towards building infrastructure, capital expenditure, on education and health, and retraining of retrenched labour and retiring high cost debt.

The paper concludes that implementation of the recommendations suggested will lead to a vibrant, profitable, and professionally-run public sector in all strategic areas, improvement in quality assets of bank lending to PSUs and savings of over Rs 50 billion for the government as there won't be any loss-making PSUs. It will enable the amount so saved to be utilised for payment cost for VRS in three years.