Dr Bharat Jhunjhunwala
Oil and Natural Gas Corporation (ONGC) and Oil India have together bought about 10 per cent shares of the Indian Oil Corporation (IOC) from the Government of India for Rs 5,000 crore. The Finance Minister asked them to do so. All three are Public Sector Undertakings under the control of the Ministry of Petroleum. Technically this is disinvestment because the Government has sold its shares. But, in reality, this is only changing hats. This transaction is like putting the share scripts from the left to the right hand. IOC was controlled by the Government before this sale. It will continue to be controlled by the Government after the sale. The only difference is that the Government will now control IOC via ONGC instead of directly.
To be fair, the Government wanted to sell shares of IOC in the market. Road shows were held in Singapore and other countries. But foreign investors did not bite. They were concerned that profitability of IOC may take a dive because it is dependent on whims of the Government. Presently, IOC is selling diesel at subsidised price as directed by the Government and incurring loss on this sale. IOC is not getting fully reimbursed for the burden borne by it. Investors are wary that they may invest in IOC and later the Company may incur losses due to such directives of the Government. Their investment will then become a loss.
The Government is not willing to guarantee that it will not interfere in the workings of PSUs. Thus the market is unwilling to buy the shares of the companies. Yet the Government wants to raise revenues by selling shares of the companies. The solution found was to ask ONGC and Oil India to buy the shares of IOC from the Government. Technically this is disinvestment. Shares held by the Government have been sold. But control over these shares still rests with the Government. Only now the control will be exercised via ONGC instead of directly as done previously.
There is a need to rethink the entire matter afresh. There are four levels at which the PSU reforms can be undertaken. The first and, in my opinion, the best way is to sell controlling stake and hand over control of the PSU to a private entrepreneur as done in the case of Maruti and few other companies. The problem here is that privatisation can be troublesome in sectors where PSUs hold dominant position. We have only recently seen the row over pricing of natural gas. Reliance and ONGC were the only two players. In such situation private players can take the country for a ride. There is, therefore, need to put in place a strong regulator before privatising dominant companies like IOC, Coal India or State Bank of India. Privatisation is best with this caveat because it gets rid of Government interference in working of the PSU. The Government cannot interfere after majority stake is transferred to a private party. At the same time the regulator would ensure that they do not overcharge. The Government is likely to get a better price because the strategic buyer would be willing to pay more for control of the Company. Privatisation, however, has been discarded by the UPA in favour of disinvestment on grounds that the public has a right to own controlling stake in PSUs built with taxes paid by it. The money received from privatisation is still owned by the public. The real reason that UPA has discarded privatisation is that bureaucrats do not want to let go of their control over the PSUs.
Mokshagundam Visvesvaraya, the Dewan of Mysore, formulated the problem well. The role of the State, he said, was not to run industries. That was the private sector's job. However, this did not mean leaving the task to them alone. The State had an active role in supporting the private sector. The starting of new industries called for entrepreneurship and adventure. The private sector suffered from the fear that capital that was invested might be lost. Therefore, says his biographer N. Rao, Visvesvaraya held that the Government must itself start new industries on a pilot basis and hand them over to private hands when successful. This is the model we must espouse.
The second level is to make a separate Ministry of PSUs. PSUs owned by various Ministries will be all transferred to this Ministry. This will drastically reduce the day-to-day interference in their working. The role of the parent Ministry will be limited to providing policy guidelines. For example, Ministry of Coal may direct Coal India Limited to reduce the quantity of production and focus on improvement of quality or vice versa. The Ministry of PSU will be wholly focused on running the PSUs and will hopefully provide better results. This model has been successfully implemented in China. An entity by the name of State Assets Supervision and Administration Commission (SASAC) has been created few years ago. About 200 PSUs owned by various departments of the Central Government have been transferred to SASAC. A post by the Boston Consulting Group says: “Thanks at least in part to SASAC’s efforts, SASAC-controlled companies have achieved substantial performance improvements in terms of both revenues and profits.” Similar centralised Ministries have been formed at the State level to manage all PSUs owned by the respective states. I think we must adopt this model as a second best alternative after privatisation.
Disinvestment stands at the third level. It leads to minority shares being traded on the bourses. That results in the working of the PSU being scrutinised by the investors. For example, the UK-based Children's Investment Fund is a minority shareholder in Coal India Limited with the Government owning 90 per cent. Yet, objections from this fund led to the Government agreeing not to issue any directives to Coal India that would affect its profitability. Such scrutiny by the share market is valuable but, in my opinion, grossly inadequate to put the PSUs back on their feet. The workings of PSUs continue to be enmeshed in bureaucracy and inefficiency prevails as previously.
The fourth, last and least beneficial and, maybe, even harmful level is that of changing hats as has been done with ONGC buying shares of IOC. Such ‘disinvestment’ does not create scrutiny by the share market, does not get rid of the interference from the parent ministries and does not put the PSU in the hands of a private entrepreneur to be run on business principles. The Government must not indulge in more such antics. Ideally we should privatise the PSUs. As a second best, all PSUs must be brought under one Ministry which specialises in this work.
(The author was formerly Professor of Economics at IIM Bengaluru)