Disinvestment - Issue of Strategic and Non-strategic Sector


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.


The advocates of disinvestment argue that the public sector should be limited only to strategic areas. The critics argue that the strategic sector has been narrowly defined in India. Even in the USA the oil sector has been considered as a strategic area. But in India the oil sector has not been recognized as strategic; so is also the case of power generation. The oil units and power generation units should be considered as strategic and PSUs in these areas should be managed by the government.



Privatization of profit making PSUs: Government`s policy of disinvesting profit making PSU has also been criticized. The profit making PSUs are like the geese that lay golden eggs and it is unwise to kill these geese. The supporters of disinvestments argue as follows: The rationale for privatising or not privatising a PSU is not based on whether it is making profit or loss but whether it is in a strategic sector or in a non strategic sector, and whether the tax payers` money can be saved from commercial risks by transferring the risks to the private sector wherever private sector is willing to step in and assume such risks.

Valuation of shares of PSUs slated for disinvestment: The procedure adopted by PSUs slated for disinvestment for the valuation of shares has been criticized. Even the Public Accounts Committee (PAC) or the Comptroller and Auditor General (CAG) has criticized that the shares have been undervalued. There is no transparency in the procedure of valuation. Generally the task of valuation is done by an expert merchant banker and the valuation is placed for consideration by a Committee of secretaries headed by the Cabinet Secretary. There is no expert government agency to crosscheck the valuation made by the merchant banker and the parameters used in the process. Moreover, lands belonging to the PSUs have been left completely out of the exercise of valuation on the plea that they do not earn any income and hence they need not be valued. This is clearly unjustified. Critics have rightly commented that the government is selling PSU silver for a song.
 Equity swaps: If the government sells the shares of one PSU to another PSU this is known as equity swap or cross holdings. The question is whether a PSU be allowed to participate in the bids for disinvestment of PSUs? Here again no consistent policy is followed by the government. Earlier ONGC bought 10 percent each of government equity in IOC and GAIL. But when BPCL and HPCL are taken up for disinvestment, the Department of Disinvestment is of the view that cooperative like IFFCO and KRIBHCO should not be allowed to bid for these oil giants. Neither should GAIL or IOC be allowed to participate in the bid. By eliminating PSUs and cooperatives, Department of Disinvestment intends to permit the private sector – Indian or foreign alone to participate in the sale of BPCL and HPCL. The main argument of the Disinvestment ministry is that the sale of a PSU to another PSU goes against the goal of privatization for which disinvestment is only a means.
Utilization of the proceeds of disinvestment: Disinvestment does not necessarily benefit the enterprises in terms of immediate accrual of resources. The proceeds of disinvestment go to the Consolidated Fund of India from which it meets the budget deficit. A basic criticism of the disinvestment policy is that a fund raised by selling family silver is used to pay the butler. On December 9, 2002 due to strong public pressure, the government announced that it would set up a separate Disinvestment Proceeds Funds to provide complete transparency to the government`s commitment to utilization of disinvestment proceeds for social and infrastructure sectors, rather than bridging the fiscal deficit. This is a welcome development. However, care should be taken that since resources become available from disinvestment proceeds, normal funds allocated to social and infrastructure sectors are not reduced. In order to sustain the interest of the enterprises in the process of disinvestment, it may be useful to set aside a certain percentage of the profits – say 10 percent as recommended by the committee on disinvestments – to be given to the enterprises themselves for their own expansion.
Interests of workers and employees: Although the government has announced that interests of workers and employees will be protected and safety net will be provided nothing has been done except providing compensation under VRS. Opportunities for retraining and redeployment have not been developed at all.



Methodology for disinvestment: It has been criticised that the government does not have a clear policy on the methodology of disinvestment. Earlier the government followed the policy of open auction sale. This method gave excellent result in 1994-95 when realization was Rs. 4843 crore against the target of Rs. 4000 crore. But later in 1999-2000 the government has shifted to strategic sale. It has been argued by the disinvestment ministry that the public offer method is dilatory and takes a long time to complete the process of disinvestment. In this context it can be pointed that the public offer method was adopted in countries like UK, France, Germany, Malaysia and others. If the method can succeed in these countries there is no reason to believe that it will not succeed in India. This method is transparent and liable to much less abuse. It is really intriguing that in the case of HPCL and BPCL, the government has adopted two approaches. In case of BPCL it will adopt public offering methodology and in case of HPCL it will adopt sale to a strategic investor. It is indeed strange why there should be two approaches for two companies that are otherwise similar and in the same business. Obviously the public offering methodology has logical superiority over the strategic partner method and the public offering method should be adopted in all cases.



Creation of private monopoly in place of public monopoly: It has been argued by the critics that through disinvestment and privatization the government is substituting private monopoly in place of public monopoly. By accepting Tatas as strategic partners in VSNL and Reliance in IPCL the government has substituted state monopolies with private monopoly. Monopoly, whether in public sector or in private sector, is undesirable but between the two, public monopoly is relatively less harmful than private monopoly because public monopoly is accountable to Parliament but in the case of private monopoly there is no such accountability. Private monopoly is therefore not desirable from the standpoint of efficiency. It is really strange that the government is passing competition law to promote efficiency and restrict monopoly on the one hand and promoting private monopoly through disinvestment on the other hand.



Valuation of shares of PSUs slated for disinvestment: The procedure adopted by PSUs slated for disinvestment for the valuation of shares has been criticized. Even the Public Accounts Committee (PAC) or the Comptroller and Auditor General (CAG) has criticized that the shares have been undervalued. There is no transparency in the procedure of valuation. Generally the task of valuation is done by an expert merchant banker and the valuation is placed for consideration by a Committee of secretaries headed by the Cabinet Secretary. There is no expert government agency to crosscheck the valuation made by the merchant banker and the parameters used in the process. Moreover, lands belonging to the PSUs have been left completely out of the exercise of valuation on the plea that they do not earn any income and hence they need not be valued. This is clearly unjustified. Critics have rightly commented that the government is selling PSU silver for a song.



Equity swaps: If the government sells the shares of one PSU to another PSU this is known as equity swap or cross holdings. The question is whether a PSU be allowed to participate in the bids for disinvestment of PSUs? Here again no consistent policy is followed by the government. Earlier ONGC bought 10 percent each of government equity in IOC and GAIL. But when BPCL and HPCL are taken up for disinvestment, the Department of Disinvestment is of the view that cooperative like IFFCO and KRIBHCO should not be allowed to bid for these oil giants. Neither should GAIL or IOC be allowed to participate in the bid. By eliminating PSUs and cooperatives, Department of Disinvestment intends to permit the private sector – Indian or foreignalone to participate in the sale of BPCL and HPCL. The main argument of the Disinvestment ministry is that the sale of a PSU to another PSU goes against the goal of privatization for which disinvestment is only a means.



Utilization of the proceeds of disinvestment: Disinvestment does not necessarily benefit the enterprises in terms of immediate accrual of resources. The proceeds of disinvestment go to the Consolidated Fund of India from which it meets the budget deficit. A basic criticism of the disinvestment policy is that a fund raised by selling family silver is used to pay the butler. On December 9, 2002 due to strong public pressure, the government announced that it would set up a separate Disinvestment Proceeds Funds to provide complete transparency to the government`s commitment to utilization of disinvestment proceeds for social and infrastructure sectors, rather than bridging the fiscal deficit. This is a welcome development. However, care should be taken that since resources become available from disinvestment proceeds, normal funds allocated to social and infrastructure sectors are not reduced. In order to sustain the interest of the enterprises in the process of disinvestment, it may be useful to set aside a certain percentage of the profits – say 10 percent as recommended by the committee on disinvestments – to be given to the enterprises themselves for their own expansion.



Interests of workers and employees: Although the government has announced that interests of workers and employees will be protected and safety net will be provided nothing has been done except providing compensation under VRS. Opportunities for retraining and redeployment have not been developed at all.




Sunday, 03rd Apr 2016, 08:23:05 PM

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