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Use divestment smartly

R Ravimohan

Over the past few years, the government of India has been pursuing divestment of various public sector undertakings. It has tried various methods to achieve this, each step bolder than the previous one.

The latest round has been particularly effective. It has handed over the reins of important PSUs to the private sector. The previous attempts to sell Indian Petrochemical and Videsh Sanchar Nigam were forgettable disasters.

This marks effectively the reality and realism of the government's programme of divestment. Cumulatively through this programme, the government has crossed many important milestones.

It has been able to hand over sensitive units to leading private sector companies. Readers may recollect the unsavoury controversy surrounding the disinvestment of IPCL last time. The government has just been able to curb its natural instinct to wield control over disinvested entities, as demonstrated in the case of VSNL.

It has been able to secure good value for its holding, as evidenced by the premium it obtained both in the case of IBP and IPCL, over their respective market prices. On the other hand, it has displayed practical sense by letting go of Paradeep Phosphates below the reserve price.

It has been able to establish fairness and transparency in the latest bidding rounds, as evidenced both by the lack of any challenges, and by the wide disparity observed in the prices bid by the contenders. It has demonstrated its ability to tackle the vexatious dichotomy between the Centre and states, as seen in the Balco case. It has also learnt the rights and the wrongs of the process, for instance in the Air-India case, which had many value-busting conditionalities.

The cumulative proceeds of the disinvestment over the past few years have totalled over Rs 260 billion. However, at current prices, the total market value of the present government holdings in all the PSUs whose shares have been disinvested is about Rs 1,000 billion, i.e. about 75 per cent of the gross fiscal deficit of the government. The government can now move forward towards the next phase of the programme.

Two major challenges the disinvestment programme will face in the future are the resolution of labour issues and the closure of unviable PSUs. There are sick PSUs which face chronic business-related problems, and unsustainable levels of debt.

The restructuring of these units and the closure of unrestructurable units will mark the realisation of the goal of the public sector reforms programme. The government also must think of a better use of the proceeds of disinvestment than depositing them in the Consolidated Fund of India. It has a wonderful opportunity to tackle both these issues in a smarter way.

Both labour reforms and closure of terminally ill units are difficult tasks. They require sensitive handling and dollops of money. Simultaneously, there is a good flow of money from the programme itself. If one takes the example of the cess fund for the road development programme of the National Highways Authority of India, one can see the efficacy of the concept of allocated funds.

There is full utilisation of the funds for an identified purpose. There is also the ability of the implementation agency to move with dispatch, having been assured of a demarcated and visible corpus. In a similar fashion, the government can think of creating three funds from the proceeds of divestment.

To address the fiscal deficit, there is an urgent need to create a Fiscal Responsibility Fund under the proposed Fiscal Responsibility Act. The purpose of this will be to reduce the government's indebtedness. A suitable formula can be worked out as to what the minimum corpus should be and how it will be used.

A second fund, called the Employees' Welfare Fund, should be created to address the challenges of the labour reforms. This fund should be used to help proper disengagement and resettlement of labour.

A third fund, called the Public Sector Restructuring Fund, should be used towards business and financial restructuring of marginal PSUs which can be turned round. It can be resurrected through debt restructuring, plant upgradation, and other commercial activities which are likely to put the unit back on track, and fetch a better price for the government's holding.

These funds should be created by transferring the divestment proceeds. They could obtain a higher leverage by seeking multilateral aid. The involvement of the multilaterals will not only bolster the programme size in terms of reach and impact, but also keep a ready check on the progress of various programmes.

How should disinvestment proceeds be divided among these funds? In terms of the need, sensitivity and utility, it is desirable to allot 40 per cent each to the FRF and the EWF. The balance 20 per cent could be allocated to the PRF. The rationale for allocating 40 per cent to the FRF is that it will fulfil one of the main objectives of privatisation, namely the reduction of the fiscal pressure that the PSUs put upon government finances. The allocation will by itself bring down the deficit level by around 30 per cent. More could be raised, once other PSUs are put on the block.

To give a financial meaning to the phrase "reforms with a human face", an allocation of 40 per cent to the Employees' Welfare Fund is suggested. It shows the government's commitment to address the concerns of the labour constituency. It is also essential that the government does something concrete about retraining and redeployment.

The portion of the workforce that needs to be redeployed is so enormous that unless handled with care and foresight, it would lead to blow-outs of unprecedented proportions. We can learn from countries such as South Korea and Indonesia where precipitous reforms led to social unrest.

However, if a fund of the above nature is in place, and utilised in as fair a manner as the divestment programme is happening, the labour constituency's cooperation level can be enhanced, and the sustainability of the programme will improve. The fund will enhance the ability of the government to deal with the harder cases of divestment. This would demand a large, if not the largest, allocation to the EWF.

Restructuring of ailing PSUs is necessary to enhance the value of the divestment which follows rehabilitation. Thus, the amount to be spent on this activity needs to be minimal. We must also understand that this is to be done only in cases where such restructuring will clearly enhance the government's value proposition. Therefore, stiff cut-off benchmarks need to be created in terms of expected returns on such investments.

The creation of these funds will strongly communicate the government's resolve to sustain its divestment programme. It will reassure the labour constituency. It will also help enhance the interest of potential bidders, considering the favourable environment that will be created. To top it all, such dedicated funds will make sure that the objectives of the programme are well understood, and that the funds are utilised without diversion.

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