Is Privatisation of PSUs really a Good Idea?

For the past 2 year or so, 'Privatisation' has become a buzz word in the Indian economy. A flurry of news now and then is around selling off Public Sector Undertakings to private players.

What is the justification provided for taking this step? Government says, in recent years many PSUs have become loss making. These enterprises have become a liability on the government. 

It's a misbelief to think that PSUs are inefficient

To be honest, both private as well as public sector have a crucial role in the development of Indian economy. Problem starts arising when effort is put into thoughtlessly converting one sector into the other. 

Prophets of privatisation try to convince that it is the solution for all economic issues.

I believe that we should remember the causes that led to the global financial crisis that spread from Wall Street to all streets. It was a lesson for the world that an excessive capitalist system too has its own flaws. That includes privatisation.

Maximising tax payers' value

Prescription of disinvestment strategy fails to address the basic issue of maximising value for taxpayers. The money that the government puts in PSUs is nothing but the money of India’s taxpayers. It is therefore the government's duty to ensure maximum value for the investment made. A disinvestment programme, which is linked to a budgetary revenue target fails to provide that value.

A firesale privatisation is a very inefficient and impractical (in terms of political-economic scenario in the country) method of trying to squeeze out value. 

A general ideology behind IPO/stake selling is to expand the business. Funds are raised to open new branches, hire more staff, improve management efficiency.

So after privatization, did new branches open? Did business expand? Did more staff hire? No. So why was it hyped before, why is it being hyped now. It's just an exercise to get rid of these companies to balance the country's fiscal records.

PSUs are largely profitable

We have Maharatnas in the public sector but seldom we have them in the private sector. The misguided propaganda about PSUs being a national liability was thrown out of the park in the Public Enterprises Survey 2018-19. It reported, out of the 249 CPSEs operational, 179 are profitable, and only 70 loss-making. Btw, CPSE stands for 'Central Public Sector Enterprises'.

The State Trading Corporation of India, MSTC and Chennai Petroleum Corporation are examples of profit-making CPSEs but have now fallen into the loss making list. How did things suddenly get so wrong?

Among the top loss-making companies in India, there are only two PSUs, Air India and BSNL ranking sixth and seventh. The rest are private companies. 

Infact, when Amrapali builders (Private company) could not deliver flats to its customers, the Supreme Court directed the flat to be completed by public sector NBCC. When Reliance failed to run Delhi metro, the DMRC took it over and ran profitably. The captive coal blocks of the private sector also saw a production decrease and had to depend on Coal India for supply. 

Sale of PSUs at throwaway price is a celebration for the real estate mafia. Maharatna BPCL with ₹9 lakh crore worth properties was put on sale at a throwaway rates.

And see the current situation: https://www.bloombergquint.com/business/bpcl-offers-vrs-to-employees-ahead-of-privatisation

Air India has total operating slots worth $75 million at various international airports and landing rights in 30 countries, which were earned over long bilateral talks and the government is ready to let all that go for a bargain sell off.

Learning from some success stories

Within the Indian landscape, there are few examples, where even though significant ownership of company was under the government. The private partner was allowed full freedom to create enormous value for shareholders without giving up public welfare.

Example 1: Maruti Udyog was set up as a joint venture between of the government of India and Suzuki Motors of Japan. The pearl in the structure was management control – government, despite its majority stake, allowed a considerable management and operational freedom to Suzuki to express itself and manage the company on commercial lines. We know what leaps it facilitated in the Indian automobile sector!

Example2:  Strategy used for finance companies

The Industrial Credit and Investment Corporation of India (ICICI), initially the parent company of ICICI Bank was set up as a joint venture of public sector banks, insurance companies and the World Bank. 

Another one, during its development stage Axis Bank was sponsored by the government through a special purpose vehicle created out of the restructuring of Unit Trust of India. 

HDFC (Housing Development Finance Corporation) was initially sponsored by ICICI, with minor percentage of shares with IFC (International Finance Corporation, a World Bank subsidiary) and the Prince Aga Khan foundation.

All these companies have had incredible success over the years and have generated enormous wealth not only for themselves but for their shareholders as well.

While there would be several reasons for the success, a key commonality in all the four cases is management control. Their management teams were given full flexibility to run the enterprises on commercial lines. The story is otherwise in case of many PSUs.

The government should promote training the staff in terms of their efficiency as well as skills. Performance based promotion is another way of instilling motivation of growth among the workforce. Advanced business models, more idea generation at each level in hierarchy are essential to compete with private sector. 

Privatisation will only to uncertainty for employees. For public it means increased costs. For the economy, it means another potential powerful arm that has been cut off.

That's my viewpoint for now. Thanks guys!! 

In case you have anything to add or any questions, please head on to the comments section.

Stay Inquisitive 💡

Written by: Aastik Pasricha

Reference: Privatisation instead of decontrol - wrong end of maximising PSU value

Should public sector undertakings be privatised?