Making waves before the budget

The Balco sale, when completed, can be a shot in the arm for the process. But will the sharp controversy in its wake obscure other developments?

By C. R. L. Narasimhan

Arguably the most contentious of the economic issues, the public sector disinvestment programme has been very much in the news these days. There has been a flurry of announcements, the last and most significant being the decision to sell 51 per cent of Government equity in Bharat Aluminium Company (BALCO) to Sterlite last week. The Government will get Rs. 826.50 crores in all from the transaction. The disinvestment process gets a badly needed push. A completed sale, after all, is so much more interesting than periodic announcements of plans to sell PSEs. The Balco sale also proves that controversy can never be separated from decision making under divestment. That will be another story.

It is not that there has been no other activity on the divestment front. Big ticket strategic sale plans for VSNL and CMC have already been announced. And finally the Government has begun working towards selling its stake in Maruti Udyog, the country's number one car maker. Earlier Air India and Indian Airlines were put on the block. There were indications that their sale was making some progress. Latest reports are, however, disconcerting inasmuch as they speak of lack of bidding interest in the case of Air India.

The problem here seems to be one of preparing the airlines for subsequent sale. The Minister for Disinvestment has spoken of excessive manpower in Air India (in relation to its fleet) as a serious deterrent for earnest bidders. In varying degrees most PSEs will have to be restructured before a controlling stake in them is sold. That is not a new suggestion by any means. However, the difficulty in complying with it shows that the privatisation programme has to overcome serious hurdles even before it starts off in a conventional sense.

Recent newspaper reports speak of a Government move to release a white paper on the subject. That will certainly underline the importance of the issue, but will it be more than another round of reiteration of Government's intent? The one common thread of the disinvestment programme so far (since 1992) has been that while the approach has not been short of conceptualisation, it has always been faulted in its implementation. To put it differently, ideas have been there in plenty but each time the best of intentions could not be translated into a ``successful'' divestment except in two cases.

In the run up to the Union Budget, the disinvestment programme has been making news for other reasons too. There are indications that it will finally be delinked from the budgetary process. Till now the sale proceeds under the divestment programmes have been booked under capital receipts. Every year the Finance Minister has been setting a target. (In the last two years the target was Rs. 10,000 crores). Each year there has been an underachievement under this head. This year, for instance, there will be very little to show by way of PSE sale under capital receipts.

But the Government's embarrassment because of the persistent fiscal shortfall will not be the only reason for doing away with the booking of sale proceeds within the annual budgetary exercise. Right from the beginning there have been experts who felt that the PSE sale programme will be better off without having to function under a tight timeframe. The Government may not get the timing and hence the valuation too right. The PSE concerned too does not benefit: a common criticism has been that instead of allowing the sale proceeds to be deployed in the unit concerned, the Government appropriates the money for its own use. The allegation has also been made that the Government spends it in anticipation of a PSE sale, which does not materialise. While many such points can be made, the only merit in linking the PSE sale to the fiscal process is that it gives the exercise an air of urgency.

The official thinking on the disinvestment programme has also been changing. As the Finance Minister pointed out recently there has been a paradigm shift: whereas previously there were piecemeal approaches involving instalment by instalment sale of a PSE share the current approach is to sell a large chunk of its equity to a strategic partner who will also assume the management control. The new approach is expected to improve valuations and will therefore be good for the Government and the unit concerned.

The major snag here is that even more than the periodic divestment of shares that was common in the past (without the Government ceding its majority stake), the strategic route will be time consuming. The Government has to perforce consider a number of variables before putting up a unit for strategic sale and, equally importantly, monitor the process thereafter. All these suggest that it is going to be a while before the disinvestment - or the privatisation programme as it is now called - gathers momentum. After all, the political environment has not changed and any decision concerning PSE disinvestment will be questioned no matter how considered the decision making is.

Two points are especially relevant here: (a) Each PSE sale transaction is unique. Unless there is better understanding of the divergencies, the official policy will remain controversial. In turn, the process will suffer. (b) Important as the Balco sale has been, it is only the second transaction of that type. The first one was the sale of Modern Foods to Hindustan Lever in March 2000. In matters such as this neither undue optimism nor outright despondency is called for.

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Section  : Business
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