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Should the government continue to run PSUs?

  The government continues to handle the running of PSUs, and has injected funds in an effort to keep them profitably afloat. Privatisation appears to be a perfect resolution to the problem, but actually implementing it is proving difficult, with the government therefore resorting to disinvestment.  

Dr Suresh Srinivasan

India has been resorting to disinvestments rather than privatising its public sector undertakings (PSU). Disinvestment is a term that is frequently heard during the budget exercise, where the government sells its shares in PSUs to bridge the defect gap, ie, to cover the shortfall between revenue and expenditure.

There is a fundamental difference between disinvestment and privatisation. In very basic terms, disinvestment is selling a part of the government’s shareholding in PSUs without diluting management control. This means that the government continues to manage and run these companies on a day to day basis. However, privatisation involves the sale of shares together with ownership, by completely giving up management control and allowing third parties to take over the day to day operations of the company.

The pros of relinquishing control

Retaining control by the government means the government managing the business and taking day to day decisions. For example if the Steel Authority of India (SAIL) is a steel manufacturing PSU, the management of SAIL comes under the direct control of the government, which manages other businesses, along with managing SAIL. The probability that the government will run this business efficiently, as compared to a privately managed steel manufacturing competitor, is quite low. This is largely due to a focus issues, since, unlike the government, the private steel manufacturing player performs only steel manufacturing operations and nothing else. Not running operations efficiently results in accumulating losses, which in turn leads to a requirement for the government to fund such losses through valuable taxpayer monies. Hence the question arises: Why, in the first instance, should the government run an inefficient operation if a private player can do it more efficiently?

In essence, what this means is that the government should get out of the business of being in business, and this can be achieved through privatisation of large PSUs! Unfortunately, India is yet to see a major privatisation drive, at least in the last 10 years!


In the context of mere disinvestments (in contrast to privatisation), the crucial questions to be asked are: Do such disinvestments do anything to increase the competitive position of these PSUs? Do they deepen the markets in enhancing efficiency, technology, innovation, management depth or governance? Do the consumers benefit in any form due to such disinvestments? Or, does it reduce the burden of government involvement in running such a PSU? Not at all! We are still far away from privatisation in its true sense.

Let us consider the oil and gas PSUs. There are around 13 large companies like ONGC, IOC, HPCL, BPCL, etc. These are run by a management team that is overseen by the Ministry of Petroleum and Natural Gas. These have around 27 government directors and 55 non-official part time directors on their boards, which provide management oversight on the government’s behalf. Various government machineries like the Public Enterprises Selection Board (PSEB) are also involved in overall management and selection of the board and the senior members of the management team. These are an enormous drain on government resources.

Privatisation need in banking

Coming to banking, the government recently announced a `88,000 crore package to capitalise the banks in the country. The need for such capitalisation is the poor performance of such banks, due to the lack of governance and an independent professional board that provides management depth and execution oversight. Interference from the government in commercial decisions is a major concern. The PJ Nayak committee flagged precisely these problems three years ago, and recommended creating an intermediary structure, where the Banks Board Bureau (BBB) can professionally run the public sector banks (PSB), thereby taking the burden away from the government.

Although the BBB was created two years ago, it has not gone beyond headhunting for senior PSB positions. More importantly, the government had made certain senior manager changes at PSBs, short circuiting the BBB. This, together with the reported conflicts between the bureaucrats in the finance ministry and the BBB, seems to have resulted in high level exits within the later. The end result is that government interference has not reduced, and a professional PSB board is still a distant dream.

With such level of interference and lack of independence, it seems the PSBs will continue to underperform. The `88,000 crore package, therefore, clearly appears to be a short term fix and a drain on taxpayer money, as the long term solution to strengthen the PSB management and the government moving away from managing the banks is clearly more difficult to execute.

With 100% FDI being contemplated in private banks, the disparity between public and private sector banks could widen. The key message is that if the government does not get out of managing banks, it will need to pump more valuable public money into uncompetitive PSBs. A mere merger of weak PSBs with strong banks, which is currently being contemplated, is by no means an answer; the government needs to seriously consider privatising such weak PSBs. Naturally, this is extremely difficult from a political perspective, but still needs serious consideration and assessment of stakeholder perspectives.

Privatisation is not new

Many emerging economies did bite the bullets and privatised their large state-owned companies way back in the 1980s and early 1990s. Argentina, for example, privatised key sectors like telecom, airline and petrochemicals. Mexico and East European countries followed suit. Such initiatives brought in professional management which led to efficient utilisation of staff and resources, an enhanced sense of customer and shareholder value creation, and deeper general management effectiveness. It also created a “market driven” business environment that will safeguard the best interests of the consumers. More than anything, it freed up government resources!

Challenges in India

India has hardly seen any such strategic disinvestment, or privatisations, in the last 10 years. Balco strategic disinvestment was something the government burnt its fingers on 15 years ago, and that possibly still lingers. Balco has some good learnings that will prove valuable for forthcoming privatisations. In any disinvestment process, the employees are bound to oppose the process right from the time of announcement. They will demand a rollback of privatisation, indulge in large scale strikes and agitations. This is again mainly because of the insecurity, lack of transparent information flow and the threat of job losses. Unattractive VRS packages, revised service conditions and social security under the private management are generally the major concern.

Unless the employees are engaged and kept informed at all stages of the process, including the valuation of the company and the choice of the strategic partner, this situation cannot be avoided. The Balco experience brought this out very clearly. Such employee reactions also created a serious dent to the reputation of the government, and have a potential to cause electoral damage. These will be the biggest pain point in every privatisation process that will follow. In today’s scenario, this could be a bigger problem, especially with social media becoming very active and the dissemination of news and opinions easier with every passing day.

Hence, a robust process needs to be designed to perfect handling such situations, so that these can be replicated in other privatisations to follow. NITI should evolve such a process, possibly by identifying a test case of privatisation; the closest seems to be that of Air India. This is likely to be a good test case, and if done prudently and transparently, can become a good role model for further privatisations that need to follow. In effect, India needs more of privatisation than mere disinvestment!