When it comes to band-aid economics and accountancy, governments are at their creative best. Some years back, writing on the woes of the power sector, this column had pointed out that governments for years had been deluded that there can be a market of sellers without buyers—given the bankruptcy of SEBs. We are now witnessing to a new paradox—it seems it is possible to sell and encash without selling!
The modus operandi is simple—locate a government-owned enterprise and direct/force it to buy the government’s stake in another government-owned enterprise and pay the government—Peter buys PSU, pays Paul to plug the hole. The process delivers a corollary—the government can sell an enterprise and continue to own it.
Consider the latest transaction—if it can be called that. On Thursday, the government informed that public sector Power Finance Corporation would be buying the government’s 52.63 per cent stake in public sector Rural Electrification Corporation and pay the government the value realised, which is estimated to be between Rs 12,000 crore and Rs 15,000 crore.
PFC was set up in 1986 to fund energy infrastructure and listed in 2007. In March 2018, its reserves were Rs 37,221 crore, and cash of around Rs 4,600 crore. Theoretically, it has the money to shop. At the same time its loan book of Rs 2.4 lakh crore includes 9.67 per cent NPAs—Rs 25,076 crore or nearly half of the Rs 51,995 crore in loans to private sector outfits are classified as stressed. That, though, won’t detain the “sale”.
In 2017, the government directed public sector oil giant ONGC to buy public sector HPCL and collected Rs 36,915 crore. It didn’t matter that ONGC had to borrow to complete the “deal”. Last year, the government also listed insurance companies GIC and NIA and collected Rs 17,357 crore—thanks to the munificence of Life Insurance Corporation, which bailed out both the issues. Indeed, LIC is the chosen white knight of the government—this year, its shopping cart has IDBI Bank, which has the highest NPAs of all banks.
The template is now entrenched in the public finance management practices—strip cash from productive public sector entities to bridge the gap between revenues and galloping expenditure.
The government has a rich toolbox to leverage cash out of central public sector enterprises, including block deals, dividends, bonus and exchange traded funds and buybacks.
Typically, buybacks are deployed by cash-rich companies with a widely held shareholding to increase share value. Buybacks by PSUs are essentially cash transfers to government. Between 2014-15 and 2017-18, the government extracted Rs 29,791 crore in buybacks. This year, the target is around Rs 15,000 crore.
So what’s happening to disinvestment as originally conceived and coined by John Maynard Keynes? To start with, the department of disinvestment is now known as the Department of Investment (not disinvestment) and Public Asset Management. The official definition of strategic disinvestment is “the sale of substantial portion of the government shareholding” of 50 per cent or more along with change in management. This is yet on paper. Besides the renaming of the department and the issue of 12 different notifications since 2016, little has moved. Disinvestment continues to be tactical and consanguineous.
In 2017, the government listed 24 entities for “strategic disinvestment”—only one disinvestment went through, that of HPCL, which was bought by ONGC. The story of Air India is well-known—there were no takers for the whole entity and the spin now is that it will be sold in parts. Similar is the saga of Pawan Hans—interestingly, the government did try to offload its 51 per cent equity on ONGC.
The conundrum continues. This year the government will sell ITDC’s Patliputra Hotel in Patna to the Bihar government for Rs 13.005 crore, has announced the takeover of HSCC by NBCC for Rs 285 crore, and will divest its holding in Dredging Corporation of India to Vishakhapatnam Port Trust, Paradip Port Trust, JNPT Mumbai and Deendayal Port Trust in Kandla—all autonomous bodies of the government of India.
The government has argued that these transactions were outlined in Budget 2017 and aim to strengthen CPSEs “through consolidation, mergers and acquisitions” and integration across the value chain. In itself the generalisation of the idea in an era of competition is troubling. Be that as it may, what is the so-called synergy between LIC and IDBI Bank? Or between HSCC and NBCC—one is under the health ministry, and the other under the ministry of housing and urban affairs?
The linkage between the logic of integration and the reality of transactions is at best tenuous. Indeed, if value chain integration through consolidation is the aim, why not merge BSNL and MTNL, or BHEL and NTPC along with Coal India or the multitude of PSEs under the Railways? It is arguable that state-owned enterprises are necessary to promote national objectives. However, tactical thinking on a strategic sector will deliver neither tactical nor strategic advantage.