DISINVESTMENT DISCORD

Minister for Disinvestment Arun Shourie at a press conference in New Delhi on December 27, after a meeting of the Cabinet Committee on Disinvestment. - V.V. KRISHNAN

The financially imprudent and legally untenable move of the Union government to put up for sale profit-making public sector enterprises such as BPCL and HPCL, runs into trouble in the face of divergent views within the Cabinet and opposition from outside.

AS a former journalist, Arun Shourie is rightly mindful of deadlines. Early September, the Union Minister for Disinvestment had to accede to a three-month postponement of decisions on the sale of government equity in two public sector oil companies Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited (HPCL and BPCL respectively). Differences within the Union Cabinet compelled him to concede ground, especially since the point was made rather sharply by a majority of his colleagues that the strategic importance of the petroleum sector made it an inappropriate target for privatisation.

Three months was evidently an arbitrarily chosen deadline for narrowing divergences of perception. But Shourie would brook no further delay. Within days of the expiry of the three-month deadline, he went before Parliament to present a revised set of proposals on disinvestment in the oil companies. Following the well-worn tactic of splitting the difference or taking the arithmetic mean between disparate opinions, Shourie proposed that one of the companies could be sold through strategic sales, involving a transfer of management control, while the other could be sold through a public floatation of shares in the markets.

The Central government currently holds 51 per cent of the equity in HPCL and 66 per cent in BPCL. The former was identified for strategic sale since it offered the easier prospect in the dilution of government ownership and control. BPCL was designated to take the alternative route the slower one of disinvestment through the public offer of shares, leaving management control in the hands of the government.

It soon transpired that in his rush to meet a deadline, Shourie had been rather inattentive to matters of detail. A point of law, or rather, constitutional propriety remained to be sorted out. Just after he came out with his compromise formula, Shourie was confronted with a rather knotty problem. HPCL and BPCL, members from the Opposition benches pointed out, had been created by Acts of Parliament in 1974 and 1976 respectively. The dilution of the government stake in these companies particularly since it involved the prospective transfer of management control meant the effective repeal of these Acts. And that was a decision that the executive did not have exclusive authority over without a reference to Parliament.

Shourie claimed that the government's top law officers had endorsed his view that once incorporated, the companies' functions were governed by the terms of the Companies Act. Disinvestment, which was little else than a share transaction, did not need the prior approval of Parliament in this respect. However, being aware of the equivocal attitude of even the treasury benches towards his proposal, Shourie assured Parliament that he would obtain an authoritative opinion from the Attorney-General of India before proceeding with his plans. Perhaps intended as a ritualistic concession to the authority of Parliament, this assurance was soon to rebound on Shourie.

Prior to the crucial meeting of the Cabinet Committee on Disinvestment (CCD) on December 27, the Ministry discreetly put out the broad outlines of its proposals through the media. The intention was to reduce the government stake in HPCL to 15 per cent by offloading 34 per cent to a strategic partner, and 2 per cent at a concessional rate to company employees. And where BPCL was concerned, the government planned to sell off no less than 38 per cent of its stake through a public offering, while reserving a quantum of 2 per cent for company employees. The final outcome would be a reduction in the government share to 26 per cent.

As the CCD went into session, speculation was rampant about the scenarios that could emerge. Shourie's proposals were seen as a radical effort to put the "strategic importance" argument beyond the scope of debate. But it was assumed that to gain CCD assent, he would have to yield ground elsewhere. He would, it was surmised, have to concede the right of other public sector enterprises (PSEs) to bid for the disinvested shares of HPCL and BPCL. This would effectively mean that the purpose of privatisation would not be met, since giant PSEs such as Indian Oil and the Oil and Natural Gas Corporation (ONGC) with vast turnovers and comfortable cash reserves could well buy up the shares on offer.

But as the speculation raged, there came the anti-climax. The CCD merely decided once again to postpone a decision on the matter until the Attorney-General offered his opinion on the legal status of the two oil companies.

The point was raised by Petroleum Minister Ram Naik, who reminded the Committee that an assurance had been given to Parliament which needed to be honoured. Deputy Prime Minister Lal Krishna Advani listened intently to both sides of the argument and weighed in with the observation that propriety demanded that a commitment made to Parliament should not be breached. Noting the drift of opinion within the Committee, Prime Minister Atal Behari Vajpayee who is otherwise known to be relatively well-disposed towards the disinvestment process, urged that the decision be further postponed to avoid any appearance of impropriety. Clearly, the tearing sense of urgency and absolute firmness of conviction that Shourie has displayed, are not shared by many of his Cabinet colleagues.

It is not difficult to see why. Both BPCL and HPCL have been earning profits, contributing substantial dividends to the Central exchequer, and imposing few demands on government revenues to meet their investment needs.

When the Central government's revenue account is in deficit, it seemed to make little sense in most objective assessments, to sell off profitable assets. That would have been equivalent to the worst form of financial imprudence getting rid of productive assets to meet daily subsistence needs.

The answer that has been devised by the Ministry of Disinvestment is rather ingenious. Bharat Aluminium Company (Balco), it points out, was a profitable PSE, but the average dividend it contributed to the Central exchequer over the eight years prior to its privatisation was only Rs.5.69 crores. In comparison, the government obtained from its privatisation, a sum of Rs.826.5 crores. If that sum had been raised through the borrowing option, it would have imposed at an average borrowing cost of 10 per cent an interest burden in perpetuity of Rs.82.65 crores. The gain to the government and to the tax-payer was of the order of the difference between the notional interest income accruing to the government from privatisation and the actual dividend earned from public ownership.

A similar calculus applies in the case of CMC Ltd, another profitable PSE that was privatised in 2000, netting the government Rs.152 crores. The notional interest earnings on this sum would be Rs.15.2 crores, as against the average dividend of Rs.0.80 crores that the company paid. With the Indian Petrochemicals Corporation Ltd (IPCL), likewise, privatisation meant additional revenues of Rs.149 crores annually, against average dividend earnings of a mere Rs.16.24 crores.

If all the PSEs that were transferred to private enterprise through strategic sales since 1999-2000 were to be considered, the government's receipts have totalled Rs.11,314 crores, implying annual interest earnings of Rs.1,131 crores. Against this, the PSEs' cumulative contribution in terms of dividends was Rs.52.41 crores, which was more than offset by the average annual losses of Rs.126 crores registered by two of the companies Jessop and Paradip Phosphates. The actual gain from privatisation was thus of the order of Rs.1,213 crores annually.

These arguments have a seeming persuasiveness about them. If the government were not enabled to raise resources through privatisation, it would need to do so through borrowing. That would impose long-term interest costs on the economy, putting pressure on outlays in vital sectors like health, education and rural development. Privatisation is thus a means of meeting government commitment in these crucial sectors.

A LITTLE familiarity with the trajectory of economic reforms in India over the last decade and more, would show that this argument in fact is a colossal exercise in evasion. Since liberalisation, privatisation and globalisation became the reigning mantras of economic policy in the early 1990s, the government's resource mobilisation effort has been one of the principal casualties. Indeed, the Central government's total tax revenues, which stood at a reasonably healthy 13 per cent of gross domestic product (GDP) prior to the "reforms", stand today at an anaemic 9 per cent. This is among the lowest in the world, and a standing reproof to official claims that greater civic awareness and tax compliance would be an outcome of liberalisation. Privatisation in the circumstances, especially in profitable and strategically important sectors like petroleum, is little else than a compounding of the errors of the last decade of reforms, a desperate holding action against acknowledging the reality that nothing less than a gigantic tax effort is needed to dig the country out of the fiscal black hole it has plunged into.

Considering the actual track record of BPCL and HPCL, the companies have been paying an average dividend of between 75 and 110 per cent over the last many years. On BPCL's paid up capital of Rs.300 crores, this works out to a figure of between Rs.225 crores and Rs.330 crores. And on HPCL's paid up capital of Rs.340 crores, the dividend could work out between Rs.255 crores and Rs.374 crores.

If an average dividend yield of 100 per cent were to be assumed, the government would currently be earning on its equity holding of 51 per cent in HPCL, around Rs.174 crores as dividend income. If the shareholding were to be diluted to 15 per cent as proposed, then the annual earnings would decline to Rs.51 crores. The loss in dividends would be a mere Rs.123 crores, and though the anticipated realisation from the sale of 34 per cent equity in HPCL remains a matter of speculation, informed conjecture puts it at anything between Rs.5,000 crores and Rs.6,000 crores. If the Disinvestment Ministry's methodology were to be accepted, then the annual gains from this sale would be of the order of Rs.500 crores far in excess of the dividend income lost.

A similar calculus would be seen to apply to the case of BPCL too. And the proponents of privatisation have an argument ready to deal with the strategic sensitivity of the petroleum sector. With Indian Oil Corporation (IOC) being by far the largest enterprise in the sector and indeed in the country there is little danger that private ownership of either of the other two oil companies will seriously compromise national security. IOC, in fact, has four times the refining capacity of the next largest oil PSE and sales equivalent to the combined turnover of the other two. Since there is no proposal to privatise IOC, there would be adequate safeguard in future for the country's strategic interests, as well as a strong bulwark against the growth of private sector monopolies.

This argument needs to be assessed against the reality that the only private enterprise likely to make a bid for the strategic takeover of HPCL is the country's largest business house, with an entrenched monopoly position in petrochemicals, immense ambitions in telecom and political clout unlike anything wielded in the past by big business. Control over HPCL would in fact put its sales turnover ahead of IOC's. And with its well-known ability to leverage political donations for business gain, it would then be in a position to perhaps even subdue the might of IOC.

The proposed privatisation of the oil companies must then be seen for what it is a temporary expedient to avoid facing up to the gravity of the fiscal crisis. The seeming appeal of the financial calculus is really artificial, since the annual flow of revenue from privatisation is notional. There has been no retirement of public debt, which could conceivably relieve the Central exchequer of a part though an infinitesimally small part of its interest burden. And as long as the revenue account deficit is wide and growing, one could as well assume that the privatisation proceeds are going into meeting revenue expenditure, which creates no assets and earns no returns. And if one were conversely to assume that all the privatisation proceeds go into capital investment, then the benchmark figure for calculating yields should not be the borrowing rate, but the rate of return on public investment.

A STUDY done in 2000 by the Standing Conference on Public Enterprises (SCOPE), provides interesting figures on the rate of return on capital employed in PSEs, in comparison to their private sector counterparts. Contrary to the conventional understanding, it points out that by most criteria, the central PSEs if taken-over "sick" private sector units were to be omitted have been earning a far better return on investment than private units.

These findings, of course, are richly nuanced and need to be studied carefully. Yet the official policy on PSEs shows little attention to these details. Consider the prevailing policy on disinvestment, as spelt out by the President in his address to the joint sitting of Parliament in February 2002: "Learning from our experience, especially over the last decade, it is evident that disinvestment in public sector enterprises is no longer a matter of choice, but an imperative. The prolonged fiscal haemorrhage from the majority of these enterprises cannot be sustained any longer. The disinvestment policy and the transparent procedures adopted for disinvestment have now been widely accepted and the shift in emphasis from disinvestment of minority shares to strategic sale has yielded excellent results."

A little attention to the small print of the disinvestment programme would show that the "excellent results" of the last few years have been in fact an outcome of the privatisation of units that bear no part of the responsibility for the "fiscal haemorrhage" and have rather been earning substantial dividends for the Government: Videsh Sanchar Nigam Ltd., Indo-Burma Petroleum Ltd., Maruti Udyog Ltd, and IPCL. These four enterprises have contributed close to 80 per cent of the Central government's net realisation through strategic sales.

Clearly, if the illusion of "excellent results" is to be sustained, more of the profitable PSEs would have to be rushed to the auction block in defiance of common sense and political prudence. With the underlying economic calculus being tenuous at best, disinvestment has become a stopgap fiscal convenience in the perception of the Finance Ministry, and an ideological crusade in the perception of Shourie and his circle of intimates. On neither count does the public at large have any reason to endorse the programme or rejoice in its supposed successes.