Why Divestment is an Elusive Target

News: In the Air India case, one of the prominent politicians(MP) is demanding a court-monitored or CBI (Central Bureau of Investigation) inquiry.

He had petitioned the Delhi high court alleging that Air India’s disinvestment process was “arbitrary, unconstitutional, unfair, discriminatory and, therefore, shouldn’t be allowed to go through.

The government regularly faces multiple headwinds in the sale of its holding in the public sector companies.

As a result, the overall performance of the government on the disinvestment front in 2021 is particularly disappointing.

Last year, it fell short of its ₹2.1 trillion aim by ₹1.78 trillion. Even pre-covid, it met its goal only twice in the six years starting 2014-15.

For 2021-22, the government had set a target of ₹1.75 trillion from strategic as well as non-strategic stake sales in public sector enterprises (PSEs). It also wanted to privatize two public sector banks and one national insurer.

In this context, the various challenges posed to the Disinvestment process are analysed in this article.

What are the various challenges/issues posed to the Disinvestment process in India?

Firstly, there are regular protests from unions and requests for reconsideration from state governments.

Secondly, rising uncertainty in the global markets due to the pandemic, divestment plans seem to have fallen short of their fiscal targets in the past two years.

Thirdly, litigation issues. For instance, as mentioned above, a court-monitored or CBI (Central Bureau of Investigation) inquiry in the Air India case is demanded.

Fourth, potential investors backing out at the last minute. For instance, the BPCL disinvestment program where the ISquared Capital opted out of the race.

Fifth, the lack of political will to back divestment is the biggest issue. The problem is that due to politics, selling at a lower price can create a problem for the government.

Sixth, the issue of bureaucratic risk aversion. No government official would want to be caught post-retirement, just in case, there is an investigation on selling at a lower price.

Seventhly, there are other internal factors that are stumbling blocks. These include certain preparatory activities at the level of the PSU such as addressing any special dispensation available to these entities, issues around the land title, identifying and carving out non-core assets.

Eighthly, one of the key issues stems from the value that the government aims to get from the stake sales. The value may be more than the actual value or real value of the asset on the block, more so in the case of loss-making units.

So, what could be done?

First, the government should find ways of redeploying people, given that employment is a big issue today. It may help close down loss-making units.

Second, merging with other PSUs where possible if the product is the same (as has been done for banking) is another option.

Third, in order to address the concerns of the bureaucracy, more assurances need to be given through the disinvestment ministry, which takes ownership of the decision, also backed by the prime minister’s office. Bureaucratic reforms may also be the need of the hour.

Fourth, decisions ought to be taken quickly. Else, the value of the unit (like plant and equipment) depreciates to a large extent. Timely divestment can increase the sale value and stakeholder returns.

Fifth, not all PSEs should be disinvested. Many of them are high performers in core economic sectors. Good units should not be sold, like NTPC or oil companies, which have either monopoly power or have sector benefits, as this becomes useful for the government to garner resources.

A new PSE policy: Read here: https://forumias.com/blog/govt-releases-new-public-sector-enterprise-policy/

Source: This post is based on the article “WHY DIVESTMENT IS AN ELUSIVE TARGET” & “Let’s exorcise the ghost of stalled asset sell-offs” published in Livemint on 6^th Jan 2022.