It’s time to take a relook at privatisation

News: This article discusses that privatization and the short-term gain associated with it should not overshadow the long-term interest. Hence, there is need to take a relook at privatization.

 Why privatization is being considered as panacea?

India’s fiscal deficit (for the Centre) in FY22 is expected to be at 6.8% of the GDP and with the debts of States, it will be 12.7% of the GDP. Fiscal deficit is growing wider every year and there is a consensus that privatization is the panacea.

Why privatization is not panacea?

One, the gap in growth between public sector undertakings (PSUs) with autonomy and private firms is not significant. For instance, British privatization initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance.

Two, privatization has mixed results in developing countries. There are examples like VSNL and Hindustan Zinc, but growth post-privatization is due to multiple factors like better funding and better business cycle. The issue with PSUs is government apathy and their inability to generate tax revenues.

Three, privatization as a policy has failed to raise significant funds and actual receipts from disinvestment have always fallen short of targets. For example, by FY20, ₹50,304 crore was raised against a target of ₹1 lakh crore (PRS India, 2021). In total, between FY11 and FY21, about ₹5 lakh crore was raised that is, about 33% of just FY22’s projected fiscal deficit.

Four, considering social and institutional constraints, India’s ability to privatise firms will be slow in the future. For example, BPCL.

Five, since interest rate is rising, this is not the right time to privatize. For example, the recently held auction of 21 oil and gas blocks had only three firms participating, of which two were PSUs and 18 blocks ended up with just a single bid.

Six, there is also a challenge of valuation. For example, about 65% of 300 national highway projects have recorded significant toll collection growth. The valuations of such assets should ensure that they capture potential growth in toll revenue.

Seven, there are also serious social consequences. PSUs generates employment and have multiplier effects on economy. Hence, a push for privatisation is a push for mass layoffs when there is already low job creation.

Eighth, another major concern is greater concentration of public assets in selected private hands. For example, telecom has only three players left. It will increase higher usage fees, inflation and also a loss of strategic control.

What is the way forward?

 First, stake sales can be considered a preferred route. It gives time to ensure price discovery, allowing improved performance to raise valuations over time.

For example, the Maruti model. The government had a joint venture with the Suzuki Corporation. Exits from Maruti were conducted in small tranches which ensured a better valuation for the government.

Second, a PSU with greater autonomy with the government retaining control via a holding firm can be a solution. For example, in China growth has been led by corporatised PSUs, all of them are held under a holding company (SASAC), which promotes better governance, appoints leadership and executes mergers and acquisitions.

In Singapore, the Ministry of Finance focuses on policymaking, while Temasek (the holding firm) is focused on corporatizing and expanding its PSUs.

Source: This post is based on the article “It’s time to take a relook at privatisation” published in The Hindu on 10^th Feb 2022.