Why divestment of Indian PSUs won't be easy

It was reported last week that the government intends to sell off sick public enterprises. Given the state that most of these companies are in, it is highly unlikely that anybody would bid to take over ownership of them as going concerns.

It is safe to say that, as a group, one of the biggest losers from the process of liberalisation and reform that has been going on since 1991 is the large number of public enterprises.

Some of them were set up in the heyday of the planned economy, to address the country’s needs for basic goods and infrastructure services.

Others were absorbed into the government’s fold by acquiring private sector companies bankrupted by the restrictions imposed by industrial licences and other policy instruments.

After 1991, some of the more successful ones were listed on the stock exchanges to bring in private capital and some of these have achieved a sustainable level of competitiveness in their business models.

These are exceptions.

The large majority have -- as a consequence of obsolete products and technologies, and depleted physical and human capital -- sunk into a morass from which emergence looks tough.

It is against this backdrop that the national debate on privatisation and disinvestment must be seen.

It was reported last week that the government intends to sell off sick public enterprises. Given the state that most of these companies are in, it is highly unlikely that anybody would bid to take over ownership of them as going concerns.

Some of them may have been attractive turnaround prospects a decade or more ago, but that time has long passed.

The only conceivable way in which most of these companies can be sold is by unbundling them into pools of assets and selling the individual pools.

The National Textile Corporation is a good example; its land holdings in Mumbai and elsewhere, belonging to the mills that it took over during the 1960s, are worth a fortune. Privatising these companies as going concerns, expecting the new owners to continue to run the businesses is to delude oneself.

If this basic premise is accepted and the government decides to go the unbundling way, it must address some other significant concerns.

If the process is to be accorded political legitimacy, it cannot be seen as being captured or even influenced by cronyism.

Ensuring that the best value is realised for any pool of assets as transparently as possible will be of critical importance.

The workers who are inevitably going to be displaced need to be assured that their lifetime earnings expectations are not disrupted; this also goes for the very large pension liabilities that these companies have to meet.

In short, the process must be conducted so as to balance the wider national objective of maximising realisations while honouring existing commitments.

The best way to do this would be to move the process out of the control of the government itself and set up a multi-stakeholder process -- perhaps in the form of a re-constituted disinvestment commission -- that is tasked with developing a credible process and then executing the plan to unbundle and sell.

Photographs: Reuters