Often the debate on privatization of state-owned firms in India is focused on individual firms. The issue of privatization per se is largely dealt in a qualitative manner. The government has committed itself to a very ambitious investment programme in the social sector. It has also set up the sixth pay commission for revising the salaries of government employees.
Privatization of public sector undertakings (PSUs) can thus be viewed from the perspective of raising resources for these tasks.
The basic premise of such an approach is that the government’s primary objective is not to earn a financial return on its investment in PSUs, but to raise resources. The estimated investment in roads, drinking water supply, electrification and telecommunications in rural areas under the Bharat Nirman programme is Rs1,74,000 crore in the period, 2005-09. Similarly, the estimate for investment in urban infrastructure and basic services for urban poor in 63 cities under the Jawaharlal Nehru National Urban Renewal Mission is more than Rs1,00,000 crore in the time horizon, 2005-12.
When the fifth pay commission was implemented in 1997, it was estimated that it created an additional burden of Rs17,000 crore per year on the government. The sixth pay commission could potentially result in a similar burden.
In all, the above would require an expenditure of the order of Rs4,00,000 crore in the next five-seven years. This number is approximately 10% of our GDP. Government deficits would increase if borrowings are used to finance these programmes. This in turn would levy a big tax on the poor—inflation. The crowding-out effect due to increased government borrowing would also adversely affect economic growth. Yet, not undertaking social sector spending would curtail long-run growth.
Another way of raising resources for this purpose would be by partial or complete sale of PSUs. Complete sale is neither politically feasible nor always desirable. There are areas of strategic importance and millions of livelihoods are at stake.
The government could introduce non-voting shares. These would ensure that it retains control of PSUs while new capital is raised. Such an arrangement would be attractive to those opposed to privatization. In sectors such as banking, where additional capital is required, due to the new capital adequacy norms, growth would not be constrained due to scarcity of banking capital.
Those investing in non-voting shares would earn a financial return without gaining any control of the PSU. Hence, investors in non-voting shares are likely to invest only in PSUs which offer a good return.
While non-voting shares would allow raising additional capital without losing control, the government could use a single holding company structure for sale of existing shares without losing control of PSUs. As of 2005-06, the net worth of PSUs (excluding banks and departmental undertakings) in which the Central government has at least 51% holding was Rs4,12,737 crore.
The government’s stake in the equity of these PSUs collectively was at 83%. If we take the net worth as a proxy for market value, then a 32% stake could be sold at around Rs1,32,000 crore. The government’s stake would then come down to 51%. Then a single holding company (say Government of India (GoI) holdings) could be formed and this 51% stake could be transferred to it. GoI holdings of 49% could then be sold to foreign and other investors, thus raising another Rs1,03,000 crore. Thus, around Rs2,35,000 crore could be raised by bringing down GoI stake down to 51% and employing a holding company structure.
Non-voting shares would enable additional raising of capital required by PSUs. These numbers are conservative estimates and as the listed PSUs contribute roughly one-fifth of the market capitalization, this would lead to much larger numbers.
The accumulated losses of Central PSUs were Rs73,147 crore in 2005-06 and the net profit in 2005-06 was Rs70,288 crore. Simplistically, a net profit of Rs70,288 crore would mean a market value of approximately Rs8,71,571 crore if we use the P/E of 12.4 for the CNX PSE index (as on 28 June, made available courtesy of India Index Services and Products Ltd—a joint venture of Crisil and NSE). This holds even if net profit has not increased since 2005-06.
Thus, some Rs4,96,000 crore could be raised by bringing down GoI stake to 51% and employing a holding company structure. While an exhaustive valuation exercise may be required, considering the huge cumulative losses made by PSUs, we can reasonably expect a significantly higher valuation than the net worth of these PSUs.
While internal and extra-budgetary resources contribute to development plans, and we also have local government participation, we must not lose global opportunities for pushing through our development goals. Let us build something long lasting for the time when conditions are not so good and there are fewer opportunities for such ventures.
A.M. Godbole is an executive assistant, AV Rajwade & Co. These are his personal views. Comment at email@example.com