For registration call @ 9958826967

Monetise and Modernise - Mantra For PSEs (25 February 2021)

Monetise and Modernise - Mantra For PSEs (25 February 2021)

Context:

Reiterating the government's commitment towards privatisation of PSUs and asset monetisation, Prime Minister Narendra Modi on Wednesday said that the motto of his government is to "monetise and modernise". Addressing a webinar on the Budget announcements for the Department of Investment and Public Asset Management (DIPAM), the Prime Minister asked the private sector to come in support of the government's initiatives proposed in the Budget and help it prepare the roadmap for accelerated growth.

He added the Budget has targeted monetising 100 government assets, which would create investment opportunities worth Rs 2.5 lakh crore.

Background:

  • At independence, India adopted a mixed economy model and the Public Sector Enterprises (PSEs) were established on a socialistic pattern of development.

  • But the issue of privatisation has come to the forefront due to the poor performance of several PSEs and the consequent huge fiscal deficits.

  • In India, privatisation is sought to be achieved through 2 measures:

    • The disinvestment of the government’s equity in public sector undertakings.

    • The opening up of hitherto closed areas to private participation.

Summary of the Debate

Where India’s PSEs stand as of today?

  • India has a very large collection of PSEs so at one end of the spectrum there are many which for many years have been practically non-functional. Their capital assets have become obsolete, many efforts reviving them over 20 odd years have not gone very far and therefore the only logical solution for them has been that they be liquidated and their assets sold which is the land and the capital goods are really scrapped.

  • The next set of PSUs are those which are in losses but they run, they are not obsolete, they have manpower resources and they have capital assets and therefore if the government has not been able to make them profitable under the PSU culture, then their privatization is the right way forward.

    • For example: The Delhi Vidyut Board was losing money it was breeding heavily, it was privatized explicitly and now the consumer is happier, the companies are making profits.

  • The companies which are running well which are profitable and their technologies are reasonably all right for example; NTPC or the Oil Companies.

Kind of privatization that India needs to look at going forward:

  • There are three different things which can happen in privatization:MyGovIndia's tweet - "Hon'ble PM @narendramodi addressed a webinar on the  effective implementation of #Budget2021 provisions in the Department of  Investment & Public Asset Management yesterday. Have interesting ideas on  Budget implementation

    • A Private promoter, a large corporate in India buys it

    • Some foreign entity funds, MNC buys it

    • Enough disinvestment takes place so ordinary people buy shares and you end up getting a board managed company.

  • The fundamental change which has come about in 2021 for the government is that it is appreciating the role of government and private sector in the modern market economy and redefining its own functions and role.

  • Government gone step by step in that

    • Opening up all the sectors to the private initiative whether it was coal, whether it's space, atomic energy.

    • Privatizing of non-strategic sectors.

    • Monetizing of public assets. It is a strategy for PPP sector, when it's too difficult for private sector to do it government will do it and then hand it over monetize it through the private sector because it's more efficient in running these things, because of regulations it's harder to set it up for the private but for running it, they are still more efficient and that generates more money which government can reinvest in it.

  • There's something called public goods infrastructure where you need PPP that means government's role will continue even though it's not strategic as such but there are areas where really there are too many regulations, there's too much government interest and control that it's very hard for a private sector to operate, a highway is a typical example of that because it goes through so much land, it affects so many people so it's very difficult unless government participates and facilitates.

  • Loss-making unit should just be privatized because it's been demonstrated for years and years that government has been unable despite repeated investment to do better about it.

  • The profitable ones, the focus should be disinvestment because it's really not that urgent to hand it over to private management, some of these may be privatized but other ones could just be disinvested gradually to get the maximum return out of them for the government.

Challenges in monetizing:

  • The kind of assets that are there with the PSUs, there may be land.

    • Many of the PSUs do have a lot of land which they don't really require, if they are more or less defunct or moribund then they are not really serving any purpose so the capital assets would probably have appreciated to near zero value.

    • These PSUs which have become monument, they also may be having a lot of debt on their books.

  • The loss making PSUs such as Air India, it has a huge debt on its books so when we monetize or privatize Air India, we will have to provide more or less a clean balance sheet to the new investor and that may not really yield much monetary benefits to the government at the moment.

  • These loss-making PSUs reflect a drain in the public data resources because they have to be constantly kept propped up and working capital requirements have to be met by infusion of funds. So, it is better to have this monetization of privatization at one go.

  • But there is a certain element of risk involved because if it's a government department like DIPAM which has been tasked with doing it, how does it evaluate the value of a PSU which is to be monetized, because if you take the help of various professional agencies, they will come up with slightly different figures in terms of the share value and if you take the whole value of the asset, it may differ very widely and that is where the government body like DIPAM may find itself in difficulty in declaring a kind of a base price before it invites bids and requests for proposal and then it gets into negotiation.

  • There are issues about facing inquiries much later including criminal cases which some have been filed in various courts relating to divestments which took place 20 years ago that is something which perhaps will have to be dispelled set to rest and the government at the highest level will have to play a very important role in providing that kind of system or a an environment where the decision taken in a bona fide manner based on available facts.

 Role of technology in modernization:

  • One of the most important things is the government's ability to infuse funds, there are PSUs which need infusion of funds from the government to modernize

  • They need to go public, because it's not giving up total control, 51 percent control could still be there but the rest could be divested so that is partial divestment but not privatization.

  • Issue about innovation and technology is an extremely important issue because in terms of global competitiveness, in terms of providing competitiveness to our own user industries, it is important to be abreast and to have state of the art technology.

  • If we want to rely on the private sector for instance, to provide this impetus for innovation and for research and development that is perhaps not going to come, so the government has to take the lead choose a few sectors where research and development innovation will be backed up with financial resources and that is where PSUs will also form a part of it that is how they will gain.

  • Innovation is slightly different from research and development, innovation can also take place at the level of a PSU that is something which needs to encourage and policy has to be put in place because there has to be some kind of a personal incentive, individual incentive, an incentive for a PSU which innovates cuts cost, increases efficiency and productivity or builds the same things of a much higher standard of quality.

Way forward:

  • The USA has defined six sectors and four industries where the USA needs to focus which are strategic in the technological sense so like that India have also been thinking about it and it will have to define and it has to be a joint effort of the government and the private sector.

  • Privatization or divestment is the only way possible so that we don't have the PSUs bleed the government in an unproductive way and it should be backed by financial resources for research and development, for innovation

  • India must have a very robust public-private partnership, it should not be government alone or private sector alone, it should has to be a partnership.

  • The resources with the Indian private sector and its capacities have to be kept in mind on two dimensions:

    • If they can make Greenfield investments and add to the growth movement to the economy the resources should not come in buying out a running enterprise which is doing well

    • The issue of concentration of economic power and related to that is how much of the Indian economy do we want to sell to MNCs and foreign funds.

Comment

Upload File