In recent years, disinvestment has been a major watchword for the Centre. Last year, its budget was in some senses even anchored on expected disinvestment revenue, with the government looking to earn Rs 1.75 lakh crore from the monetisation of PSUs (public sector undertakings) like Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI (Shipping Corporation of India). However, as of December 2021, the government had met just about five per cent of that target, or Rs 9,240 crore. In her budget this year, Union finance minister Nirmala Sitharaman indirectly acknowledged the huge miss by scaling down the FY22 disinvestment revenue projection from Rs 1.75 lakh crore to Rs 78,000 crore and setting the 2022-23 target at just Rs 65,000 crore.

For several years, the Centre has faced a host of troubles in making good on its privatisation promises, be it a pushback from employee unions worried about their future or trouble generating investor interest. Many PSUs on the block also have complex, damaged balance sheets, making it difficult to value them accurately. Tuhin Kanta Pandey, secretary, DIPAM (Department of Investment and Public Asset Management), says the government is mindful of the challenges and has shifted focus from diluting PSU holdings to full privatisation. The sale of Air India to the Tata Group has been encouraging, though it brought the government only Rs 2,700 crore in cash. Pandey hopes to repeat this success.

Other PSUs on the block include IDBI Bank (which did not find mention in this year’s budget speech) and helicopter operator Pawan Hans. Despite the continued privatisation push, the Centre’s budget this year is much more conservative in expectation and objective. For one, it sets no targets for the divestment of PSBs (public sector banks) and financial institutions—a politically contenti­ous area—and revises last year’s target for it to nil from Rs 1 lakh crore. A hoped-for success is the upcoming LIC IPO (Life Insurance Corporation initial public offering), expected to launch on March 11. Fund managers say the IPO could raise between Rs 50,000 crore and Rs 1 lakh crore, but with war breaking out in Ukraine, the government might choose to delay the launch, which will have consequences for its divestment agenda. Meanwhile, Tata Steel has also acquired a 93.2 per cent stake in the government’s Neelachal Ispat Nigam, a steel manufacturer, for Rs 12,100 crore.

MISSED TARGETS

The list of missed divestment targets includes firms that have now spent years on the block. Pawan Hans, for example, has been on sale for 10 years. The firm’s revenues have reportedly been falling since 2016, with losses in 2019 and 2020. Last year, the Centre made another attempt to sell it, relaxing its earlier terms to attract more buyers. In December, it announced it had received bids, but little has been said on the matter since.

Another example is the sale of BPCL. So far, the government has had to extend its deadline for filing preliminary expressions of interest four times. Part of the trouble has to do with the sector—with crude oil prices highly volatile in recent years, it has been difficult to generate investor interest in energy companies. On the block is the government’s entire 52.98 per cent stake in BPCL, for which it says it has received three expressions of interest. Ratings agency Fitch rates the firm BBB- with a negative outlook, saying “uncertainty over the bidder consortiums and process complexity, including valuation, may lead to potential delays in the privatisation of India’s second-largest fuel retailer.” Similarly, the sale of SCI remains in limbo because bidders have found it difficult to complete their due diligence of the firm’s assets.

A major hurdle to privatisation, across sectors, has been the pushback from employee unions. On the morning of January 27, the day DIPAM was to officially hand over Air India to the Tata Group, officials attended a virtual hearing of the Madras High Court. The court had taken up a petition by an employees’ union against the sale of Air India, citing worries about the future welfare of current workers. Worried that employee activism and litigation could scupper the sale, the government agreed to almost all the union’s demands in this particular case, including the continuation of medical benefits for retiring and retired Air India employees, the encashment of leaves, and so on.

Employee unions are almost never in favour of divestment. Major reasons include job security and pay levels. “PSU employees want to stay [in the public sector] because they get three times the salary of their counterparts in the private sector,” says Nilesh Shah, MD of Kotak Mahindra Asset Management. “The average BPCL salary is Rs 20 lakh per annum—the average private sector employee makes a third of that.”

Another systemic problem is the complexity of PSU balance sheets, which makes it difficult to value such firms. In addition to the massive debt they often carry, many government undertakings also come bundled with unwanted assets. Air India again is a good example—the sale required the airline’s non-core assets (including real estate like Centaur Hotel) and about Rs 51,000 crore of its debt to be partitioned off into an SPV (special purpose vehicle). After many rounds of discussions, it was also decided to sell the airline on its enterprise value (market cap plus net debt) rather than its equity value. An official closely involved with the project says it was only after these decisions were taken that the Centre was able to find bidders. “We faced many hurdles with the sale of Air India,” admits Pandey. “Bidders were scared.” When it comes to the sale of BPCL, the government may once again have to take the asset-separation route, since a major stumbling block is the firm’s massive real estate assets.

According to DIPAM, in 2021-22, the government had received about Rs 44,450 crore as of January 3 from various subsidiaries. Of this, only Rs 9,329.9 crore was from divestment, with the remaining Rs 35,116.72 crore being dividend receipts.

NEXT UP

In one sense, the government’s divestment challenge becomes harder with every success, since what remains on the block are firms that investors have already passed on. Pandey says, “Except for the new listings—for example LIC’s IPO, which is a big opportunity because we are bringing something new to the market—the scope is very limited for the government to raise money through divestment. We have been diluting our stakes in existing companies. If we want to [reduce our stake] below 51 per cent, then we are talking about privatisation and handing over management control.”

The to-do list so far includes IDBI, SCI, BPCL and Pawan Hans, which have proved hard to sell for various reasons. A senior official closely involved with the divestment effort says, “Pawan Hans has been on the block for 10 years, and it will be tough to find buyers for IDBI because of the bank’s poor competitiveness. Most companies are also saddled with tarnished assets.”

One challenge the government will have to grapple with is how to sustain investor interest through the process. Frequently, bidders have grown cold midway through their valuation/ due diligence reviews, perhaps realising just how difficult it will be to take over the management of a PSU. In addition to the depreciated assets, massive debt and complicated asset holdings, there is also the challenge of bringing many different stakeholders—employee unions, the existing PSU management, bidders, regulators and policymakers—all onto the same page. Though the political leadership appears determined to see this through, the scaled-down divestment targets in the 2022-’23 budget indicate an acknowledgement of the enormity of this challenge.

The difficulty is also aggravated by continuity issues in DIPAM. Secretaries have relatively short tenures—three years—but building, sustaining and channelling the investor interest needed to divest a PSU is an enormous effort. It involves not just a marketing blitz but also careful financial analysis and a strategic regulatory and political campaign to steer the deal to a successful conclusion.

There are no easy answers to privatisation. Experts say clear plans and quick decision-making could help. It is also crucial to speed up the sales to plug asset erosion—Air India’s debt doubled in the period between the first announcement of its privatisation and its eventual handover to the Tata Group. The reopening of old cases by the judiciary—such as the one relating to a divestment deal conducted under the watch of former IAS officer Pradeep Baijal, or one relating to the divestment of Hindustan Zinc years after the deal was concluded—also has a chilling effect on bureaucratic speed.

Shah says the Centre may find it efficient to adopt the Singapore model. In that country, one firm, Temasek Holdings, manages the investments and assets formerly held by the government, while another—GIC (formerly the Government of Singapore Investment Corporation)—manages the government’s financial assets. This frees up ministries to do policy work by handing over the privatisation process to professionals. Yet another option is to tap equity markets to dilute PSU stakes and let a private board manage these firms. Meanwhile, amendments to the General Insurance Business (Nationalisation) Act were cleared during the monsoon session of Parliament. The Banking Laws (Amendment) Bill 2021, relating to the privatisation of two PSBs, was also listed for introduction in the winter session of 2021, but opposition from bank unions and state elections have delayed its tabling.

The fact that billionaire investor Rakesh Jhunjhunwala chose to launch his own airline rather than bid for Air India is a lesson for the Centre. There are many reasons India’s ailing PSUs remain stuck on the block—from their poor competitiveness and massive debt to the continuing asset erosion and the pushback from employee unions. If the Centre is committed to achieving its divestment targets, it is critical for these problems to be addressed quickly and comprehensively.