The Atal Bihari Vajpayee Government seems intent on unravelling its most defining contribution to economic reforms-the privatisation of public-sector undertakings (PSUs). Inter-ministerial disputes, ideological differences and ego clashes have slowed down the breakneck pace at which Disinvestment Minister Arun Shourie had sold 28 PSUs between October 2001 and June 2002 and raised over Rs 5,000 crore for the Government.

NAIK: Doesn't want oil PSUs to be sold, says they are strategic

FERNANDES: No to strategic sales, wants public issues

MAHAJAN: Pro-privatisation till recently, opposes strategic sale

DISINVESTMENT TUG OF WAR CHARGE « PSUs are being sold to corporates, not to small investors « Privatisation is creating private monopolies. « Not enough efforts being made to restructure PSUs. « Privatisation of oil retailing will mortgage national security. « Not enough foreign participation in privatisation. DEFENCE « Strategic sales fetch higher prices and improve PSU performance. « Not true except in case of IPCL sale to RIL. Here too low tariffs prevent monopoly pricing. « Crores of rupees spent on reviving PSUs since '70s. No results. « Foreign, private players already in oil exploration and refining. « A number of foreign players bid for Air-India, IBP and IPCL.

Since July 11, the Cabinet Committee on Disinvestment (CCD)-which has Prime Minister Vajpayee and Home Minister L.K. Advani as members-has not met even once. The CCD normally meets twice a month. The bids for appointing advisers for sale of two high-profile PSUs-Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL)-are lying unopened since April. It is not even clear whether these two companies, with a potential to raise Rs 10,000 crore in strategic sale of government control, will ever be sold. That despite the Cabinet giving an "in principle" nod to their sale in February.

Shourie's detractors not only question the method and the purpose of disinvestment but also complain of his uncompromising attitude and his inability to understand the political compulsions. These detractors include his cabinet colleagues and his erstwhile colleague in journalism and Swadeshi Jagran Manch leader S. Gurumurthy. Defence Minister George Fernandes is believed to have put his foot down against the strategic sale of HPCL and BPCL. While it Minister Pramod Mahajan is also opposed to strategic sales, Petroleum Minister Ram Naik doesn't want the companies to be sold at all. Even Advani isn't sure which is the best way to privatise the two companies.

Besides the opposition to the sale of HPCL and BPCL (see box), there is criticism of the method adopted for privatisation in general. The foremost allegation is against the Disinvestment Ministry's preference for strategic sales (in which the controlling stake of a company is sold to the buyer) as against the public issue route (in which the stake is dispersed among a large number of investors).

Shourie's critics claim that by going in for strategic sales for most privatisations, the minister is handing over government companies-many of which are profitable with high market values-to the highest bidder. Though that gets the highest possible price for the company, the small investor is denied the benefit of owning at least a part of such PSUs. In Britain the Margaret Thatcher administration had taken the public issue route to disinvestment in the 1980s. By selling high-value PSU shares to the public at a discount, privatisation enriched the British middle classes. Indians are being denied such an opportunity.

Shourie has multiple defences. To begin with, strategic sales as the preferred method for privatisation wasn't decided by him. The budget speech of March 2000 had enunciated this. The Disinvestment Commission headed by G.V. Ramakrishna had also favoured strategic sales. Besides, a strategic sale fetches more revenue than a public issue for the same amount of shares sold. The price to earning (PE) ratios achieved for PSUs sold through strategic sale range between 12 and 89, compared to PE ratios of four to six attained from public sale of shares. Reason? The bidder pays a premium for buying a controlling stake of the disinvested company.

A PSU sold through a public sale can always be acquired by a company if it buys a controlling stake in the PSU from the open market. If that happens, the company will acquire the PSU without paying a control premium. There are other benefits of a strategic sale. They result in a quick turnaround in the PSU performance, benefiting employees and taxpayers. That's why state governments cutting across party lines are embarking on privatisation through strategic sales.

HPCL AND BPCL PRIVATISATION

SLIPPING UP FUTURE TENSE: Oil PSUs are rallying points for opposition to privatisation On February 27 this year the Cabinet gave "in principle" approval to the sale of HPCL and BPCL, but asked Disinvestment Minister Arun Shourie, Petroleum Minister Ram Naik and the finance minister to decide the exact method of sale. Naik couldn't find time for Shourie till July 29. And when the meeting did take place, the ministers agreed to disagree. Naik is opposed to the privatisation of the oil PSUs and wants to make a presentation to the Cabinet giving "his side of the picture". The opposition to the privatisation of the oil PSUs is justified mainly on the following grounds: « Both HPCL and BPCL are hugely profitable. It doesn't make economic sense to sell them. « Oil is a strategic sector where the government must retain some control. « Private companies can come in through fresh investment rather than by taking over a PSU. « HPCL and BPCL plan to build refineries. What would happen to those plans if they are privatised? Apparently weighty, the objections aren't entirely in tune with realities. Privatisation entails the government getting out of business, whether it is profitable or not. When private oil companies spread their network, the profits and value of HPCL and BPCL are bound to dip, as has happened in all sectors where PSUs are faced with private competition. In March 1999, the Government decided that only defence, atomic energy and railways are strategic sectors. The rest, including oil, are not. That's why private and foreign investment is allowed in oil exploration and refining, both of which are more sensitive than retailing of petroleum products, the main business of HPCL and BPCL. The opponents of privatisation, which include many heavyweights in the Cabinet, are propagating the public sale of HPCL and BPCL shares after which the Government will still retain the ownership of the PSUs. With the deadlock persisting, the Government has two choices-to formally reverse its decision to privatise HPCL and BPCL and face the consequences in terms of loss of credibility and a stock market hammering. Or go in for simultaneous public and strategic sales.

Besides, a public sale isn't really privatisation unless it is accompanied by a strategic sale. If a small percentage of the government holding in a PSU is sold off to public, the company remains under government control. So do all the ills of public ownership. Britain tried to solve the problem by undertaking massive restructuring of its PSUs-which involved appointing new management, delinking the company from the government and laying off employees-before going in for a public sale. In India, despite repeated attempts, no such restructuring has taken place. In the 1970s and '80s, crores of rupees were spent in restructuring PSUs but not a single company turned around. The Ranchi-based Heavy Engineering Corporation went through six restructuring packages, yet the company continued to pile up losses. There are other similar instances.

To be sure, strategic sales and public issues aren't really mutually exclusive. In all the companies privatised through strategic sales so far, the government has the option to sell its remaining stake-26 per cent and above-to the public. That's exactly what is being done with the 45.54 per cent government holding in Maruti Udyog. NALCO, a profit-making PSU, will be privatised entirely through public issues-both in the domestic and foreign capital markets.

That should take some sting out of yet another charge against Shourie. His critics says that privatisation so far has not attracted enough foreign investment. Foreign companies did bid for Air-India, IBP and even for IPCL, but either the privatisation fell through or the bids from Indian companies were higher. Only Maruti's privatisation brought Rs 1,400 crore of foreign money in May this year. If the level of foreign interest in Indian privatisation is less than desired, the Government has to look for reasons within. Global investors will come if the PSUs on offer are good and the Government is speaking in one voice on its privatisation policy-whatever that may be.

-with Malini Goyal