1 Liberalisation, Disinvestment, Privatisation or Restructuring of PSEs Probably the most...

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Liberalisation, Disinvestment, Privatisation orRestructuring of PSEs• Probably the most influential concept of

later part of 20th century– Repackaging free market economic theory

and adapting it to the language of the contemporary politics

– In 1969 Peter Drucker the design of a “new non-governmental autonomous institutions as agents of social performance under re-privatisation, may well become central job for tomorrows political architects

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• MargarateThatcher a pioneer although Queensland between 1929-32 was the scene of first privatisation programme

• Meaning of privatisation– Involvement of greater market forces– Ensure higher competition– Reduced role of State– Involves transfer of ownership– Control over assets or activities– Expanding peoples participation

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• Meaning of Liberalisation– A state of the economy and economic

principle which may include•Reasonable exchange rate•Removing entry barrier in industry•Lowering import duty•Creating international competition•Abolishing monopolies, access to

foreign technologies and investment, tax and trade reforms

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• Change in ownership from public to private– Gains in productive efficiency but no

increase in allocative efficiency• Objectives of privatisation

– Improve efficiency and performance– Reduce Government interference– Promote private sector culture– Encourage popular capitalism– But it is different things to different

people

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• Effects of privatisation– May improve enterprise efficiency– Develop competitive industry– Accessing capital know-how and

markets– Effective corporate governance

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• Safeguards against privatisation– Without good Government control

privatisation may affect equity and social justice, efficiency and sustainable growth

– Private investment need to be supplemented by public investment in public goods

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• MANAGEMENT PERSPECTIVE– Concept of performance– Have the objectives been achieved?– 3 elements viz, expected

performance, actual performance and measurement mechanism

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• Multiple objectives of PSUs– In private industry, there is a single, clear

and unchanging primary objective– In the case of PSUs objectives are more

numerous, more ambiguous, ever changing• Financial versus non-financial objectives

– Arguments for and against– Arguments, however, cannot be extended

to cover up operational inefficiencies under the garb of social obligations

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• Role of owners and managers– In private enterprises 3 distinguished

rules viz., ownership, strategic and operating are more well separated

– In public enterprises there is a conflict on roles between owners and managers

– In public enterprise boards, bureaucrats and interest groups dominates

– Thus, who dominates boards and exercise control are not specialists

– Bureaucrats are good at avoiding risks and business without risks is not possible

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• Control mechanism– Control by Parliament, COPU,

administrative ministry, DPE, Audit Board etc. leading to decisions satisfying one group or the other without advancing enterprise interest.

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• Is there a difference in productive efficiency between public sector and private sector?– No empirical study to prove either way– Till June 1984 money locked in sick

industrial units was 2900 crores (public sector 22.5%, joint sector 7%, private sector 70%)

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• Does ownership matter– Ownership is not as important as

environment– ‘right’ to manage can make a big

difference

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• Control mechanism– Multiplicity of control mechanism– MOU based on Arjun Sen Gupta

Committee Report introduced in 1986– Objectives of MOU– An agreement between Government and

PSU– Performance in improving system– Concrete goals and objectives– Objective performance evaluation system

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• PUBLIC ENTERPRISES REFORM– May include improving performance– privatisation– liquidation

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• Improving performance may include– Restructuring of existing financial,

technical and organisational structure– Clarifying enterprise objectives and

goals– Improving financial discipline and

performance monitoring– Increasing managerial autonomy and

accountability– Redefining the role of Government

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• These improvements do not last long• The alternate course is privatisation

– Result of WB & IMF conditionality– Under private ownership loss to an

enterprise is private and not that of society

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• Typology of privatisation– 2 broad categories:– Sale and contracting out services

• Types of sale– Total sale : suitable for both profit-

making and loss-making units– Can we fix price offer or through auction

or placement– Allows Government to raise money by

sale– But setting the initial price is difficult

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• Partial sale – Above 49% or below

• Trade sale: •suitable for sale of parts of an

enterprise• where capital market is

undeveloped

• Restitution• Auction : generally for small units

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• Sale through holding companies• Sale to management or workers

– In management buy-out distinction between owners and managers disappear

– Imply buy-out needs a lock-in period : role of institutional investors

– Institutions hold large shares e.g. U.K. (60%), Japan and Italy (75%)

– Can hold the management accountable– But institutions deal with others money

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• Contracting out– Govt. acts as facilitator and provider

and not as a producer of goods and services e.g. security, maintenance of vehicles, buildings, railway platforms

– Quality and delivery may improve but cost may increase due to lack of competition

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T o ta l ow nership t rans fe r P a rt ia l ow nership t rans fe r

S a les C ontrac t ing out

D e f ine O b jec t ives

Public Floatation

Trade salesor Specific buyer

Management Buy-out

Employers Buy-out

(Transfer of ownership)

* Fixed priceMarket priceProfit Earning Capacity value(PECV)D.C.F.*Auction*Private placement

(No transfer of ownership)

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• Privatisation process– Define Govt. objectives and priorities– Meet objections of interested groups– Methods

• Selecting the PE for privatisation– Retain core group of enterprises– Sale of liquidate firms outside the core

group – Phase the programme

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• Categorisation of firms Category Action(a) Essential/strategic/viable Retain under

Public ownership (b) Essential/strategic/Non-viable Retain, but take

specific steps to improve performance

© Non-essential/Non-strategic/ Sell total or in part Viable

(d) Non-essential/Non-strategic/ Liquidate Non-viable

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• Alternate model Taxonomy of PEs

No. Profit/ Social Market NumberLoss obligation structure of PEs

& exter-nalities

1 Loss Low Competitive 972 Loss Low Monopoly 43 Loss High Competitive 74 Loss High Monopoly 205 Profit Low Competitive 776 Profit Low Monopoly 1

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• Privatisation not an objective but an alternative for reforms

• As per IFC Report– 81% privatisation through direct sale

and 58% revenue– Public offer sale 12% and 39% revenue– Followed by other methods around 2%

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PUBLIC SECTOR

• Evolution of public sector policy– To build infrastructure for economic

development and promote rapid economic growth and industrialisation of the country

– To create employment opportunities and promote balanced regional development

– To create a self-reliant economy through the development of local industries for import substitution and by encouraging and promoting exports

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• Industrial policy resolution of 1956– Strategic role in the economy

• Effects– Countries ranking in industrialisation– Development of technical skills– Well trained work force

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• Problems– Low productivity– Poor project management skills– Over manning– Lack of technological up-gradation– Inadequate R&D– Poor HRD

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• New approach of July, 1991– Focus on strategic hi-tech and essential

infrastructure– Reference to BIFR for sick units– Disinvestment of a portion of Govt.

share – Professional Boards– MOU system - autonomy and

accountability

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• Private Sector– Freedom to add new capacities– De-licensing of some industries– Investment in certain sectors

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• Other option for PSUs– Reform and restructuring– Identify likely global giants for

support– Strengthen profit-making PSUs

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Profile of PSUs (Rs.’00 crores)

FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Operation Units (No) 233 236 237 239 240 241Net Profits 37.9 22.7 23.6 32.7 45.5 72.2Profitable Units (No) 131 123 133 131 121 130Net Profits 57.5 53.9 60.8 73.8 97.7 121.2Dividend 3.2 4.1 6.9 7.9 10.3 14.4Loss Making Units (No) 96 109 102 104 117 109

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• Public Sector Plan Outlays Composition of Public Sector Plan Outlays

(%)FY 90 FY 91 FY 92 FY 93 FY 94 FY 95

Net Internal Resources 34 34 39 41 34 46Extra Budgetary Resources 34 42 42 45 52 41Total Budgetary Support 32 24 19 14 14 13Plan Outlay 100 100 100 100 100 100

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• Profile of Loss-making Units

FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Total No. of Units 96 109 102 104 117 109Total Loss (Rs.'00 Cr.) 19.6 30.4 36.7 39.5 52.9 49.1% Loss in Taken Over Units 24 16 15 24 24 20% Loss in Other Units 76 84 85 76 76 80

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• Composition of Net Losses (%)

FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Total No. of Units 77 71 73 73 81 71Total Loss (Rs.'00 Cr.) 39 40 30 34 23 33% Loss in Taken Over Units 16 11 3 7 4 4% Loss in Other Units 100 100 100 100 100 100

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• Sectoral Composition of Losses(% of total losses)

Sector No % No % No % No % No % No %

MANUFACTURINGFertilisers 4.00 18.30 3.00 14.90 2.00 15.00 5.00 18.00 6.00 15.00 3.00 16.00

Consumer Goods 13.00 13.30 14.00 7.20 14.00 6.10 15.00 9.50 15.00 14.00 15.00 14.00

Heavy Engg. 7.00 3.90 8.00 5.50 8.00 7.40 9.00 6.20 8.00 9.60 8.00 11.00

SERVICESTrans. Serv. 4.00 8.50 4.00 10.10 3.00 12.00 4.00 12.00 3.00 11.00 3.00 11.00

FY 94 FY 95FY 91FY 90 FY 92 FY 93

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– Major losses in fertilizer, heavy engineering, consumer goods, transport

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• Budgetary support– Plan outlay around Rs.50,000 crores– Rs.46000 crores internal accruals and

extra budgetary resources– Balance around Rs.4000 crores

budgetary support

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• Budgetary support of PSUs– Plan investment– Plan investment for both profit/loss-making

PSUs– Non-plan outlay primarily for loss-making

units– Plan investment through budgetary support

(equity & loan) : 1210 crores to 15 units– Non-plan outlay : Rs.1028 crores to loss-

making units (1996-97).

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• Budgetary support to profitable PSUs– Rs. 128 crores as equity– Rs. 2364 crores as loan to 21 units

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Composition of Budgetary Support(Rs.Crores)

Category Plan NonPlan

G.Total

On lending Director Total

Profitable 1114 1378 2492 2492

Loss Making 254 956 1210 1028 2238

Total 1368 2334 3702 1028 4730

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• Conclusions– Lending of Rs. 1114 crores from external

sources– Draft on budget Rs. 1378 crores for

profitable units– Rs. 956 crores to loss-making – Losses of loss-making units increased in

1990s– 60% of budgetary support relate to them

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• Growth of public enterprises– Contributes quarter of our GDP– CPE 246 in number and SLPEs 850

• New orientation on PSUs 1991

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• PSUs in strategic hi-tech and essential infrastructure. Along with that PSUs may enter in areas not reserved for it. Sick PSUs to be referred to BIFR– Govt. shareholdings to be offered to

mutual funds, financial institutions, general public and workers

– Powers to be made professional– MOU system

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Profile of PSUs (Rs. ‘00

crores) FY 95 FY 94 FY 93 FY 92 FY 91 FY 90Operation Units (No.) 241 240 239 237 236 233Net Profits 72.2 45.5 32.7 23.6 22.7 37.9Profitable units 130 121 131 133 123 131Net Profits 121.2 97.7 73.8 60.8 53.9 57.5Dividend 14.4 10.3 7.9 6.9 4.1 3.2Loss making Units (No) 109 117 104 102 109 96Overall Losses 49.1 52.9 39.5 36.7 30.4 19.6

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• Budgetary support– Decline in budgetary support as a

percentage of total plan outlay since 1991

– Increased component of extra budgetary resources

– Total assistance (plan and non-plan) to 15 loss-making units Rs.2238 crores

– Plan assistance to 21 profit-making units Rs.2492 crores

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• Profit and loss profile– 120 PSUs with profit of Rs.9700 crores– 117 enterprises with a loss of Rs.5200

crores– 91 enterprises showing cash loss

(Rs.2827 crores in 1992-93).– Employment in these units 4,78,000– Cash loss of Rs.60,000 for maintaining

one employee– 120 out of 133 enterprises making profits

consistently

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• Causes for loss– Poor choice of location– Non-availability of inputs like law

materials and fuel– Choice of wrong technology– Over manning at executive workers level– Poor internal management– Inefficiency in marketing– Effect of public policy

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• Classification of PEs on the basis of competition, social obligation, efficiency

Taxonomy of Central PEsNo. Profit/ Social Market Likely

loss obligation structure decisionandexterna-lities

1, Loss Low Competition Close2 Loss Low Monopoly Encourage competition3 Loss High Competition Improve4 Loss High Monopoly Improve5 Profit Low Competition Privatise6 Profit Low Monopoly Encourage competition7 Profit High Competition Continue8 Profit High Monopoly Improve

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• SLPE– 954 SLPEs approx– 875 under Companies Act or statutory

corporation– 436 commercial category– 312 commercial-cum-promotional

category– 121 promotional

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• Possible lines on restructuring of PEs– Unanimity on methods amongst various

interest groups

• Rangarajan Committee Report– A reserve list for retention under public

control - disinvestment upto 49%– 74% disinvestment in enterprises not of

strategic importance– 100% disinvestment in other enterprises

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• Social objectives– Traditional concept of PSUs furthering

social objectives– But private sector also fulfils certain

social objectives (industrial growth, employment opportunities, infrastructure development, etc.)

– Only about 22 PSUs fulfils social objectives (strategic objective and/or equity objective

– Even the MOUs do not mention of any social objectives

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• Suggested ways of restructuring – Loss making CPEs– Priority attention to restructuring of

loss-making units– Of these nearly 100 PEs do not serve

any social purpose

• BIFR– Problems and inadequacies in

functioning of BIFR

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• Possibility of a new authority– Like authority in Germany

(Treuhandanstalt)– Can be termed ALME– Will hold PE interest and seek a

solution

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• Profit making PEs– Present approach to get cash resources– Unethical inter-generational

consideration

• Restructuring – Ownership– Financial and organisational– Possible change in gearing

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• Modalities of privatisation– Management/workers buy-out– Floatation– Private negotiation

• National Renewal Fund

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Privatisation around the world• USA

– The Government simply regulates business– Privatisation in USA is a misnomer– It has de-regulation revolution from the

time of President Ford– First de-regulation in 1968 by Federal

Communication Commission (FCC) by allowing limited competition against AT&T

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– Transport de-regulation during Carter administration by Civil Aeronautics Board (CAB) and Interstate Commerce Commission (ICC) repealing price setting, allocation of market and restricted entry of new competitors in all transportation

– FCC de-regulated television and radio, broadcasting and tele-communication during Reagan administration

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– Similarly oil price controls and allocation quotas were phased out by President Carter. This improved efficiency and quick adaptation to changing technologies

– The process lead to liquidation of many established companies (air transport, trucking companies) but emergence of new entrepreneurs

– Government of USA owned few assets. Therefore, privatisation in USA was different

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– Selling of some Government assets, terminate support to commercial activity, price products more competitively and rely on voucher and contracting out

– The view was that Government should provide service and need not produce service•Sale of public assets•Lease back (to Govt.) arrangements,

vouchers and contracting out

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• U.K.– Most extensive experience, 11% of GDP– Associated with post-1979 Conservative

Government– Thomas Cook, Rolls Royce privatised in

mid-1970

• While Paper supported autonomy, competition, greater efficiency, protection from political pressure

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• Since 1977, 43 major cases of privatisation e.g. British Petroleum, British Aerospace, British Telecom, British Airways, British Rail etc.

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• Methods adopted– Contracting out– Deregulating statutory monopolies to

create private firms for competition and better efficiency

– Sale of publicly owned firms– stock offering to employees and

customers– Popular capitalism

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• Privatisation of water authorities– Sale of 10 water companies after writing

off of debts– Injecting substantial fund to cover

external debt– But new water authorities to incur heavy

capital expenditure to improve services

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• Privatisation of Electricity industry– For privatisation, existing electricity

industry separated into:•generation, supply and transmission

• For transmission new company: National Grid– 12 local distribution companies in 1990– Central Electricity Generating Board (CEGB)

split into National Power and Power Gen– 40% stake of Government in National Power

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• Benefits– Closing down high cost power stations

having combined cycle gas turbine plants– Up-stream move (bidding for North Sea

gas exploration, investment in foreign coal production) and down-stream move (energy management services)

– Electricity like any other commodity open for competition

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Recommendations Action taken

Standard EmpoweredGroup

Core Group has beenempowered asrecommended

Transfer of Management Decision awaited

Reduction of GovernmentEquity

Decision awaited

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Recommendations Action takenEstablish DisinvestmentFund

According to Govt.communication, Fund hadbeen set-up in September 1996.Details regarding the scope orpurpose are not available

Delink the disinvestmentprocess from theBudgetary Exercise ofGovernment

Decision awaited

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Recommendations Action takenReferral of PSUs to theCommission

Govt. has decided not torefer subsidiaries of PSUsto the Commission

Voluntary RetirementScheme

Decision awaited

Disinvestment withoutreference to theCommission

Decision awaited

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Recommendations Action takenPublic Offer of equity bythe PSUs referred to theCommission

Decision awaited

Disinvestment Package Decision awaited

Offer of Sale Book Building followedin GDR issues

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Recommendations Action takenStrategic Sale Process for selection of

global financial advisors forthe strategic sale ofBALCO and KIOCL hasbeen initiated

Selection of Intermediaries Accepted

Retailing of PSU shares toSmall Investors &Employees

Accepted

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Recommendations Action takenRecommendation onJoining the NSDL

Accepted

Audit of DisinvestmentTransactions

Decision Awaited

Professionalising theBoard of Directors

Broad basing Boards by 3non-official part-timeDirectors (1/3rd of totalBoard strength).

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Recommendations Action takenProvision for ElectedDirectors

Decision Awaited

Selection of TopManagement

Decision Awaited

Salaries and Incentivesfor Top Management

Decision Awaited

Autonomy in PriceFixation

Decision Awaited

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Recommendations Action takenAccountability Accepted

Setting up of Pre-Investigation Board

Decision Awaited

Strengthening theInvestor Interface

Decision Awaited

Powers to Dispose ofAssets

Decision Awaited

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Recommen-dations

Action taken

Freedom ofInvestmentwithin certainlimits

Up to Rs.300 crores or net worth forcategory 1 PSUsUp to Rs.150 crores or 50% of net worthfor category II PSUs

Powers to formjoint ventures

JV upto Rs.100 crores or 5% of net worthfor category I PSUsJV up to Rs.50 crores or 5% of net worthfor category II PSUs.Overall selling of 15% of their net worth inboth cases.

Full freedomwith regard toinvestments

Same both for strong performers andmoderate performers

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REVIEW OF DISINVESTMENT COMMISSION RECOMMENDATIONS

– Disinvestment Commission set up on 23rd August, 1996

– Main objectives:•Determine extent of disinvestment•Select F.A.•Supervise overall sale process•Advise Govt. on capital restructuring

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• Disinvestment Commission to be an advisory body– Disinvestment Commission, therefore,

recommended constitution of SEG for implementation

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• 50 PSUs referred– Reference of 7 PSUs withdrawn later– Commission classified PSUs into

strategic (100 % holding by Government) Core (disinvestment upto 49%) Non-core (disinvestment upto 100%)

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• Recommendations– Establishment of disinvestment fund– Delinking disinvestment from

budgetary exercise– Standing empowered group– Pre-qualification and selection of

strategic buyers– Selection of FA and global co-ordinator

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• Recommendations (contd.)– Transfer of management– Reduction of Government equity– Strategic sale– PSU shares for small investors & PSU

employees– Audit of disinvestment transactions– VRS

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• Recommendations (contd.)– Grant of autonomy– Pre-investigation board– Disinvestment package

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• REVIEW OF DISINVESTMENT COMMISSION RECOMMENDATIONS– Disinvestment Commission set up on 23rd

August, 1996– Main objectives:

• Determine extent of disinvestment• Select FA• Supervise overall sale process• Advise Government on capital

restructuring

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• Disinvestment Commission to be an Advisory Body– Disinvestment Commission, therefore,

recommended constitution of SEG for implementation

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• 50 PSUs referred– Reference of 7 PSUs withdrawn later– Commission classified PSUs into

strategic core and non-core units– Core (disinvestment ... (100%

holding by upto 49%) ... Government)– Non-core (disinvest- ment upto 100%)

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• Recommendations– Establishment of Disinvestment Fund– De-linking Disinvestment from

budgetary exercise– Standing empowered group– Pre-qualification and selection of

strategic buyers– Selection of FA & global coordinator– Transfer of management

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– Reduction of Government equity– Strategic sale– PSU shares for small investors and

PSU employees– Audit of disinvestment transactions– VRS– Grant of autonomy– Pre-investigation Board– Disinvestment package

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SOME EMERGING ISSUES IN PSU REFORMS• PSU accounts for over 50% of

industrial capital– Investment of more than 2 lakh crore

rupees in Central PSUs– Need for reform to ensure sustained

growth– Reform in the context of deregulation

and globalisation

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– Role of free market in improving productivity

– Use of disinvestment in this context to achieve•Roll back of the State•Larger public ownership•Disposal of sick units•Encouraging competitiveness

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• Goals– Short-term and long-term goals– Short-term goals: to reduce fiscal

deficits– to improve

efficiency– Is there a long-term goal ?

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• Portfolio– Which PEs share-holdings to be off loaded– Canada and Spain started disinvesting loss-

making PEs– UK & Chille followed the opposite route– In Canada, UK & Pakistan core PEs have

been disinvested– In India both profit & loss-making units had

been selected indicating lack of focus

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• Partial versus full disinvestment– Partial disinvestment permits Government to

control and own– Successful examples British Telecom,

Malaysian Airlines– East European countries for full

disinvestment– In India adopted partial disinvestment– No management change and little autonomy– The 3 E’s

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• Process of disinvestment– Initial bidding & tendering in India– The above practices created doubts– In UK it was through IPO– In France, Malaysia the stock market

route– Question of transparency

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• Participative involvement of PSUs– In India participation by PSU was

inadequate– Unlike in UK & France– Should PE determine quantum, time-

frame and pricing of shares ?

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• Scope of extent of disinvestment– Only Rs.12,000 crores between 1991

and 1997 works out to 1.25% per year of total investment

– In UK it was Rs.80,000 crores from 1979 to 1986

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• Shareholding by workers– Cost to workers of disinvestment

shares– At market rate or at discount?– No clear policy in India

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• Valuation of share– Valuation should be on accurate, up

to date and wide variety of data– Valuation should be on in-depth

research of data and timing price value and market needs

– In France, valuation is done by two independent banks and examined by privatisation commission

97

• Capital market development– Its need for implementing

disinvestment programme– Absorptive capacity of capital market

in India low– Govt. shareholding is high– Off loading of PSUs shares may lead to

crowding out of private sector– Need to attract valuation– Listing in foreign bourses

98

• Disinvestment mechanism– Generally by an independent body,

need a separate enactment (e.g. France, Malaysia, Singapore)

– In Mexico, a high power unit in Ministry of Finance

– In Philippines an asset privatisation trust headed by a qualified businessman and supported by experts

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– In Kenya, need a decentralised structure by holding companies

– In India, through Disinvestment Commission as an Advisory Body under an executive order

– Implications

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• Restructuring– Abroad (UK, France, Argentina, Singapore)– Both internal and external restructuring

before disinvestment– Internal restructuring consisting of

commercialisation, corporatisation of PEs– Financial restructuring consisting of

adjustment of debt equity mix and equity from private parties

101

– Product policy changes– Labour restructuring– External restructuring, redefining

limits of Parliament, Government, Vigilance and C&AG

– In India such restructuring is for from complete

102

• Role of BIFR– Generally ineffective– Role of National Renewal Fund

inadequate so far

• Disinvestment so far– By fits and starts– Not achieving the avowed objectives

• Evolution of Public Sector Policy

103

• Industrial Policy Resolution 1956– Strategic role in the economy

• Effects– Countries ranking in industrialisation– Development of technical skills– Well trained work force