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Monday, May 30, 2005

Opinion

Opinion - News Analysis

The BHEL disinvestment

Jayati Ghosh

The UPA Government has gone back on its promises in disinvesting equity in BHEL.

THE DECISION of the United Progressive Alliance Government to sell off 10 per cent of public holding of equity in Bharat Heavy Electricals Limited (BHEL) is in direct contravention of its own promises. The National Common Minimum Programme made it clear that profitable public sector enterprises would not be privatised. In the case of "navratna" PSEs such as BHEL, it had further explicitly promised that while they would be allowed to raise resources from the capital market, the Government would devolve full managerial and commercial autonomy to such enterprises — to strengthen them and enable them to become globally competitive players.

The decision to divest shares in BHEL — just like the earlier sale by the UPA Government of some equity in NTPC — completely disregards both of these important promises. This particular act of divestment would take place without the agreement of the parties providing outside support to the UPA, and indeed by overriding the decision-making power of the Board of BHEL, which has clearly not been consulted either. Further, the expected proceeds from the sale of this equity — around Rs.2000 crore — is to go into the Government's coffers, to the newly created National Investment Fund. This is supposed to finance health and education schemes and also provide some funds for the revival of public sector units. In other words, this money is to go towards spending by the Government, in a move that is both unnecessary and fiscally irresponsible.

Unnecessary, because this amount of public resources can easily be found if the Government really intends to. After all, more than Rs.30,000 crore was found as additional defence expenditure. And irresponsible, because the sale of equity from a profitable enterprise necessarily involves the loss of future revenue because of foregone profits. The sale of any asset implies a capital loss, which properly should only be balanced through some other change in assets or liabilities, such as through retiring debt. Using such money as a form of current revenue, which is in effect what is being done here, is completely illegitimate.

In the case of BHEL, the amount of foregone profits is not small at all, since last year alone, the total operating profits of the company (before depreciation interest and taxes) amounted to more than Rs.19,000 crore and even post-tax profits were more than Rs.10,000 crore. Indeed, BHEL, like several other "navratnas" has been showing profits continuously for some years, but has not been allowed to spend the money for its own expansion and development. Instead, it has simply added to its reserves, such that its reserves currently amount to well over Rs. 50,000 crore. This is extremely wasteful, and it also denies BHEL and other such companies the opportunity to invest and restructure in ways that would increase their external competitiveness. Many profitable PSEs are currently in this position, whereby they are simply holding huge reserves because of constraints put upon them by the Government. The fear is that if they are privatised, the private purchaser will then have access to the use of these huge reserves that it can use to its own ends rather than in socially desirable ways. This was true, for example, in the case of both VSNL and Balco, where privatisation allowed the private buyers access to the enormous built up reserves to further other investment plans of the purchasing company.

It should be obvious that such a strategy is not only unwise but also counter to any genuine attempt to strengthen the public sector. It is even contrary to proposals made by a committee set up by this self-same UPA government to consider issues of autonomy, delegation of financial powers and empowerment of central PSEs, chaired by Dr. Arjun Sengupta. The Report of this Committee ("Group of Experts on Empowerment of Central Public Sector Enterprises") was submitted in April 2005. Many of the points made in this Report have a direct bearing on disinvestment of the type now being pursued. The Report points out that "the Ministry in charge of the company should recognise the fact that they are not the owners of the company but are only exercising the functions of ownership as a custodian on behalf of the Government and the public at large." (Page 8)

The Report recommends much greater autonomy and clearly defined powers for the Board of Directors, which should be fully responsible for the supervision and control over the management of the company. It should have full powers of pursuing new lines of business, deciding on suitable acquisitions and mergers, setting up subsidiaries, as well as other decisions regarding capital expenditures, joint ventures, and so on. What this means is that the Board of a PSE, rather than the Ministry or Cabinet, should decide in the best interests of the company and keeping in mind its social objectives, how to use its resources, whether to issues shares for expansion, and so on. The Report therefore proposes a whole institutional package towards strengthening the PSEs, making their management more professional and providing them some autonomy from their Ministries in order to allow them to invest and restructure in ways that would strengthen their competitive position over time.

It is obvious that the disinvestment proposed for BHEL runs completely contrary to the recommendations of this Report. Instead, once again the profitable PSEs are being treated as milch cows for a Government that has decided that it is strapped for cash, regardless of what is in the best interests of the company itself and the economic activities it is engaged in.

Another very important recommendation of the Report is that any decision to reduce Government shareholding to less than 51 per cent should be taken only with the consent of Parliament in each case. But the recent action of the Government suggests it is willing to ignore not only its own promises and the views of its allies and supporting parties, but also the recommendations made by Committees that it has set up, if it does not suit its own temporary and short-sighted goals.

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