Divestment delay to hit FDI, pricing -- DCR

Divestment delay to hit FDI, pricing -- DCR
ENS ECONOMIC BUREAU

MUMBAI, JULY 15: Duff & Phelps Credit Rating (DCR) has said that the decision of the Cabinet Committee on Disinvestment (CCD) to hold in abeyance the divestment of the government's stake in public sector companies like MTNL, BHEL and Maruti Udyog will be an impediment for the economic reforms process. Had the government taken its coalition partners along with it and managed a consensus on the disinvestment issue, it would have sent the right signals to the global investing community.

``The more the governments dithers on this issue, more are the chances that it will get much lower prices, as competitive pressure takes its toll on the PSUs,'' DCR said in a study on the disnvestment process. Already, a number of serious investors in the power sector are having second thoughts of investing in India, what with continued uncertainty on the policy front and substantially improved investment opportunities in North America. DCR India is of the opinion that the latest development could slow down the FDI flow into India.

Though the government has recognised the potential of privatisation, in its pursuit of greater economic efficiency and growth, it continues to dither on the issue, DCR said. The CCD, which met on June 23, 2000, did not take up the much-awaited `big ticket' disinvestment decision on the public sector monoliths. Although the government had recognised the potential of privatisation in its aim of achieving greater economic efficiency and growth, DCR said, the actual process of disinvestment itself has, however, fallen woefully short of the expectations, to say the least.

From the start, the government has been slow in decision-making. As a result, successive governments have failed to achieve the sell-off targets. Since 1991-92, the government has been able to realise only Rs 19,300 crore out of a target of nearly Rs 45,000 crore. PSUs account for nearly 28.2 per cent of the gross capital formation in India.

DCR has cited opposition on two fronts: a) bureaucrats and ministers who fear losing control and power with privatisation; and, b) the Leftist ideological view that disinvestment entails the selling of the family silver to vested interests. ``There has been a lack of political will towards privatisation. With several ministries involved, the cumbersome process of disinvesting increases the likelihood of inter-ministerial conflict, resulting in delays. The government has been side-stepping the issue through periodic policy statements. The government, which was to have chalked out a three-year road map for disinvestment, ended up formulating a one-year policy on disinvestment,'' it said.

The CCD has done precious little to instill confidence in the potential investors, it said. ``The swapping of equity of oil companies among themselves was considered more as an attempt to meet revenue requirements rather than as a serious attempt at disinvestment. Similarly, foreign interest in the IPCL issue waned because of delays on the part of the government. Another problem is that of valuation of the company to be disinvested. In fact, the VSNL GDR issue was withdrawn for fear of underselling. Since the asset value varies over time, the government does not have a transparent mechanism of pricing the sale of the PSU,'' DCR said.

According to the rating firm, the fate of the labour employed in a disinvested company has not been resolved. ``The government has yet to formulate an appropriate exit package in tandem with the Central exit policy. One of the major reasons for the poor response to the sale of the PSUs has been the fear of the surplus labour. It is imperative for the government to decide on the modalities of disinvestment as quickly as possible rather than merely debate over the issue,'' it observed.

Maruti, which was a market leader in the passenger car segment at a time when the automobile industry as still under a controlled environment, has been steadily losing its market share to new entrants in the present competitive environment. Had the government gone in for disinvestment earlier, it would have certainly got a better valuation.

``The government must get out of business so that the ailing public sector can survive and prosper in the growing competitive environment. The government should earmark a part of the proceeds from privatisation towards the restructuring of PSUs, building social infrastructure, retiring of public debt, and a VRS for surplus staff, rather than use the proceeds to meet budgetary shortfalls. Delinking the disinvestment process from the budgetary exercise, as recommended by the Commission, would set aside fears of underselling for meeting budgetary deficits,'' it said.

Notwithstanding the allegations and counter-allegations that fly between government and opposition, the privatisation process must be transparent to the extent possible. Appointing of merchant bankers/advisers/consultants on the basis of their proven track records will ensure good valuation for the PSUs, it added.