At This Glacial Pace, Government Is Going To Miss Bus Again On Privatisation, Asset Monetisation

One has to be sceptical about the government’s privatisation and asset monetisation plans given past track record. More so, since the political thinking and bureaucratic processes involved do not inspire any confidence. If privatisation and asset monetisation proceed at the glacial pace it is now proceeding, the government can kiss goodbye to any revenues from these processes.

Three years after Bharat Petroleum and Air India were put on the block, neither of them is anywhere near the bidding stage even though the Department of Investment and Public Asset Management (DIPAM) has promised that both will be privatised this fiscal. We have less than seven months to go in 2021-22 and there is the large Life Insurance Corporation IPO overhang also gumming up the works.

Air India’s privatisation may also depend on the successful withdrawal of lawsuits by Cairn and other entities, which have sought to grab its assets abroad after the government failed to honour international court verdicts against its retrospective taxation. The abolition of retrospective taxation is supposed to speed up this process, but so far one has not seen forward movement.

It was probably with the idea of raising a large sum of money at one stroke that LIC was proposed for a listing this year. Finance Minister Nirmala Sitharaman announced in this year’s budget that the LIC issue would happen along with the privatisation of two public sector banks and one general insurer.

We have seen little progress on any of these proposals, and the LIC issue, which should have been easy, has got stuck even in the choice of legal advisers to the issue. A request for proposals (RFP) was floated in mid-July, but there was a lack of response, and another request has been made with 15 September as the new deadline. It seems unlikely that the IPO will happen this year, unless the sale is entirely to institutional buyers.

One can understand why this reluctance exists. The fact is everyone and his aunt knows that LIC will always have government ownership — it is simply too important for fiscal and privatisation policies — and the fate of government companies that got listed and lost market value is simply too long to enumerate here. Suffice it to say, the LIC IPO will take a lot of selling even to big investors.

As for the asset monetisation pipeline, which involves the leasing (and ultimate return) of Rs 6 lakh crore worth of brownfield assets over four years, the hope is that 15 per cent of the assets will be monetised this fiscal, which should yield roughly Rs 88,000 crore.

The problem is this: each asset will need to have its own vehicle — some could be public-private partnership concessions, others Infra Investment Trusts (InvITs) — which could take a long time to legally set up and monetise. Any asset, whether it is a toll road or gas pipeline or power generation plant or transmission line, or railway stations, or telecom cable, will need a separate vehicle for monetisation, and many legal and administrative bridges will have to be crossed.

For example, selling the assets of a power generation company, which may have power purchase agreements with state governments, will need states to be on board. The monetisation may also need guarantees that the agreed sums for power consumed will be paid into escrow accounts from where the concession partner will be compensated for his capital investment.

When it comes to land, it is even dicier. It is worth recalling that the Centre has been unable to sell any major land parcel for a very long time. Example: Videsh Sanchar Nigam Limited was privatised by the Atal Bihari Vajpayee government by excluding the land parcel. To this date, this land has not been monetised. What is the likelihood that large parcels of public sector land will be monetised anytime in the near two years?

Then there is a possibility of foreign investors’ concerns. Will they ask for payments designated in dollars, or seek currency protection options from the government? When concession periods are long, running over 20-25 years, who can invest dollars in the hope that the investor will not lose out from exchange rate fluctuations? Some kind of cheap hedge options may need to be devised for foreign interest to ignite over asset monetisation plans.

So, what is the way forward? Three ideas could be considered.

One, put the assets to be monetised into a basket, and get a private sector manager to oversee the monetisation plan with a strict timeline. If there is any hitch, the private sector manager will tell the government in advance why some proposal won’t fly. Anybody could have told the government in 2018 that the Air India privatisation plan won’t fly, if they had been asked to give their advice.

Two, it is not a good idea to try and sell one asset after another in serial order. It should not be first BPCL, next LIC, then Air India, or whatever is the current plan. What the government should do is put out all its likely privatisation targets at one go and provide a buffet of offerings. This approach has two advantages. First, it signals serious intent. Plus, it gives buyers the option of buying this asset or that, rather than just what is being offered now. This would be particularly true of banks, where there are still six banks — Bank of India, Bank of Maharashtra, Punjab and Sind Bank, Indian Overseas Bank, Uco Bank and Central Bank of India — which will ultimately be privatised, but may struggle to raise capital in the meantime. The only way to privatise them is to put all of them on the block simultaneously, and allow potential buyers to take a look and decide what works best for them. Trying to do one-off sales is likely to prolong the process and leave some of them out in the cold. A bonus: if one of these banks is sold, it will send out a powerful signal that these are good assets, and if buyers don’t rush, they will miss the opportunity of a lifetime.

Three, the philosophy behind privatisation cannot be driven merely by the idea of raising money or maximising value from sales. Sometimes, the plan should be to avoid future losses (Air India), and at other times to boost competition, and often to remove conflicts of interest where the government is both owner and regulator of the public sector undertaking it intends to sell.

The window of opportunity is narrow. The markets are booming right now, and if some significant sales are not pushed through now, the government will have missed the bus. Once again.