Privatisation of PSUs: an overview

The push for privatization of Public sector undertakings seems to be going forward with the Atmanirbhar package including it and the recent proposal for letting private players run 151 trains. The Oil Minister also cleared uncertainty by saying that there is no going back with the BPCL privatization process. The LPG era that started with 1991-92 reforms, with this, push, seems to get the biggest push with this clear stance.

This topic of “Privatisation of PSUs: an overview” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.

What are the Public Sector Undertakings?

• The government-owned companies are known as Public Sector Undertakings (PSUs).
• In a PSU majority i.e. 51% or more of the paid-up capital is owned by the central government/any state government/partly by the central governments and partly by one or more state governments.

Why the Public sector Undertakings were needed?

• On the eve of independence, India was grappling with grave socio-economic issues, such as low income and unemployment, regional imbalances and lack of skilled manpower, weak industrial base, low level of investments and infrastructure lacunae, etc.
• Hence, Public Sector was developed as an instrument for self-reliant growth. The country adopted the planning, which created the path for the development of PSUs.
• Initially being confined to core and strategic industries, the governments in the second phase went with the nationalization of industries, the takeover of sick units of the private sector, and taking public sectors to the new fields like manufacturing consumer goods, consultancy, contracting and transportation, etc.
• The Industrial Policy Resolution 1948 explained the logic behind and importance of continuous growth in production and equitable distribution. The policy envisaged active engagement of the State i.e. state-owned PSUs in the development of industries.

What Was the Role of PSUs?

1. Create significant ‘capacities’ (ability to produce) in basic and capital goods.
2. Achieve self-reliance in core areas and also facilitate import substitution
3. Attain commanding heights of the economy and become a driver for the industrial
   growth and a catalyst’ in accelerating overall growth of the economy
4. Adopt pro-labor technology to create employment opportunities
5. Setting up industries in backward/tribal areas for their integration with the rest of the
   economy and also for better regional development.
6. Provide for the development of the private sector.
7. Set up self-contained townships covering residential, schools, hospitals, transport, etc.
8. Public sector to have regulated prices by the government given their importance to
   the economy and not creating an upward spiral in the prices of basic goods

What are the types of Public sector undertakings?

• Public Sector Undertakings are classified as Public Sector Enterprises (PSEs), Central Public Sector Enterprises (CPSEs), and Public Sector Banks (PSBs).
• The Central Public Sector Enterprises are classified into ‘strategic’ and ‘non-strategic’. Areas of strategic CPSEs are:

1. Arms & Ammunition and the allied items of defense equipments, defense air-crafts and warships
2. Atomic Energy (except in the areas related to the operation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine, and non-strategic industries)
3. Railways transport.

• All other CPSEs are considered as non-strategic.
• The PSUs are further categorized as Maharatna, Navaratna, and Miniratna companies according to their performance and given appropriate powers to manage themselves accordingly.

Have the PSUs been able to fulfill their role?

• Broadly they have delivered in creating significant capacities’ in all core areas and
  having achieved self-reliance in all kinds of industrial goods required in the economy.
• Today, India can safely claim that it is not dependent on any country for its
  requirement of industrial goods largely due to the public sector
• They have provided gainful employment.
• It has also facilitated the evolution of the private sector and also been responsible for
  the levels of industrialization and industrial maturity reached.
• They can also be credited for making the industrial sector a driver of growth
  and lifting overall rates of growth.
• Having said that, The PSUs also have been at the receiving end of criticism. The PSUs today are seen as the relic of past inefficiencies and white elephants that must be sold off to achieve efficiencies in resource planning.

What are the issues with the PSUs?

• India’s public sector landscape is fraught with a large number of loss-making and dysfunctional public sector units.
• A total of 70 Public Sector Undertakings were in a loss as of March 2019, with total stress amounting to over Rs 31,000 crore.
• Out of these, state-run carrier Air India, telecom companies Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) were the top three loss-making PSUs in fiscal 2018-19
• This is particularly true for state PSUs. The States have so far invested ₹14.6 lakh crore in 1,136 functional and 319 dysfunctional State PSUs (SPSUs).
• 1,136 working SPSUs incurred a net loss of around ₹ 84,000 crore collectively during 2016-17, and their accumulated losses amounted to ₹4.65 lakh crore.
• There are governance issues with the PSUs as well. The career bureaucrats are placed at the helm which hampers the efficient management of these PSUs.
• There is a politicization of the appointments in the higher management creating a spoils system.
• In the Public sector, there is an excess security of employment which breeds inefficiency and hampers the quality of production.
• The existence of obsolete plant machinery and the inability to infusion of newer technologies is a major cause of PSUs being in loss.
• The losses prompt PSUs to take loans from the Banks which they cannot repay creating the conditions of the twin balance sheet.
• The lack of vision in the management creates a condition of lower capital utilization, continued higher input costs, and compromise on quality.
• Apart from these issues, the philosophy behind PSUs has undergone a sea change now with the redefinition of the state’s role as a facilitator rather than a producer, but most of our PSUs still remain trapped in the vast no man’s land between the state and market.

What is the need to privatize the PSUs?

• Apart from the above issues that push India towards Privatization, there are various pull factors also.
• The private sector has come a long way and acquired the will and capacity to compete at the world stage. It no longer needs the government to take care of non-profit-making industries. Rather it is seeing opportunities in areas like railways too through investments in Mass Rapid Transit System.
• There are many advantages of privatization that could be complementary to the developmental targets.
• Privatization raises government finances that can be spent in social sectors.
• It creates money for restructuring and improvements necessary for PSUs.
• It brings in professional management to the mismanaged PSUs. It increases the profitability of the firms.
• Privatization brings in more investment including Foreign Direct investment.
• It also helps in up-gradation in technology, skills, and operational efficiency.
• It reduces the Public debt that is rising to unsustainable proportions.
• It also releases resources such as large government manpower currently locked up in managing PSUs to be redeployed in priority areas.

History of Privatization in India

• As discussed above, the PSUs were necessities of the post-independence economic realities. Between 1951 and 1991 the PSUs ran the show as far as industries are concerned.
• But with PSUs turning inefficient and immediate needs of the balance of payment crisis led Indian policymakers to seriously think on economic reforms which included de-nationalization of various sectors.
• Promising PSUs are categorized as Maharatna, Navaratna, and Miniratna. Many sectors such as telecom were opened up.
• But the initial phase saw only gradual privatization and big bang disinvestments did not take place till the beginning of the 21^st
• The setting up of the Department of Disinvestment in 1999 accelerated the process of disinvestment and the department oversaw many strategic sales like ITDC, Balco, etc.
• The disinvestment only increased after that barring some opposition to the privatization and due to coalition governments.
• After 2014, with a government secure of its majority in power, disinvestment and privatization was one of the main economic agendas.
• The current government makes its stance clear by saying that the government has no business in doing business.

What is the difference between Privatization and disinvestment?

• Privatization implies a change in ownership from government to the private sector. Privatization of a PSU is said to be done if the government sells more than 51% of the ownership of a PSU to a private entity.
• Disinvestment, on the other hand, refers to either dilution of government stakes in a PSU to a level that results in the transfer of management or could be limited to partial stake selling and continued ownership of the government.

What is the current status of disinvestment/privatization?

• The NITI Aayog and the erstwhile planning commission too talked about the need to privatize and reform the administration of Railways.
• The current policy of privatization is guided by the policy laid down in 2002. The policy envisages disinvestment as a process of optimal use of the national resources and realization of the productive potential of the assets.
• The policy aimed at the modernization of PSUs, the creation of new assets, returning the public debt, and the generation of employment.
• The center has set a budget target of Rs. 2.10 lakh crore from disinvestment in the current fiscal year of which Rs. 1.20 lakh is expected to come from the CPSE disinvestments.
• As mentioned in the beginning, the government wants to privatize all but 4 public sector companies in strategic sectors.
• While announcing the fifth and last tranche of Atmanirbhar package, The Finance Minister said that privatization will be a difficult move under current circumstances but the government is absolutely clear that it wants to go further in the privatization process.
• Recently, The Indian Railways initiated a process to allow private firms to operate passenger trains on its network through 151 new trains. While, 151 is not a large number but it essentially kickstarts the involvement of private participation in passenger trains operation.
• In February, the Power secretary said that the central government will encourage states with electricity utilities that lose more than 15% of revenue due to archaic networks, power theft and sloppy billing, and connections to seek private participation in their distribution network.
• The Oil Minister also made it clear that there is no going back in the process of privatizing BPCL.
• Also, the government has made it clear that it wants to focus on governance rather than running businesses, and to this end, a new PSU policy is in the making.

What are the impacts of the privatization in the current times?

• The privatization of Railways is one of the most talked issues in recent times with apex think tank The NITI Aayog lending its support. Its Strategy for New India@75 envisages infrastructural targets like 100% electrification, improving track penetration, etc. All these targets demand private investment.
• As the Bibek Debroy committee suggested, there is a conflict of interest as the Railways being policymaker, regulator, and service provider. Independent regulation will bring in effective checks.
• Privatization of Railways will lead to better infrastructure, improved safety, and reduction in travel time, improved punctuality, tariff rationalization, etc.
• It will also improve the quality of onboard services like better sanitation, food and water supply, and also improved Railway stations.
• It will bring technology infusion in Railways to improve working efficiency.
• The Disinvestment drive has not been successful in the levels of expectations. Hence the privatization spree is thought to give more clarity-hence the sale of even profit-making PSUs.
• The Privatization drive is necessary to reach the target of disinvestment assumed in the fiscal year.

What are the challenges associated with the privatization drive?

• In India, generally, public opinion is not favorable to the privatization process as it is against the interest of marginalized and socially disadvantaged sections.
• The privatization of Railways will have an impact on ordinary people which depend on low-cost travel of the cross-subsidized passenger traffic. The experience with the Metro train rates is not encouraging.
• The proposed privatization and consequent high-end service promises will cater only to the well-off. Whether it will be beneficial to the ordinary has an obvious answer.
• The private sector works on profit motives. It will generally focus on more popular routes and other routes will be neglected making underdeveloped parts virtually inaccessible and resulting in cutting off from the developmental processes.
• Besides, there are many issues with the process itself. Government’s attempt to privatize Air India has not been very successful. This situation is likely to follow in other loss-making entities also as the private players are not very enthusiastic about buying loss-making entities.
• The privatization of profit-making PSUs is beyond understanding. There seems to be more of a fiscal and liquidity needs-led push than long-term structural change aspiration in it. It only leads to a loss of regular income to the government.
• Privatization of Oil PSUs has been the cause of concern as Oil is a strategic natural resource and ownership in foreign hands is not compatible with our strategic needs.
• There are concerns about crony capitalism also.

What is the way forward?

• While, disinvestment and privatization in loss-making assets is a common wisdom now, we must not forget that there are slippery slopes in this path.
• We must not get carried away and sell the PSUs for lesser prices than expected just for the sake of privatization.
• A proper judgment of the value of the PSU is necessary and Railways and BPCL are some of the sectors where the proper pricing is difficult to come up with as the potential for future growth is high as of now.
• There is an issue with how do we utilize the proceeds of disinvestment. Using it for bridging the revenue deficit and neglecting dire needs of modernization of existing strategic sectors and asset creation will be a huge misstep.
• To make the assumptions of cronyism go, the process of privatization must be fair and transparent with a level playing field to al players. A third-party evaluation of assets and a minimum number of bidders should be necessary pre-conditions to ahead with each sale.
• The after-privatization governance is also important and the private player that wins the bid must be made accountable so that the existing socio-economic functions of that asset must continue and they are not sacrificed for profit motives.
• The regulatory mechanism also needs to change if the all-around privatization takes shape. This is a critical process as we must balance the socio-economic needs with market requirements of freedom of operation.
• The new policy must take into account all these issues and come up with a fool-proof policy to regulate the Privatization and after.

Conclusion

The PSU privatization is a long-lagging process. This is thought to be a necessary pre-condition for growth and good governance of the existing PSUs. Amid the pandemic hit market conditions, it needs to be seen if the current drive fetches good results. At any cost, the poor of the country must not bear the cost of aspirations of the remaining middle and higher class. Any future policy must be aware of the tremendous role that PSUs played and still play.

Practice Question for Mains

What is the difference between Disinvestment and Privatization? Critically analyze the current spree of privatization and its potential for success. (250 words)