economic-survey-vol-1-chapter-9-privatization-and-wealth-creation

This chapter examines the realized efficiency gains from privatization in the Indian context. It analyses the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04.

Difference-in-differences (DiD) is a statistical technique used to estimate the effect of a specific intervention or treatment (such as a passage of the law, enactment of policy, or large-scale program implementation).

  • It compares the changes in outcomes over time between a population that is affected by the specific intervention (the treatment group) and a population that is not (the control group).

Key findings of the survey:

  • Privatized CPSEs performed better: On average privatized CPSEs performed better than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee.

  • Unlocking the potential of CPSEs: From the same resources privatized CPSEs have been able to generate more wealth than their peers.
  • The difference in BPCL and HPCL prices:  In September 2019 disinvestment of BPCL was announced and the survey examined divergence in the stock prices of both post the announcement of BPCL’s disinvestment.
    • Disinvestment in HPCL translated into an increase in the value of shareholders by 33000 crores.
  • Efficiency: Disinvestment has a very strong positive effect on labor productivity and the overall efficiency of PSUs in India. 
    • Eg: Privatization in the telecom sector resulted in Increased customer satisfaction, increased data usage, increased penetration of banking services.
    • Privatization in Vietnam improved capital allocation and economic efficiency. 
  • Stringent employment protection laws are deterrent to privatization. One percentage point decrease in government ownership is associated with an increase in the credit spread, an increase in profitability by 2-3 percentage.

UK example of privatization:

  • The British privatization program started in 1980, In the next phase (1982-86), the focus shifted to privatizing core utilities and the government sold off Jaguar, British Telecom, the remainder of Cable & Wireless and British Aerospace, Britoil and British Gas.
  • The dominant method of disinvestment: Initial Public Offering (IPO). The OECD called the British Telecom privatization “the harbinger of the launch of large scale privatizations”.
  • Open competition: British privatizations went hand-in-hand with reforms of regulatory structures.

Evolution of disinvestment policy in INDIA:

  • Liberalization reforms 1991: In the initial phase it was done through the sale of a minority stake in bundles through auction.
  • Strategic sale 2000: India adopted strategic sale as a policy measure in 1999-2000 with the sale of a substantial portion of government shareholding in identified Central PSEs (CPSEs) up to 50 percent or more, along with transfer of management control.
  • Dilution of equity 2004-05: Another major shift in disinvestment policy was made in 2004-05 when it was decided that the government may “dilute its equity and raise resources to meet the social needs of the people”, a distinct departure from strategic sales.
  • Strategic Sales 2014 phase: Strategic Sales have got a renewed push after 2014. 
    • Department of Investment and Public Asset Management (DIPAM) laid down comprehensive guidelines on “Capital Restructuring of CPSEs” in May 2016.

The Government has been following an active policy on disinvestment in CPSEs through various modes:

NITI Aayog has classified PSUs into “high priority” and “low priority” based on: 

  • National Security
  • Sovereign functions at arm’s length
  • Market Imperfections and Public Purpose

The PSUs falling under “low priority” are covered for strategic disinvestment to facilitate quick decision making.

Way Forward:

  • Exit from non-strategic business: Aggressive disinvestment through the route of strategic sale, should be utilized to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in CPSEs. 
  • Privatization Model of Singapore: The government can transfer its stake in the listed CPSEs to a separate corporate entity. This entity would be managed by an independent board and would be mandated to divest the Government stake in these CPSEs over a period of time. 
  • Temasek Holdings was incorporated by the Government of Singapore on 25 June 1974, as a private commercial entity, to hold and manage its investments in its government-linked companies (GLCs).

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