Good judgement needed to push privatisation

Subir Roy
Senior Economic Analyst

EVER since the nineties when under the new economic policies the government sought to withdraw from its earlier position of holding the commanding heights of the economy, the public has slowly been acquiring shares in public sector blue chips. This process has culminated in the present government’s avowed policy of disinvesting as much of its stake in the public sector as possible without seeking to retain control, that is going in for straightforward privatisation.

But privatisation does not come easy and so long as the government remains a major shareholder, it has to mind what it does. The government’s recent experience with the Indian Railway Catering and Tourism Corporation (IRCTC) which gave it a bloody nose offers an abject lesson on minding investor sentiment even though it can theoretically do pretty much what it pleases by virtue of it holding a controlling stake in the company.

In another recent development, the process of the government stepping back from the ownership of commercial entities has come full circle. In the heyday of privatisation, the government is back to floating and owning a development financial institution (DFI) by creating the National Bank for Financing Infrastructure and Development (NBFID). This is when with the conversion of IDBI and ICICI into commercial banks, it was assumed that the DFI was a dead idea whose time had passed.

The sum total of learning from these two instances is that while the government has no business to be in business, its whole approach towards privatisation has to be nuanced and it will be damaging its public image if it missteps under the illusion that one size fits all.

Put in another way, we are back to that terrible idea, symbolising political interference in commercial decision-making, through adopting what is called ‘a case by case’ approach. In a broader policy sense, it can be said that there is only one rule which is never proved wrong — namely, all rules will have to be broken one time or another.

Now, details of the two instances. The government owns 67 per cent of the shares of IRCTC, and so as the de facto owner, can do pretty much as it pleases. IRCTC also holds a kind of monopoly — in online booking of railway reservations and catering on the railways. This is a key source of income for the company, with the fee that it charges for the online reservation accounting for as much as 71 per cent of its surplus (PBIT or profit before interest and tax).

So, one fine morning, in its constant search for revenue, it decided to ask IRCTC to share 50 per cent of what it earns from the reservation service. All hell immediately broke loose in the stock market with the IRCTC share plunging nearly 30 per cent. The government realised that it has goofed up things, and to its credit, without sitting on prestige, in less than 24 hours, rescinded its decision to pick IRCTC’s pocket.

No prizes for guessing how the stock market reacted. The share price bounced back and in a sense all was forgiven and forgotten. The whole episode has to be seen in the context of the government’s initial sale of a part of its holding in the company to the public through what is called an ‘offer for sale’ which met with enormous success because the investing public knew that the IRCTC has an assured source of revenue without having to really do anything to sell the product (online reservations).

Now, let us come to development financial institutions and NBFID. In the good old days, there were three DFIs — IDBI, ICICI and IFCI. Their job was to lend for setting up infrastructure projects whose fund requirements were so large and gestation period (the time it took to break even, if it ever came to that stage at all) so long that the commercial banks of the time which only dealt in short-term deposits and loans could not afford to fund them.

The DFIs were able to lend to long gestation period projects as they had access to long-term funds which commercial banks did not. They could issue securities which gave them longer term funding and overall they operated under a special dispensation from the Reserve Bank of India (RBI).

Then came the foreign exchange crisis of 1991 and the Narasimha Rao government with Manmohan Singh as Finance Minister. The government felt that the stock market and the banks could fund the long gestation projects and the DFIs were a headache as they made little money and gobbled up a lot of government cash.

So, IDBI and ICICI converted themselves into banks (IFCI was deep in red and turned moribund). But in recent times, IDBI got into trouble because its overload of non-performing assets was declared a ‘weak bank’. The government had no desire to pour good money into it and so got LIC to take it over, thus technically making it privately owned. Now, the government has announced its desire to privatise IDBI in the true sense of the word. So of the trio, only ICICI manages to survive on its own feet.

Simultaneously, the government whose primary agenda is to take forward the country’s infrastructure is seeing an acute need for a classical DFI. Hence, it has conceived of one and created the NBFID which will have both developmental and financial objectives.

It will help develop a deep and liquid bond market of international standards for long-term infrastructure financing in India. Plus, it will develop markets for various types of derivatives (for interest rates and currencies). It will also try to bring into India equity from global institutional investors with an eye on attracting green financing. For example, financing of solar and wind power projects, as also capacity for manufacturing solar power modules, will be an area of focus.

Thus it will both invest on its own and also play a role in creating an ecosystem which will facilitate investment in infrastructure, from both domestic and foreign sources. To facilitate investment in NBFID securities, the government has designated them ‘approved’ securities, thus giving them the status of treasury bills and longer-term government securities. The aim will be to support infrastructure projects across their lifecycle by promoting sustainable infrastructure financing.

What the two examples tell us is that privatisation is a complex process in which at the end of the day, the government has to tailor its approach on a case-by-case basis.