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Free PSUs before privatisation

A K Bhattacharya | October 01, 2003

Reformers are upset with the recent Supreme Court verdict on the divestment of government equity in oil majors -- Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited.

The Supreme Court verdict has meant that the government cannot go ahead with its divestment plans for HPCL and BPCL without getting Parliament's approval.

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Parliamentary approvals take time and the government has to wait for a few more months before it can take credit for having initiated the first big and real move to privatise an oil company. The earlier attempt to privatise IBP had failed to satisfy the purists.

The government did reduce its stake in that company below 51 per cent, but another public sector company, Indian Oil Corporation, had outbid the private sector competitors and gained control of IBP.

But this time, no public sector company is being allowed to bid for HPCL or BPCL. Whenever the government moves ahead with its divestment plan after obtaining the approval of Parliament, you will see genuine privatisation in the oil sector for the first time.

So there is no need for raising a big hue and cry over the Supreme Court verdict. Yes, there will be delay. But what the Court has ordained will ensure that nobody later questions the legitimacy of the privatisation exercise once Parliament's approval is obtained.

In fact, the time the government has got between now and Parliament's approval is a golden opportunity for it to bring about much-needed reforms in the entire disinvestment process.

The most important step should be to transfer HPCL and BPCL to the disinvestment ministry. At present, these public sector undertakings function under the administrative control of the petroleum and natural gas ministry. The government should not allow the status quo to continue if it wants to remove the uncertainty over divestment and the resultant complications in the day-to-day running of HPCL and BPCL.

Mind you, the Supreme Court has not questioned the government's right to privatise the oil companies. All it has done is to stipulate that since the government had acquired these companies by an act of Parliament, their privatisation too should be done through a legislative process.

Shifting the administrative control of HPCL and BPCL to the divestment ministry will be an executive decision, non-violative of the Supreme Court order. And yet, it would distance the two companies from the petroleum and natural gas ministry, which has made no secret of its reluctance to give up its administrative control over them.

In fact, the government should use this opportunity to transfer all PSUs, which are due to be privatised, to the divestment ministry till such time they are actually sold off to the strategic investor.

This was an idea originally mooted by the PV Narasimha Rao government before it launched its disinvestment exercise. But no ministry wanted to give up control of the PSUs under it. Thus the idea was given up.

But time and again, it has been proved that ministries like to retain control of the PSUs as long as they can and delay taking the interim measures that ideally should be taken to facilitate the PSUs' transition into a privately owned enterprise with no government support.

There are many advantages if the PSUs, identified for privatisation, are transferred to the divestment ministry at least six months to one year before their actual sale.

Unlike their parent ministries, the divestment ministry will not be unduly attached to them and its main concern will be to improve the proceeds from the divestment effort. So, if needed, it will be quick to restructure the PSUs before putting them up for sale, so that they fetch a better price.

The divestment ministry will also be able to use this time to gradually free the managements of these PSUs from the government's shackles. True, the government has given some freedom to the profit-making PSUs to make investments up to a limit.

But the top managements of PSUs still do not enjoy any freedom to recruit the best talents at their market price or offer attractive compensation packages to retain employees. There is a public sector pay scale stipulated for all the employees and no management can deviate from it.

Even a few months of freedom from such government controls can do wonders for companies like HPCL and BPCL before they are actually sold off and made to face the market. The divestment ministry is ideally suited to bring about such changes.

There is nothing strikingly new in the idea that PSUs before their privatisation should be handed over to a special unit, which could prepare them for sale to get the best price. Britain and Mexico have used this privatisation model and benefited from it immensely.

There is no reason why it will not work in India. The delay caused by the Supreme Court verdict can prove to be an opportunity, only if the government decides to seize it without any delay.

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