Need to review the divestment strategy
Much of the support for privatization is based on the argument that the performance of state-owned enterprises can be improved by exposing them to market forces. There is an underlying belief that private sector organizations are more effective than public organizations. The bankruptcy of two private sector banks last year is a strong rebuttal to this unfounded and widely held belief.
The zeal with which this year’s budget has jumped forward by having a high target of Rs 1.75 lakh crore in the year 2021-2022 of income from divestment, privatization and monetization of assets seems very inspiring. However, the timing of this aggressive leap of faith raises many questions about the intentions of the PES reforms.
Does timing have a lot to do with the soaring budget deficit made necessary by Covid-19? If so, what is the amount of resources that would be re-injected into the PES for further restructuring and strengthening?
These questions are relevant because we cannot assume that public sector enterprises (PSEs) as a concept have somehow exceeded their usefulness. Despite a rapid privatization phase in the 1990s, public ownership of assets and economic activity through state-owned enterprises (SOEs) persisted and even expanded in some economies.
For example, in OECD countries, state-owned enterprises account for 15 percent of GDP, while in transition economies, state-owned enterprises can represent 20 to 30 percent of GDP. The World Bank estimates that state-owned enterprises globally account for 20 percent of investment and 5 percent of jobs. In 2010, the OECD estimated that state-owned enterprises accounted for 30% of Chinese GDP, 38% of Vietnamese GDP and 25% of Indian GDP.
In fact, the 2018 Guidance Document – World Bank Group Support to State-Owned Enterprise Reform indicates $ 8 trillion in global SOE revenues, which is equivalent to the combined GDP of Germany, France and the United Kingdom.
Despite this decent performance, on a global scale, the experience of privatization raised a host of concerns about the economic, social and environmental consequences, which ultimately broadened the SOE reform agenda in many countries.
China and Singapore – An Example
The relevance of state ownership can rise and fall over time, but SOEs appear to be an enduring feature of all possible economic landscapes. They will remain an influential force globally for several years to come. Therefore, it is important to ensure that state investments actually produce the desired societal results.
For example, even after a long period of reforms, Chinese state-owned enterprises remain the central pillar of China’s growth and its holding company called SASAC (Commission for the Supervision and Administration of State-Owned Assets) competently manages all public enterprises.
In China, most restructured state-owned enterprises are separate legal entities from the Chinese government. These legal entities are second to none when it comes to displaying corporate governance. According to conservative estimates, state-owned enterprises account for around 30% of China’s GDP, and in 2015 their share of the Fortune Global 500 increased to 23%.
The Chinese government supports state-owned enterprises in strategic sectors such as energy, telecommunications, aviation and defense. In fact, for China, state-owned enterprises play a critical and strategic role in technological catch-up.
Whereas in comparison, a country like Singapore has moved away from government completely over business decisions. Singapore owns Temasek Holdings, an investment firm that owns and manages assets on the basis of business principles to create and maximize risk-mitigated returns over a longer period.
The companies in their portfolio are controlled by respective boards of directors, while the management is based on strong principles of corporate governance. Temasek is very different from the Singapore government and has the power to make independent business decisions.
In addition, their support for the community program reflects their profile of corporate social responsibility.
Finding an appropriate balance
In fact, an organization like Temasek Holdings is essential to bring professionalism to Indian PES. Such an approach will certainly bring more clarity on the objectives of state-owned enterprises and protect them from political interference in business decisions. It would make more sense for India to learn from China and Singapore by using PSUs strategically than just selling them.
As we did successfully in the 1970s-1980s in the pharmaceutical sector, leadership roles can be assigned to PESs in selected strategic areas.
The success of the Indian Space Research Organization is a testament to the fact that PSUs can be as competent as any other top-notch innovative organization.
Launch new and emerging industries by channeling capital to state-owned enterprises that are or may become large enough to achieve economies of scale in sectors where start-up costs are otherwise high.
An argument often used against SOEs is that they destroy value rather than create value. They are often seen as “black holes” that consume taxpayer dollars without delivering appropriate levels of return or desired societal outcomes due to less competitive pressures to operate efficiently and effectively than their private sector counterparts.
However, if SOEs have a defined and clear purpose and mission and are actively owned and managed to create value and deliver results, they can and should be innovative and agile. This, in turn, allows SOEs to remain commercially relevant, which is positive for the company’s shareholders, while creating jobs and stimulating growth in existing and emerging industries, which is positive for the company. economy and society. It is an example of finding an appropriate balance between maximizing efficiency and effectiveness while facilitating good growth in the company.
To strike the right balance, SOEs need to implement these programs –
State-owned enterprises should be managed in accordance with the principles of transparency and accountability, and their performance should be reported in a timely, consistent and transparent manner.
Public enterprises must operate in an innovative and agile manner, and use technology (especially digital) and service innovation to deliver products and services effectively and efficiently: “better for less”.
Government participation in SOEs needs to be continuously monitored and evaluated to ensure that value continues to be delivered.
For state-owned enterprises that no longer need to be state-owned, their privatization should be considered in a way that derives the most value to society.
By implementing this program, SOEs can be catalysts for sustainable value creation for the general public and can also build trust by being transparent and accountable.
In fact, it makes sense to go back on what the Minister of Finance had to say in 2007 by introducing Corporate Governance Guidelines for central public sector companies. He said: “The ultimate unlocking of value for PESs comes only by being publicly traded. This nonetheless makes a public enterprise or dilutes the character of PSE… there is a need to reassess the role of the public sector in a growing global market. The market is the world, not just India. Achieving global benchmarks is essential for the success of any business creation. “
Privatization and asset liquidation can be the quick fix to increase income. But that can never prove to be an effective long-term solution, especially in the context of a life-changing event like Covid-19. Rather than making this black swan event an excuse to find an easy answer, we should explore the possibility of having a symbiotic relationship between the relevant public and private sectors to exceed the goal of a $ 5,000 billion economy. dollars by 2025.
(The writer is a former IRS officer and author of the upcoming book “The Current Perspective on INDIAN ECONOMY”)