Economic Survey backs Temasek-like model proposed for divestment

Chief Economic Advisor Krishnamurthy Subramanian made a case for aggressively privatising central public sector enterprises (CPSEs) and suggested that the government transfer its stake in listed firms to a separate corporate entity.

Subramanian recommended the corporate entity be managed by an independent board with a mandate to divest the government stake in listed CPSEs over a period of time. “This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs,” the Economic Survey said.

The CEA said the government would do good to learn from the experience of Temasek Holdings, a firm owned by the Singapore government which holds and manages the investments of that country’s state-owned companies.
“Aggressive disinvestment should be undertaken to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in the selected CPSEs for which the Cabinet has given in-principle approval,” the Survey added.

The focus of the strategic disinvestment needs to be on exiting non-strategic business and directed towards optimising economic potential of these CPSEs so that the government could utilise this capital in public infrastructure, according to the Survey. Subramanian said the government should prioritise 33 public sector units which are in the pipeline for strategic sale since 2016.

The CEA presented an analysis of 11 CPSEs whose strategic disinvestment took place between 1999-2000 and 2003-04. It showed that after privatisation, the firms witnessed improvement on all economic performance indicators.

The analysis was done over a period of 10 years before and after privatisation. It further compared their performance to that of the peers in same industry group.

“The trends confirm that the performance of the privatised CPSE and its peers is quite similar till the year of privatisation. However, post-privatisation, the performance of the privatised entity improves significantly when compared to the change in the peers’ performance over the same time period,” the Survey noted.

For instance, the net worth of the 11 privatised firms increased from Rs 700 crore before privatisation, to Rs 2,992 crore after privatisation, “signalling significant improvement in financial health and increased wealth creation for the shareholder”.

Hence, the aim of privatisation or disinvestment should be to maximise the government’s equity stake value.

The Survey mentioned that the disinvestment of government’s shareholding of 53.29 per cent in Bharat Petroleum Corporation (BPCL) led to an increase of around Rs 33,000 crore in the value of shareholders’ equity in BPCL when compared to Hindustan Petroleum Corporation. “This translates into an unambiguous increase in BPCL’s overall firm value, and thereby an increase in national wealth by the same amount,” it said.

Between 2016-17 and 2018-19, strategic sales accounted for around 28 per cent of the government’s total disinvestment proceeds on an average. For 2019-20, the government has set an ambitious target of Rs 1.05 trillion towards disinvestment. So far, the government has garnered only about Rs 18,000 crore.

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