The money this deal could fetch the Union government is just the tip of the iceberg. Government owns just over 53 per cent of Bharat Petroleum Corporation Limited (BPCL).
Valued at 20 times the earning per share (the same as Reliance Industries) the fair price for handing over strategic control of the company should be around Rs 660 per share versus yesterday’s closing of Rs 404 per share -admittedly post the crude price fall hammering of oil stocks and the 52-week high of Rs 550 per share.
This translates into revenue for government of around Rs 700 billion in FY 2001 – or around 0.35 per cent of GDP which is not to be sneezed at in these hard times.
BP sale critical for bridging the fiscal deficit FY 2021
Keeping the fiscal deficit within the targeted 3.8 per cent of GDP in FY 2021 is expected to be a major struggle. Success will depend significantly on achieving the budgeted disinvestment receipts of Rs 2.1 trillion, which is 5X of the likely achievement this year ending March 31. So, getting the money into the treasury is important.
Sweet revenge for BJP reformers who advocated sale as early as 2003
Readers might remember that the privatization dream-run of the Vajpayee led NDA government came to a grinding halt against the implacable opposition from regressive factions within the BJP and the threat of workers agitations when the privatization of HPCL and BPCL were taken up in 2003.
Hindustan Petroleum Corporation Limited was safely tucked away as a subsidiary of the public sector behemoth -Oil and Natural Gas Corporation- in January 2018 through a deft maneuver which extracted revenue from the sale of government equity in HPCL to ONGC without encountering any of the downside of resistance from vested interests.
The privatization of BPCL is qualitatively different and vindicates those who argued, even in 2003, for its sale to a strategic investor.
The good news is that the sale of this well-run PSU will exemplify what privatization should be about – that it is not the business of government to be in business.
Sale of a genuine “Crown Jewel” shows decoupling of economic growth from public ownership of core industries
The argument is often made that well-run PSUs must not be sold since there is no compelling financial reason to do so, unlike say loss-making ones like Air India.
This argument ignores that public capital comes at a high social cost. Higher the amounts of debt sequestered by the public sector higher will be the cost and lower the volumes of credit available for the private sector. By getting out of businesses which can be and are, elsewhere, routinely owned and managed by the private sector, government reduces its encroachment into the debt and capital markets.
Today the Indian public sector accounts for around one third of large business. The smaller it becomes, the less will be the incentive for government to distort markets through administered cost-plus pricing.
An enlarging pie for the private sector is good for autonomous regulation
Autonomous regulation routinely fails in sectors where the public sector is dominant. Consider the difficulties State level electricity regulators have disciplining the largely public sector dominated distribution companies (DISCOMs) except in a few cities including Delhi, Mumbai, Kolkata and Kanpur.
TRAI a “gold standard” regulator gace private telecom an early start
Of course, exceptions exist. Take for instance the stellar track record in private sector development of the TRAI to the detriment of all three publicly owned service providers – Videsh Sanchar Nigam, BSNL and MTNL, all of whom have fallen by the wayside.
Financial sector regulators have also aggressively nurtured private banks, funds and insurance
Similarly, whilst public sector banks have floundered over time, the government; the Reserve Bank of India; the Insurance Regulatory and Development Authority of India and SEBI have all been successful in enlarging the financial sector through greenfield private banking, fund management and insurance.
Despite the ugliness of the YES Bank melt down, it is private banking which provides two thirds of the incremental lending today. Meanwhile, public banks await resolution of stressed debts to improve their balance sheets or bank upon continuing high operational margins, thanks to the reduction of 1.35 per cent in repo rates even as retail lending rates hold firm.
A fiscal crisis spells happy days for reformers
It is telling that in 1992 the UPA, under Narasimha Rao, was forced to liberalize and reform on the back of potential bankruptcy. Today, slowing economic growth and an unwillingness to make public spending more efficient by sharply reducing pork, are forcing Modi 2.0 to venture beyond the boundary, defined for economic reforms, by the Vajpayee government in 2003.
More reforms to come?
Optimists will view the proposed BPCL privatization as a signal that more overdue reforms will follow. This would be welcome. But the space for reforms appears circumscribed by three boxes which must be checked. First, reforms must get some incremental revenue. Second, they must come with a low political cost. Third, they must be big bang enough to resonate globally.
Land ownership reform to permit farming at scale ticks all three boxes. It can reduce subsidies over time. It appeases large farmers and can attract overseas investment. That is why it is being approached in a circuitous manner via the proposed incorporation of 10,000 Farmer Producer Organizations which will facilitate the pooling of land under a quasi-corporate set up. Big farmers, who can shepherd-in smaller farmers on their periphery, can benefit.
Dismantling the Mandi system, as a compulsory link in the food value chain, whilst being most important, appears unlikely because it ticks only two of the three boxes. It can substitute higher farm earnings for subsidy and will excite international investors. But the opposition from the large number of traders is politically unacceptable.
Changing onerous labor laws to give more flexibility to employers might be high priority under the Doing Business Index, But the downside of a possible negative political fall-out makes it a non-starter.
Freeing export and import controls on food is now even further away given global protectionist trends. The World is replicating what we have been experts at – hunkering down and shutting the gates!
The privatization of BPCL is not an ideological shift from the “commanding heights” syndrome which the BJP has assimilated. It is a transactional move in the face of a serious public sector cash crunch. And yet, it is an entry point for downsizing government. One can only hope that this small blessing will have more significant unintended consequences.
Adapted from the author’s opinion piece in TOI blogs March 12, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/privatizing-bpcl-is-a-big-deal/