Changing hats is not disinvestment

The Government has decided to privatise three large Public Sector Enterprises (PSEs), namely Bharat Petroleum, Shipping Corporation and Concor. The Central Government holds the majority shareholding in these Corporations and the management is in the hands of government officials.

The Government proposes to sell its majority shareholding in these Corporations to one "strategic" buyer. The management and control of these PSEs will then be handed over to the buyer. Government interference in the management of these PSEs will come to an end.

This "strategic" disinvestment is wholly welcomed because the temperament of government officials is not suitable for doing business. Further, the personal gains of the officials and the interests of the PSEs are not in sync.

An official can make personal gains by giving out lucrative contracts to his/her close ones thereby pushing the PSEs into the red.

At the same time, the Government proposes to "disinvest" its majority holding North Eastern Electric Power Corporation Limited (NEEPCO) and Tehri Hydropower Development Corporation India Limited (THDCIL).

NEEPCO produces hydroelectricity in the north-eastern states while THDCIL produces the same in Uttarakhand. The Government has decided to sell its majority holdings in these PSEs to National Thermal Power Corporation (NTPC) which too is owned by the Government.

In other words, the shares of NEEPCO and THDCIL that are presently held by the Government directly will now be held by the same Government indirectly through NTPC. NEEPCO and THDCIL will continue to be controlled by the Government.

Only the hat will change. In the process, however, the Government will obtain about Rs 16,000 crores from NTPC as payment for these PSEs.

The cash kitty with NTPC is today controlled by the Government but the cash does not belong to the Government. The Government, that is, the Ministry of Finance will get the Rs 16,000 crores. The fiscal deficit of the Government will reduce in the same measure.

However, the main problem of these PSEs will remain unattended because the control of these PSEs by the government officials will remain intact—only it will become indirect through NTPC.

Previously, the Ministry of Power appointed the CMDs of these PSEs directly. Now the Ministry of Power will direct NTPC to appoint the CMDs of these PSEs. This is significant because both these PSEs are making losses.

The valves of the Kopili hydropower project of NEEPCO had got damaged some time ago leading to huge losses. NEEPCO attributed the damage to the failure of the Government to release Rs 200 crores for repairs.

The question, however, is why NEEPCO needed funds from the Government if it was running in profit? Also, NEEPCO had tried to sell bonds of Rs 300 crores in the market recently. Only Rs 13 crores of this was subscribed which indicates that the market does not have confidence on the Company.

The situation of THDCIL is similar. THDCIL is selling electricity to the Electricity Boards at Rs 11 per unit when the same electricity is available at less than Rs 4 per unit on the India Energy Exchange.

In consequence, the people of the purchasing states such as Uttar Pradesh, Uttarakhand and Delhi, suffer losses while THDCIL makes profits. THDCIL is investing these profits to make the loss-making Vishnugad-Pipalkoti Hydroelectric Project in Uttarakhand.

This project was approved by the Cabinet Committee of Economic Affairs in 2008 at a cost of Rs 2,400 crores and the project was to be completed by 2013. The cost of electricity produced was projected to be Rs 2.26 per unit at that time.

At present the cost of the project has increased to Rs 4,400 crores and the project is expected to be completed by 2022. As a result the cost of electricity generated by the project has increased to Rs 6.42 per unit. The same electricity is available in the market at Rs 3.62 per unit today.

The actual cost of electricity produced may be yet more. As said above, the Project has already been delayed from 2013 to 2022. As of today, the project is less than one-half complete. If this past delay is any guide, the project may be completed only by 2030.

At that time the cost of electricity produced would be about Rs 12 per unit. At that time the price of electricity in the market is expected to decline to Rs 3.00 per unit or less due to the development of cheap solar power.

Yet, THDCIL will continue to make profits. It has made agreement with Uttar Pradesh Electricity Board for the purchase of electricity.

Uttar Pradesh will be compelled to buy electricity from Pipalkoti Project at Rs 12 per unit just as a number of States are buying electricity from Tehri Project at Rs 11 per unit.

The burden of the high cost of electricity will ultimately fall on the consumers of Uttar Pradesh. THDCIL would be making huge losses if it had to sell the electricity at market rates.

It is showing profits in its books by selling electricity at exorbitant rates to the States. NEEPCO and THDCIL are suffering huge losses though these losses are hidden behind the sale of expensive electricity to the consumers.

In selling the shares of these PSEs to NTPC, the Government is making profit just as a vegetable vendor is happy selling rotten potatoes to an unsuspecting buyer. The difference here is that the seller and buyer of these loss-making PSEs is the Government.

The Government is not disclosing the true state of affairs of these PSEs to the people of the country.

Further, the money obtained from disinvestment will be used to fund the consumption of the Government such as paying salaries and pensions to government servants.

The capital expenditures or investments being made by the government are continually declining. The Government is behaving like a person who sells his inherited property to go on a foreign pleasure trip.

It is necessary that the Government places the monies received from disinvestment in a separate account and uses that money only for making investment in emerging areas like artificial intelligence, big data processing and space research. Only then India will be able to lead the world in technologies and emerge as an economic powerhouse.

The efforts of the Government to hand over the management of Bharat Petroleum, Shipping Corporation and Concor to strategic buyers is entirely welcome. However, the effort to sell the loss-making NEEPCO and THDCIL under the guise of disinvestment is deceptive.

(The writer is formerly Professor of Economics at IIM, Bengaluru)