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BW Businessworld

Waiting For Godot

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However, like in many other cases in India, the disinvestment initiative has been largely bogged down by technical and procedural delays, political resistance and absence of a strategic approach.

The recent general elections have provided a splendid opportunity to the government to introduce reforms in government-managed enterprises. The first step in this direction can be disinvestment. To start with, it would be interesting to take note of the economics:

By the most conservative estimates, even if 10 per cent in each of the short-listed companies is diluted, level of fundraising possible over the next three years could be upwards of $10-15 billion.





At that level, the direct impact on reduction in fiscal deficit would be upwards of 1 per cent. At higher levels of dilution (the long-term stated objective is to dilute government stake to 51 per cent in phases), the potential of fund raising opportunity is upwards of $50 billion — which statistically, could substantially wipe out our deficit.

This pre-supposes dilutions with government still retaining majority control. If strategic/trade sales are factored in, the figures can be significantly higher, considering a 25 to 50 per cent premium for control. Or taking a step further, the embedded valuations in utilities such as railways, post and telegraph can be mind-boggling.

Looking at the above, disinvestment appears almost like a panacea. So what are the challenges? To start with, building a political consensus: a democratic consensus is imperative in our country. Here, some clear, consistent and unambiguous statements coming from senior echelons of the government would help create the groundwork and demonstrate a political will. We have seen in the Delhi metro project that when a government exercises its political will, most obstacles can be taken care of.

The other important area is labour. In economic downturns, labour issues are all the more sensitive and should go beyond voluntary retirement schemes, etc. To the extent possible re-training and out-of-the-box strategies such as lateral deployment across companies through a ‘PSU pool’ kind of mechanism may be explored for the surplus staff.

Finally, disinvestment cannot be looked at transactionally, where money is raised and the government moves to the sidelines. Capital markets are extremely demanding, and a lot is required to be done to ensure that the organisation is ready for the transition.

The preparations have to be surgical and should run on parallel tracks. First, pricing, which is a direct function of the business plan and projected cash-flows under various scenarios. While interacting with senior management of PSUs as advisors, we often hear them talking about quite disparate approaches, and often widely conflicting valuation benchmarks coming from different investment banks. Therefore, from the PSUs perspective, it is essential to have a business plan and a financial model ready.

Second, though not necessarily in importance, comes accounting. Capital markets, as recent history has demonstrated, can be brutal on accounting aberrations.

Linked to accounting would be the systems, control and governance framework. This calls for a paradigm mindset change. The organisation must remember that it would be transitioning from a single-owner managed business (the government) to a multiple owner (shareholders), professionally managed ecosystem with multiple stakeholders.

All the above aspects should be carefully considered and planned with specific time-bound responsibility assigned before embarking on the exercise. That said, no matter what the level of preparation, some aspects cannot be controlled — for example, the depth of the capital markets, the timing or the appetite for Indian paper from global institutional investors.

If we do not act now, we may very well find ourselves in a situation similar to the two characters in Samuel Beckett’s famous play, Waiting for Godot. For the uninitiated, Godot never arrived. Something which India can ill-afford.
The author is head, infrastructure & government practice, KPMG, India

(Businessworld Issue Dated 07-13 July 2009)
 


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