How to read a PSU

Two things strike you about this book on the privatisation process (oops, I think the word's disinvestment once again) by a person who's had a ringside view as the joint secretary in the department all these years. First, the two central premises of the author""correctly so""are the opposite of what the UPA government believes

PK Basu examines the argument about privatising PSUs through "strategic sales" to corporate entities, which was the practice in prominence during the NDA tenure, versus selling off PSU shares to nameless investors in the stock market (what the UPA is in favour of); he uses examples to show that the price got through strategic sales is much higher. When VSNL was a government monopoly, the government sold its shareholding at a P/E multiple of 6. When the same company was sold to the Tatas, even after it was announced the monopoly would end, the P/E multiple was almost double, at 11.

Similarly, Basu rubbishes the argument that profitable PSUs should not be sold while loss-making ones should. Why should anyone buy a loss-making unit, he asks; to turn it around, right? But that, Basu argues, implicitly recognises, that the private sector will run a unit better than the government will. So, if a profitable PSU is sold, it will perform even better.

Given that the UPA's policy is the exact opposite on both counts, it would be interesting to see what happens to Basu. Either he'll lie low, or be transferred. My guess: blame this on bad timing ""the book was probably conceived and largely written when the NDA was in power, but got published only now.

The second striking aspect of the book is that it doesn't contain any of the juicy stories that Basu's former boss, the ex-disinvestment minister Arun Shourie, used to be so fond of telling. Stories of vested interests trying to stymie proposals; of the ITDC sale being blocked, for instance, by ministers habituated to the free use of its hotel rooms.

That said, Basu provides a competent assessment of why PSUs are a drain on the exchequer and of why revival schemes are a waste. Between 1992-93 and the time the book was written, Basu says, Rs 34,000 crore of revival schemes was sanctioned by the central government, but not even one PSU got revived""this includes four attempts to revive the Mining and Allied Machinery Corporation, and six for the Heavy Engineering Corporation. Basu also gives the example of Jessop & Co, and points out that employment in this PSU fell from 5,581 to 1,459 between 1994 and 2003. Indeed, if you look at the employment in all PSUs, you'll find that it began falling long before anyone thought of privatisation since they just could not expand operations, given the huge losses incurred.

Under normal circumstances, you don't need someone to tell you this, but given the current ruling establishment's hypocrisy, it's useful to have the numbers presented so concisely all over again. For instance, all PSUs with listed shares have a lower P/E multiple than privately-run firms in the same business. On its total investment, the government gets a return of just 3 per cent, and that too mostly due to monopoly profits.

Also useful, for the lay reader, are the chapters on how PSUs are to be valued. Basu has a nice chapter on lessons for bureaucrats and how to deal with merchant bankers; he also takes a dig at a well-known merchant banker who was taken aback at the success of Maruti's IPO.

By and large, Basu skirts the major valuation controversies of the NDA days. Forget about the media coverage of these deals, there is no mention of the criticism made by even the CAG""the arguments may have been incorrect, but they find no mention in the book, a definite weakness.

Nor does Basu explain why certain decisions were taken""not allowing airlines to bid for Indian Airlines or Air-India surely would have benefited someone, and surely the decision to allow Reliance to bid for IPCL was strange given that the monopoly argument was used to keep IOC out of the bidding for HPCL (Reliance plus IPCL had a greater share of the market than IOC plus HPCL). On the whole, however, the book's worth reading. For secularists, Basu quotes a 14th century Arabic treatise as saying the government running businesses is a bad idea!

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SAVING THE CROWN JEWELS

PK Basu
Sheriden Book Company
Price: Rs 495; Pages: 252