 "ONGC, Coal India: Why govt may get less bang for the disinvestment buck")
The Union cabinet yesterday (10 September) cleared some big-bang disinvestment proposals to raise around Rs 43,000 crore by selling 10 percent, 5 percent and 11 percent in Coal India, ONGC, and NHPC respectively. Since the market is gung-ho, there is a good chance that these stake sales will be lapped up by institutional investors, if not retail ones.
The fast-forwarding of these disinvestments - though inevitable, given the large fiscal deficits - amounts to putting the cart before the horse. The truth is all three disinvestments involve energy producers, and the NDA government’s energy policies are far from formulated. Selling the household silver before finding out what the future value of silver is not a great idea.
In fact, with a proper, integrated energy policy the government will be able to earn much more from these disinvestments since their valuations are currently clouded by policy uncertainties.
Take Coal India, a company currently valued by the markets at Rs 2,28,000 crore. It is protected by a monopoly legislation, the Coal Mines Nationalisation Act, but also suffers from the disadvantage of having to accept government-fixed prices. The bulk of CIL coal is sold far below market rates.
With the Supreme Court likely to cancel coal block allocations made after 1993, there is a good chance that Coal India may get to manage some of the cancelled mines, but the policy of auctioning coal blocks in future will involve making other changes in policy too: Coal India’s monopoly could end, and sale of mines by auction means most mines will be able to market coal at closer to market rates - though there will be a coal regulator looking at this issue. Coal India could also list some of its subsidiaries, enabling the capture of more value.
Even if the monopoly ends, the chances are the mines already owned by Coal India will now be seen as more valuable. Coal India will probably be more valuable once coal sector policies are changed to bring in more competition. As the entrenched incumbent, Coal India will have a huge first-mover advantage.
Or take ONGC, currently valued around Rs 3,73,618 crore. Thanks to benign global crude prices, subsidies in diesel are ending, but subsidies in kerosene and cooking gas continue. Under the current policy, ONGC, Gail and Oil India (but mostly ONGC) bear 38-40 percent of the subsidy burden to the oil marketing companies. Ideally, the government should carry the subsidies on its own books and swipe the cash from ONGC, but it is not clear if the NDA government will do that.
We also don’t know what the NDA will decide on diesel price deregulation or reducing subsidies on kerosene and LPG.
ONGC’s future profits will also depend on how the government decides gas prices. If, as seems likely, it raises gas prices, ONGC will be the biggest beneficiary, followed by Reliance.
This means, overall, ONGC’s valuations may be better after the government decides on the subsidy sharing and gas pricing policies. The ONGC management has expressed unhappiness about the government’s premature share sale plans when there is no policy clarity, but so far its protests have fallen on deaf ears. Fiscal crisis means government will maim the golden goose in the hope of extracting more.
As for NHPC, its revenues depend on the monsoons since hydel power needs stored water from dams. To balance its hydel portfolio, NHPC is getting into coal-based thermal power, but there is talk of slicing off thermal plants from NHPC and merge them with the thermal power king, NTPC.
Moreover, there are proposals to make NHPC a bigger company by merging several smaller hydro-electric companies into it. Among them: Neepco, the North East Electric Power Corporation), THDC, a joint venture with Uttar Pradesh to operate the Tehri hydel project, and SJVNL, a joint venture between the centre and the Himachal government.
Disinvestment delivers bigger bang for the buck when the policy environment is clear and investors have a clear sight on future revenues and plans.
It is perhaps too late to expect the NDA government to come up with coherent policies in the entire energy sector before disinvestments. That’s a pity. But perhaps it should have these policies in place before the next round of disinvestment in 2015-16.