 "ONGC disinvestment: Why Jaitley should read the story of the Golden Goose first")
Arun Jaitley’s fiscal timetable may be up against a political timetable that does not favour key reforms before the assembly elections are over, but there is no reason why he should be buying into all of his predecessor P Chidambaram’s lousy ideas.
One can understand that he didn’t have the time to rework all the bad budget math he inherited, but why does he have to adopt short-term money-raising tactics that are fundamentally unsound? Take the case of public sector asset sales. Admittedly, the finance minister has to raise money in a hurry to keep the fiscal deficit in check, Chidambaram having helpfully used up 45 percent of the year’s target in just two months (April-May). But haste makes waste. Jaitley should ponder over a few questions.
For example, should he sell the family silver for a song because he needs the money urgently, or get the policies right and then sell for a better price? Which assets should he sell first, the ones he can never privatise or the ones he can?
Today’s newspapers (18 July) tell us that ONGC, a company that no government will privatise but everyone is more than willing to bleed endlessly for political purposes, has raised a banner of protest about the proposed share sale being planned by Jaitley to raise a quick buck.
ONGC, Oil India and Gail have been consistent victims of Pranab Mukherjee’s and Chidambaram’s fiscal loot-and-scoot policies over the last 10 years. More than a third of the nearly Rs 8,00,000 crore of oil subsidies owed by the government was siphoned off from their coffers. This is nothing but organised loot of taxpayer and investor wealth by the deployment of flawed policy options. It should be obvious to anyone that this was - and is - a self-defeating policy.
This is how it worked badly: to keep oil heavily subsidised for political reasons, profits from the oil production companies were transferred to the oil marketing companies (Indian Oil, HPCL, BPCL). Since the markets knew all about it, the valuations of the entire public sector oil companies dived far below intrinsic worth. On the other hand, since finance ministers always wanted money, they sold shares in companies like ONGC at rock-bottom rates - and thus earned less than what they could have. Not only that, since oil prices were heavily subsidised, their imports soared - making the subsidy bill rise even higher, and forcing the government to loot even more from ONGC and the producing companies. These policies began to be corrected only towards the end of the UPA’s term, when diesel prices were allowed to rise by 50 paise a month. But the negative effects of the policy remain.
Does Jaitley want to follow these stupidities or wait to fix the fundamentals first before sending ONGC off to the auctioneers?
According to Business Standard , ONGC wants issues such as subsidy sharing, gas pricing and other issues sorted out before divestment - and this is not an unreasonable request. In a letter to its parent ministry, ONGC has said that “divestment by the government at this stage may not realise the true potential or value of ONGC’s shares. It is recommended the disinvestment be done after resolution of all or some of these issues, as feasible.”
Let’s also remember that there is not much of ONGC left to sell after the Pranab-Chidambaram depredations. The government’s holdings in ONGC are currently at 68.94 percent, and assuming it wants to retain 51 percent, that leaves a salable surplus of just 17.94 percent - which at current market valuations is worth just over Rs 60,000 crore.
If gas pricing is freed or prices raised, and if the subsidy bills are eliminated from ONGC’s P&L account by oil price deregulation, this stake would easily fetch at least twice the amount. That’s Rs 1,20,000 crore - which could presumably be raised over two or three years after the policies are fixed.
As against that, the disinvestment/asset sale target this year is Rs 63,500 crore.
Sure, there is an urgency to raise resources for this year, but this can easily be done by selling non-core assets like the residual holdings in public sector companies like Axis Bank, ITC and L&T currently housed in the Special Undertaking of UTI (SUUTI), or the balance stakes in companies privatised earlier (Balco and Hindustan Zinc).
As noted before in Firstbiz , SUUTI holds valuable and not-so-valuable private sector shares collectively worth around Rs 60,000 crore . Chidambaram sold 9 percent of Axis Bank for Rs 5,500 crore in March. Selling the remaining shares of Axis Bank, L&T and ITC in the open market will get Jaitley around Rs 50,000 crore at least in this financial year. He could even sell some of it to the companies themselves or to strategic investors (ITC has oodles of cash, and many big groups may be interested in buying L&T or Axis Bank.)
The buyback of the residual stakes in Balco and Hindustan Zinc by the promoters (Sterlite) is likely to give the government at least Rs 20,000-21,000 crore. This was the price being talked about before the market boomed. Now, the buyback valuation could be higher.
Jaitley needs to remember that the current valuations of ONGC reflect the stock market’s optimism that the Modi government will correct the oil pricing policies followed by the UPA. Selling ONGC stock prematurely will surely push the prices down rather than up. Even if someone buys the stock at current prices, the upside from better policies will flow to them rather than the government.
Does Jaitley want to be party to the destruction of taxpayer wealth? He should put off the ONGC sale till the policy mix on subsidies and gas pricing is transparently clarified.
Maybe it is time for Jaitley to read the story of the golden goose. Trying to extract all now means less or no golden eggs in the future.