Privatisation of ownership Vs privatisation of management.
Transferring the PSU shares to the Provident Fund.
Setting up PF / Pension funds for public servants.
Advantages of transferring the PSU shares to the PF.
Balancing the risk to the PFs.
Management after the PSUs are disinvested.
 

You may well ask what is the connection between Pensions, Provident Fund, Public Sector and the Fiscal Deficit. There is a connection and if this appreciated many problems can be solved at one go.

I have been agitated about this since 1995 when the Employees Pension Scheme (EPS) was introduce. Since this scheme is a guaranteed benefit scheme rather than a guaranteed contribution scheme like the Employees Provident Fund (EPF). The EPS was created by diverting a part of the contribution from the EPF; I have always condemned this diversion of funds from a good scheme to a bad scheme.

Moreover the pensions of the government employees are paid out of the current revenues and there is no fund whatsoever. I suspect that the EPS was created with the ulterior motive of avoiding crediting interest to the EPF on that part of the contribution; this reduces the fiscal deficit in the initial years when the inflow is more than the pensions paid out. But later the higher pensions have to be paid out of the general revenues and this will add to the fiscal deficit, this is a classic case of short-term window dressing.

The EPF scheme is far superior to the EPS since it is a guaranteed contribution scheme and there is no question of paying more than there is in the fund. The only problem was that since withdrawal is permitted while in service many were withdrawing most of the balance and had little left by the time they reached the age of superannuation. This can obviously be avoided by prohibiting withdrawal of the Employers' Contribution (that is being paid into the EPS now) except after superannuation, death while in service or permanent disability (the same conditions as in the EPS). Thus the employee's contribution would be regarded as the member's savings and withdrawal would be allowed but the employer's contribution being in the nature of a retirement benefit scheme withdrawal would not be allowed.

The other major issue about the EPF is the investment of the funds and the return that can be earned on these investments. There have been many debates about this even in your paper on whether investment should be permitted in equity and other related issues.

The pension scheme for government employees is even worse since it is a 'pay as you go' scheme. This is proving disastrous even in developed countries.

The EPF is being invested mainly in government securities and special deposit scheme, this adds to the debt of the government and the interest paid adds to the fiscal deficit. On the other side of the Balance Sheet of the government one finds investment in the public sector. So why cannot the EPF be made into an autonomous fund and the shares in the public sector transferred to the EPF?

Disinvestment of PSUs is a major issue which is being debated upon today. Not much progress has been achieved in the last 9 years towards achieving this goal. The total equity of the PSUs held by the Central Government is about Rs 77000 Crores, of which Rs 18000 Crores has been sold till date. Except for Modern Foods in all other cases it has only been sale of a minority stake mainly to the PSU banks, Mutual Funds and the UTI. The figure of Rs 77000 Crores is without considering the investment in non corporate businesses run by the government like Railways, Ports, Airports, National Highway Authority, Defense production units, etc.

 The objectives of the disinvestment/divestment/privatisation policy of the government are not clear, they seem to be government by fiscal expediency i.e., to somehow raise more money to reduce the fiscal deficit either in the short term or the long term rather than to achieve a specific long term goal.

There are basic issues involved, one is whether disinvestment only means disinvestment of shares or it means distancing from management. Can there be privatisation of management without privatisation of shareholding. The biggest achievement of the modern era and more so the 20^th Century is that the Joint Stock Company and Stock Exchanges have enabled divorcing of ownership and management. Many 'family managed' private sector companies are now handing over management to professional boards and MDs merely retaining a few directorships. Ranbaxy, Dabur, Alfa Lavel, are a few examples. Mr. Ratan Tata Chairman of the Tata Group is reported to be looking for a non family man to succeed him as the head of the Tata group. The rules of corporate governance also emphasise the role of independent non-executive directors in supervising the management.

In the case of the Public Sector the directors and CEOs appointed by the government represent the true interests of the shareholders and the administrative ministries represent the shareholder's interference in the day to day management of the PSUs. Are these administrative ministries necessary? My view is no they are not necessary. The role of the government in appointing the directors and a periodic review by the Ministry of Public Enterprises and a parliamentary committee on Public Enterprises ought to be enough. Political and bureaucratic interference in the day to day management of the PSUs is similar to the interference of the promoters' family members in the day to day management of the private sector companies. The consequences of both are similar i.e., the company becomes sick.

It is obvious that once the privatisation process is completed administrative ministries have to be wound up. Now the issue is if the administrative ministries are wound up before privatisation would this improve the performance of the PSUs as a result of which privatisation would be rendered superfluous.

Another strategy is that the shares of PSUs now held by the President can be transferred to the Employees Provident Fund Organisation and to the PF Trusts. The PFO can be converted into a Mutual Fund and on the liabilities side would be the members account balances and on the assets side would be the investment in the PSUs. The interest on the PF balance is being paid by the government from out of its general revenues thus transferring the shares of PSUs will reduce the interest burden on the government.

The PF trusts set up by large companies in the private and public sectors can also be allowed to purchase the shares of the PSUs.

The Employees Pension Scheme, 1995 (EPS) should also be terminated and the balance in this transferred to the PF and added to the PF corpus. This will reduce the pension outgo under the EPS, this commitment is an open ended one and could lead to disastrous consequences in the years to come. The PF scheme being a guaranteed contribution scheme is superior to the EPS which is a guaranteed benefit scheme. The guarantees given by the government to the fast track power projects like Enron and the consequences if Maharashtra does not buy or is unable to pay the high cost of power are quite apparent for all to see.

Guaranteed returns and benefits have no place in a market economy. The returns must be determined by market forces and performance and not by sovereign guarantees.

A separate fund for government employees, defense personnel, employees of quasi government organisations such as universities, etc., can be set up and shares transferred to them also. This will reduce the pension burden on the government. The pension outgo is high and will keep increasing due to the increase in number of retirees year after year and due to the graying of the population. Thus if this burden is shifted onto a pension fund it will provide permanent relief to the governments finances. Pensions have become a major problem in many West European and Scandinavian countries. Even USA is feeling the burden of financing welfare expenses from out of current revenues rather than through savings. Investment in PSUs represents savings and return on them should be used to meet welfare expenditure. It is better to Save and Spend rather than to Borrow and Spend.

The pension fund would have to be organised like the Provident Fund and the government can make monthly contributions as a percentage of the salary of the current employees and the pension can be paid from out of this current contributions and by sale of investments if necessary.

The capital cost of the current pension burden can be ascertained by assuming a reasonable rate of return of say 12% per annum i.e., 1% per month. Thus the corpus of the fund on day one would have to be 100 times the monthly pension bill. If the revenue or increase in NAV of the pension fund is more than 12% per annum, it can build up its reserves and if it is less than 12% the government would have to meet the deficit from out of the general revenues.

The PSU shares can be transferred to the PF at cost. This is based on the assumption that the source of funds for the initial investment in the PSUs since 1950s was from the PF. For e.g., the EPF was set up in 1952 and the Imperial Bank of India was nationalised and the State Bank of India formed in 1955. Hence the compensation paid by the government to the erstwhile shareholders of the Imperial Bank of India can be said to have come out of the contributions made under the PF scheme from 1952 to 1955. The total equity of the PSUs is about Rs 77000 Crores (excluding investment in non-corporate enterprises) and the balance in all the PFs put together is much more than this.

All PSUs whose shares are transferred to the PFO would have to be listed on the stock exchange to provide for liquidity and to enable the PFO to ascertain the NAV periodically. As long as the President holds the investment in the Public Sector this can be valued only at cost and only the dividends can be used to pay pensions. If the investment is transferred to a separate fund then the investments can be valued at market price and even capital gains can be booked to pay pensions. If shares of all PSUs are transferred at cost and the market value after listing is taken then there ought to be a substantial appreciation in the value of the investment.

There have been many demands that PFs should be allowed to invest in equities; a better way of achieving this is for the PFs to invest in the PSUs instead of the government disinvesting its shareholding to the general public and foreign investors. The failure of three successive governments of the Congress, United Front and the BJP lead NDA in privatising the PSUs over the last 9 years clearly shows that the policy of privatisation is wrong and that is the reason why it has failed. Handing over the PSUs to the PF is a better option.

If the market value of the profit making PSUs is high then the PF and Pension Fund can both be started with a good reserve position. This will take care of any uncertainties in the performance of the PSUs and the vagaries of the stock markets.

There in some risk associated with equity investments, this risk can be mitigated by investing the future accruals to the PF fund in infrastructure industries only such as ports, airports, roads and power plants. The National Highways authority can also be corporatised and the Golden Quadrilateral and North South and East West axis expressways can be part funded with this money.

Housing is another major area where PF money can be invested. In fact PF can invest in say the NHB, HUDCO and these institutions can lend to the companies to construct houses for their employees who are members of the PF. This would be very beneficial to all concerned, the members would get good houses, the PF money would be well invested and employers can mobilise money at lower rates (at present the PF interest rate is 11%) for construction of houses for employees.

Even Railways, Ports, Airports, National Highways, Defense Manufacturing units, etc., can be converted into companies and handed over to the PFO through this route. Since the risk associated with infrastructure companies is less this will give stability to the portfolio of the PF.

After the shares are transferred the administrative ministries can be wound up and the management handed over to professional boards. This would anyhow have to be done once the disinvestment policy is implemented. The members of the PF can be given proxies in a few companies of their choice to enable them to participate in the AGMs of the those companies. This will enable them to have some check on the functioning of the companies.

The rules of corporate governance being debated today can be applied to these companies. Government supervision can be restricted to appointment of a few directors and annual review by parliamentary committees. Day to day supervision and prior approval from the administrative ministry on many issues can be dispensed with. The government can retain 26% share holding or the golden share concept can be used where necessary to enable the government to have some control over the companies.

The companies can at a later date broad base their shareholding by going in for public issues to raise funds for expansion. This will enable the well-managed companies to grow. At present their growth is being held up because of the delay in disinvestment and lack of budgetary support from the government in anticipation of disinvestment.

Today many politicians are opposed to disinvestment since this means winding up of the administrative ministries. But these politicians cannot oppose the above scheme since the main beneficiaries are the employees in the organised sector and not foreign investors.

The proposal to reduce governments holding in the equity of PSU Banks to 33% is being resisted by bank employees. The policy outlined above may not meet much resistance from the trade unions since the main beneficiaries are the workers in the organised sector who are the members of the PF. It may in fact be welcomed by the trade unions. This policy will ensure that the PSUs continue to be in Indian hands instead of being sold to foreign investors. Thus the twin objectives of taking care of workers interest and furthering the goal of Swadeshi can be met.

Employee Stock Option Schemes (ESOPS) are becoming popular and the philosophy behind ESOPS is that even employees must have a share in the business and benefit from its growth and success. The policy of transferring the PSU share to the PF is based on a similar concept.

Reduction in the interest and pension burden on the general revenues of the government will substantially reduce the revenue deficit of the government. The statement of assets and liabilities of the government would be better after the liabilities on account of the PF are removed and the assets i.e., investment in the PSUs are transferred. The government's pension commitment is also taken care of by this scheme.

Privatisation of the PSUs in this manner will enable the companies to perform better and their growth will boost the economy in general. The Public sector would become truly public since the general public would become the shareholders in a more direct and transparent manner.

Today the suspense over the privatisation of the PSUs is slowing down the economic growth, since the potential that many well managed PSUs have for growth is not being exploited fully.