Privatisation pitch: BPCL’s short-term price rally not a convincing argument

What really matters for long-term wealth creation is true reforms and free market

An entire chapter in the Economic Survey 2019-2020 has been devoted to the virtues of privatisation of public sector enterprises in the pursuit of wealth creation. This is not surprising, given that large-scale divestments of central public sector enterprises (CPSEs) have become critical in the Centre’s attempts to raise resources and contain the fiscal deficit. Not much progress has been seen on the Centre’s mega asset sale plans this year (just about ₹18,000 crore has been realised so far out of the planned ₹1.05 lakh crore in FY 2019-20). But a major thrust can be expected in the coming weeks and months.

The Survey – with an array of analyses, charts and graphs – makes a case for aggressive disinvestment of CPSEs. It analyses the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04. The study says that these privatized CPSEs have performed better post-privatisation than their peers on various financial parameters, and have been able to generate more wealth from the same resources. This, according to the survey, affirms that privatisation unlocks the potential of CPSEs to create wealth. The list of entities analysed include Hindustan Zinc, BALCO, CMC, Maruti Suzuki, IPCL, Tata Communications, Lagan Engineering, Jessop & Co, Modern Food India, Hindustan Teleprinters and Paradeep Phospates.

Interestingly, to make its case for privatisation of CPSEs, the Economic Survey also highlights the run-up in the share price of PSU oil marketer BPCL since September 2019 when news about the Centre’s impending strategic disinvestment in the company started doing the rounds. The Survey contrasts the BPCL stock’s rally with the relatively constrained performance of peer HPCL. The BPCL stock’s superior performance, the Survey says, reflects an increase in the overall value from anticipated gains from consequent improvements in the efficiency of BPCL when compared to HPCL which will continue to be under the Government control.

Long-term matters

That ‘it is not the government’s business to be in business’ is not disputed. But using short-term stock price rallies to justify the disinvestment and wealth creation arguments is not quite convincing. Wealth creation should ideally be viewed from a long-term prism, of at least a few years. In the case of the PSU oil marketing companies – Indian Oil, BPCL and HPCL – the maximum wealth creation happened between early 2014 and early 2018, when these stocks tripled or more. This was not due to any privatisation or disinvestment plans, but thanks to major fuel pricing reforms and the crash of crude oil prices that gave a boost to the financials of these companies. The Centre was smart to sell its stake in HPCL to ONGC for top-dollar during this boom period; this was a one-PSU-to-another case of pseudo strategic disinvestment. Thereafter, these stocks crashed, until late last year, due to challenges in the refining market, exacerbated by the Centre’s repeated covert interference in keeping fuel prices low during election seasons.

The buzz of the Centre’s strategic stake sale in BPCL last year did lift the stock. Understandably so, given that the Centre should be able to command a higher controlling premium for BPCL from private players than from a PSU peer. But the proof of the pudding will be in the eating. The stake sale has been delayed and it is unlikely to be completed by this fiscal-year end, as originally planned. Also, what will really matters for wealth creation in the long-run is true reforms and letting the marketplace function without government interference. This is especially pertinent given that the Centre will still be the largest player in the oil marketing space in the country and call the shots, through its holdings, directly in Indian Oil and indirectly in HPCL.