Getting Mr Jaitley’s sums right

Part of the fear of PSUs being sold at low values is genuine, but it also stems from Jaitley’s handling of matters. Jaitley has moved fast on his brief and, along with his department’s secretary, convincingly talks of how Modern Foods had been valued in various ways, including the value of its land. But if Jaitley had put out these valuers’ reports on the internet, these could have been examined by independent experts, to dispel all doubts.

The fact that the government is not proactive enough is another reason why it is likely to get low prices for the PSUs privatised. Take ITDC. A valuation done last year by a global hotel valuation firm, HVS, put the value of ITDC’s 26 hotels at between Rs 280 crore and 550 crore, based on its earnings profile obviously, the price will be lower if just a 26 per cent stake is sold. Part of the reason for the low value, of course, is that as compared to their private sector counterparts, the earnings of PSUs like ITDC or, say, Indian Airlines and Air India is pathetic, to say the least.

HVS also told the government that if it sold each hotel separately, it would get a much higher value, but if it allowed buyers to demolish the hotels and convert them to hotel-cum-commercial complexes, the value got would be even higher. HVS didn’t put a value to this, but it could be in the region of Rs 2,000 crore or more.

Now clearly, if all of ITDC’s equity is sold for Rs 544 crore, when the government can theoretically get Rs 2,000 crore, it is certain to raise a huge stink. The point, however, is for the government to be able to get this substantially higher price, it has to get the land use changed to, say, allow hotel-cum-commercial complexes. Similarly, to get a higher value, it may have to permit the new buyer to sack the entire staff of these PSUs. But maybe it’s worth the extra effort to get the hugely higher prices, more so since the staff will be happier if it is able to get maybe double the VRS (and maybe even stock options) it would have got in normal circumstances.

Essentially, the government needs to be pro-active, and explore all these options. Incidentally, this is something the government didn’t do, and that’s why it is still getting a lot of flak for the Modern Foods selloff.Similarly, now that United Airline has bought US Air for a massive $4.3 bn in cash (and another $7.3 bn in terms of its debt burden), Jaitley will find it difficult to explain to Sharad Yadav, apart from a host of others, as to why Air India has been valued at a mindbogglingly miniscule Rs 36 crore by one method! That’s right, one of the papers floating around in the Civil Aviation Ministry, is an estimate by an investment banker, which puts Air India’s market value at Rs 3,947 crore and its debt at Rs 3,911 crore based on this, the 26 per cent stake to be sold to a strategic investor could be worth just Rs 9 crore! Even if, the same report says, Air India is valued on the basis of its potential profits after privatisation (it has run losses for the past five years) the airline will still be worth just around Rs 500 crore or so, or Rs 130 crore for a 26 per cent stake.

In this case, of course, Jaitley will have to explain to the people that Air India is no US Air. While the latter now makes decent profits, Air India has made straight losses for the last 5 years running. And though it doesn’t make sense to give Air India more time to turn around before being sold off it’s unlikely to happen, given the track record of how PSUs function clearly major efforts have to be made to prune its mammoth staff, to cite one example, or to sell off some property to retire its huge debt. Merely selling off the airline or other PSUs on an as-is-where-is basis is very easy once the Cabinet finally clears it! and doesn’t require a minister like Jaitley. If the value of these PSUs isn’t enhanced before they are sold, it’ll be a tragic waste. Of Jaitley’s talent and taxpayer’s money.