A prospective buyer will have to think a hundred times before deciding to buy a fertiliser Public Sector Undertaking as these are prone to inefficiencies
In a big-bang approach to privatisation of Central Public Sector Undertakings (CPSUs) announced in the Budget for 2021-22, Finance Minister Nirmala Sitharaman had divided them in two broad categories -- strategic and non-strategic. The strategic includes four subgroups: atomic energy, space and defense; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services, non- non-strategic includes all other sectors such as industrial and consumer goods, hotel and tourist services, trading, and marketing, etc.
As per the plan, the government would privatise all CPSUs in the non-strategic sector (all loss-making enterprises in this category will be closed). The government has made some initial moves in taking this forward. The CPSUs are undertakings in which the Union Government has majority ownership and control with shareholding of 51 per cent or more.
A Committee of Group Officers (CGO) headed by NITI Aayog CEO Parameswaran Iyer has reportedly prepared a note mentioning eight PSU firms in the fertilizer sector which may be taken up for privatization. These include among others Rashtriya Chemicals and Fertilizers Ltd (RCFL), National Fertilisers Ltd (NFL), The Fertilisers And Chemicals Travancore Ltd (FACT) and Fertilizer Corporation of India Ltd (FCIL), besides Projects & Development India Ltd (PDIL) whose privatisation is already under way.
Given the importance of plant nutrients in raising crop yield and achieving food security, for decades, successive political dispensations had considered fertiliser to be a strategic sector and encouraged setting up of fertiliser plants in the public sector besides formulating policies to attract private investment.
At the core of these policies, the government controls the maximum retail price (MRP) of fertilisers at a low level, without any relation to the cost of production and distribution which is higher. To ensure that the manufacturers don’t suffer loss and remain viable despite shortfall in realization from sale to farmers, it reimburses to them the excess of cost over MRP.
Prior to the 1990s, for urea as well as non-urea fertilisers (around two dozen types of phosphate and potash fertilizers), manufacturers got reimbursement of the cost/subsidy on ‘unit-specific’ basis taking into account efficiency norms such as capacity utilisation, energy consumption, capital related charges or CRC, including return (albeit guaranteed) on shareholders funds, other fixed cost, delivered cost of gas and other inputs, etc.
Following decontrol of non-urea fertilisers (1992), the government progressively moved towards giving ‘uniform’ subsidies on per nutrient basis for all manufacturers of these fertilisers (since April 2010) even as they are free to fix the MRP. In case of urea, reimbursement of subsidy on unit-specific basis continues.
The policies led to proliferation of capacities in both the public and private sector (besides plants set up by cooperative giants such as Indian Farmers Fertilizer Cooperative Ltd or IFFCO). Meanwhile, majority of the fertilizer CPSUs have shown below par performance (for instance, during 2019-20, six CPSUs reported profit of a mere Rs 1,293 crore) even as a number of them especially those under FCIL and Hindustan Fertiliser Corporation of India Limited (HFCL) have been incurring losses year-after-year.
Some plants—Ramagundum (in erstwhile Andhra Pradesh), Talcher (Odisha) and Haldia (West Bengal) set up in the late 1970s/early 1980s—were babies born sick. These CPSUs have been on the ventilator for long with the Union government pumping in thousands of crores of rupees to keep them alive. But it was under the Narendra Modi-led Government that revival plans of the plants viz Sindri (Jharkhand), Gorakhpur (Uttar Pradesh), Barauni (Bihar), Talcher (Odisha) and Ramagundam (AP) were approved about five years back and commissioned in 2021/2022.
Now, as per the 2021-22 policy, all fertiliser CPSUs need to be put on the block. Having pumped in thousands of crores on their revival (close to Rs 40,000 crore in the aforementioned five plants), the Government’s decision to privatize them is anomalous. Such a sale won’t yield an amount anywhere near the money invested in their revival. Yet, the sale has to happen as the policy demands so. There is another compelling reason.
The PSUs are prone to ‘inefficiencies’ and ‘mismanagement’ courtesy, bureaucratic and political interference. This was admitted by the Ministry of Finance (MoF) which in a recent order barred PSUs to bid for other PSUs. It observed that the “transfer of management control of the undertaking from the Government to any other Government organization or state Government will result in continuation of the “inherent inefficiencies” of state-run firms”.
But it is not going to be a cake walk. A major impediment has to do with the lengthy and cumbersome process of approvals and red tape. Under the extant procedures, the Niti Aayog identifies companies for strategic disinvestment which are then considered by the Core Group of Secretaries on Divestment (CGD), a long-drawn process by itself. It then goes to the Alternative Mechanism (AM) —a group of ministers, including those of Finance and Road Transport & Highways—for approval. Strategic divestment involves around 12 steps, which inevitably lead to delays in starting the process. And when the Government enters the market, the conditions may not be favorable. Another major impediment has to do with the very fact of all pervading control on almost every aspect of fertilizers viz. manufacturing/ import, handling, movement, distribution, pricing (this covers both the price paid by the farmer or MRP as well as the price to the manufacturer), subsidy, including payment mechanisms. Each of these factors affects the financial health of a fertilizer firm.
In case of urea, the ‘unit-specific’ system of allowing cost and in turn, subsidy (cost minus MRP) makes the firm even more vulnerable to the whims and fancies of the bureaucrat (and his team of CAs) who determines how much of each of the cost components such as CRC, other fixed cost, delivered cost of gas and other inputs, etc., is to be allowed for subsidy payment.
A prospective buyer will have to think a hundred times before deciding to buy a fertiliser PSU as his ability to make a decent profit (despite his own high efficiency in running the plant) will depend on his ability to manage the bureaucrats. Being under PSUs where cost of plants were inflated resulting in high retention price, the dependence and resultant vulnerability post-acquisition will be even greater.
Given the current state of affairs, prospects of selling fertiliser PSUs are bleak. Things can change only if the government plays hardball to remove the two impediments. It should unshackle the process of share sale from red tape. It may set up a holding company (HC) where all its shares in PSUs are vested. The HC should be fully empowered to take all decisions with regard to valuation, quantum of shares, timing of sale, etc. Secondly, it should unshackle the fertiliser sector by removing all controls and giving subsidies directly to farmers.
(The author is a policy analyst)
