Sunday 29 July 2012

Why the NPCIL’s Disinvestment makes sense to the Indian government

Earlier this week, there were news reports of the government of India was seriously considering disinvestment in NPCIL (Nuclear Power Corporation of India Ltd.)While the disinvestment of defense and strategic assets in India is not new, what is also true is that the whole disinvestment process in India is a mess with some super hits and some super flops. Let us try to understand the reasons why this topic is repeatedly coming up and the urgency of the same.

NPCIL is a state owned monopoly player which does everything from planning to erection to commissioning and operating the nuclear energy projects in India. Formed relatively recently in September 1987, it is controlled by the Department of Atomic Energy which in turn, is directly controlled by the Prime Minister of India.

To an Unstarred question (No. 4317 answered on 02.05.2012 in Parliament), the following questions were asked to the Prime Minister (the replies via the relevant department/PMO are given in bold) -

(a)    Whether the Government proposes to disinvest equity in the Nuclear Power Corporation of India Limited (NPCIL)

(A)   There is currently no proposal to disinvest equity in NPCIL.

(b)   If so, the details thereof

(A)   Does not arise.

(c)     If not, the reasons therefor;

(A)   Pre-requisites for disinvestment like conversion of the company from private company to public company, appointment of requisite numbers of independent Directors of the company and dematerialization of shares are needed to be fulfilled before disinvestment process can be considered.

Why then, is the issue of divestment coming up once again?

An Open and Shut Case for disinvestment in NPCIL 

The reasons and the hurry for this could be analyzed as follows:

1)      The government desperately needs funds from disinvestment sources. It is a well known fact that the budgetary targets from stake sale of PSU’s has been negligible. So, the government HAS to think of chopping off some parts and reduce its fiscal deficit at the earliest. Last year yielded only Rs. 14,000 crore against the budgetary target of Rs. 40,000 crore.

2)      This brings us to the next point. Which companies to chop (disinvest, monetize, stake-sale or call it by whatever name)? The obvious choice is to divest in companies which are the biggest guzzlers of government dole (subsidy). NPCIL fits the bill completely. Despite showing impressive PAT (Profit After Tax) figures and being a Dividend paying company, NPCIL survives on massive hidden subsidy from the government. It is a known fact that there is NO nuclear energy project on the face of this planet which has survived or can manage to survive without massive doses of fund injection from the government (tax payer money)

3)      NPCIL may fetch a good valuation if the government comes out with in an IPO now and provided the government does it immediately. If the government delays, people will wake up to the fact that the rate of growth of renewables in India does not give NPCIL a chance to even survive after a few years. It will have no business generating energy at a cost which is likely to be double that of wind (or even solar).The obvious dangers to man and environment are well known to everyone. Analysts will begin to factor in the hidden subsidy burden which makes nuclear energy look cheap. The sharp, exponential decline in cost of generating renewable energy willonly  accelerate in the next couple of years and there will be no place for costly and dangerous means of power generation.As a smart businessman, the government would speeds to monetize or salvage whatever it can. Post IPO, the share price may fall like a stone – like in the case of some other hyped up Power sector stocks. But that would hardly matter to the government as the public would be left holding the worthless shares.

4)      To expand on the above point, Nuclear Energy works on the principle of taking subsidy money from tax-payers and transferring the profits to the investors without much risk. Further, with the dilution of the Nuclear Liability Act, NPCIL will be at almost zero risk in case of a nuclear accident (the foreign suppliers will have an effective ZERO liability) and hence it offers the best investment scenario possible for private investors masquerading as “public” to own a stake in NPCIL.Additionally, the inherent complications which arise out of disputes, court cases and above all cost escalation clauses due to project delays and cost over-runs makes these stocks very attractive to investors who know that in the long run, far more money can be extracted from the government as compared to the original cost. There are salivating opportunities for private investors who bet on long term projects involving all the thrills of litigation, publicity, dodgy deals and more.

5)      Now is the time because, the rapid development in the power distribution sector will become a reason why UMMP’s (and NPCIL) may be forced out of business. The major development is “Smart Grids” which enable power generation at a more local level depending on the load factors and distributing the power generated intelligently. Currently, a major problem in India is the Transmission and Distribution of the electricity generated. While South India is practically isolated from the national grid, the inadequate network that transports the generated power results in almost a quarter being wasted as losses. Smart grids coupled with cheaper local power generation will mean an end to such large projects on which NPCIL prides itself with.

6)      Foreign collaborations and agreements will become easier to manage after privatization. Although the majority stake and management control remains with the government, the foreign collaborators will be able to sweeten sensitive technologytransfers in their home countries and to their shareholders.

7)      Disinvestment may not necessarily be done for generating cash or to reduce subsidy burden. At times, disinvestment is also done to generate a “feel good” emotion.

NPCIL has managed to garner the devils face among Indians because of its inept handling of Koodankulam, Jaitapur, Rawatbhata and Gorakhpur issues this year. This has come on the back of the Fukushima disaster and the truth about the “Man Made” tragedy there coming out in the form of independent inquiries.

For a government monopoly to have such negativity associated with it makes for bad business sense. The government knows that it will become more and more difficult for NPCIL to set up or expand its nuclear projects if this image of “big bad brother” remains. Disinvestment can make the company more palatable since the propaganda machine will claim that it is a company owned by the people of India and not by the government.In the process, the Prime Minister can behave like a patriarch and claim that NPCIL is a prized possession which has been returned to the “real” owners – the people. Incidentally, the same argument is used to emotionally ‘convince’ project affected people during land acquisitions and public hearings.

It makes for good ad copy and might be good enough to garner political brownie points too.

8)      For NPCIL, MASSIVE funds will be required in the near future for disposal/reprocessing of spent fuel and nuclear waste disposal facilities. The second white elephant is the immense cost of decommissioning which will come up sooner rather than later. Getting public money to take care of the mess it has created is the best – nay, the ONLY – choice for the government.

Given all the above, it makes sense for the government to look at hiving off part of this “crown jewel” because increasingly, this crown is becoming too heavy to wear….

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