Pakistan’s Imran Khan Leads 1-0 as Modi Re-Nationalises Companies

I could not figure out whether to laugh or cry, to feel vindicated or cheated, when I read in the Financial Times that:

Imran Khan will place all of Pakistan’s state-owned companies into a special fund to be managed at arm’s length from the government ... Asad Umar told the Financial Times that one of the first acts of the new government would be to move some of the country’s biggest companies, including its national airline, away from government control. Mr Umar, the former chief executive of the Pakistani conglomerate Engro, was Mr Khan’s shadow finance minister in opposition. “[The] corporations will all be put in a wealth fund, which will be led by people from the private sector”, he said. The fund’s job, he said, would be to cut the companies’ losses and debts before deciding which can be privatised and which will take longer to restructure. He mentioned Pakistan International Airlines, which has total liabilities of Rs406bn ($3.3bn), as one company where the debt burden needed to be reduced.

I helplessly recalled what I had written in the heady days of 2014, when a newly-minted prime minister promised to rewrite India’s economic policies:

We can create a trillion dollar India Sovereign Fund, without spending a single penny from the government’s fiscal book! Let me show you how. The government should transfer its corporate investments to a fund managed by a board of professionals with a two-point mandate: 1) to create value by improving the governance of portfolio companies; and 2) to monetise that value by buying and selling equity in the Fund (instead of directly in portfolio companies) – this should be done not when the government needs money, but when market conditions are right. Its board will be answerable to Parliament, through the Finance Ministry. Given the political sensitivities about selling ‘family silver’, the Fund can be tasked with retaining 51 percent state control in all portfolio companies (at least until India’s liberal democracy has matured to the stage that Parliament is willing to privatize, at which point this Fund could indulge in outright sales – but for now, we will hold our horses at a mandatory control of 51% by the state, to allay the fears of left-leaning Indian politicians).

Singapore’s Temasek sovereign wealth fund offers an example. The initial portfolio included a port converted into a ship repair business, a bird park, a shoe maker, a detergent producer, a nascent airline and a steel mill. Since inception in 1974, Temasek’s annualized shareholder return has been 16 percent and its portfolio was valued on 31 March at $267 billion. Temasek is also the inspiration behind China Investment Corporation launched in September 2008 with $200 billion of starting capital, drawn from the country’s foreign exchange reserves. China Huijin, an investment corporation that held shares in Chinese banks, was also transferred to the fund.

Most of the profitable (Indian public sector) companies are listed, so if the unlisted ones are included, the India Sovereign Fund’s value could swell to $180-200 billion. Unfortunately, investors do not have much confidence in the government’s ability to create value, giving these companies a multiple of 7, while the 30 Sensex companies quote at 17 times earnings. What’s more, some of the unlisted companies like Air India sit on a huge land bank and assets like bilateral flying rights. Conceivably then, better management by an autonomous, professional holding company would enhance the current value from $180-200 billion to $ 225-250 billion or so.

Now let’s think out of the box. If the average or median value of India Sovereign Fund is, say, $325 billion over the next 6-8 years (assuming that asset and income values will grow over this period, from the current base of about $225 billion), then this Fund could raise $325 billion in equity if the government places fresh shares and brings its stake down to 51 percent, and another $ 650 billion in debt (at a conservative 1:1 debt/equity ratio) in ‘opportunistic tranches.’ That is, during periods when interest rates are down it raises debt, and when equity values are high it raises equity. Thus, it could raise nearly a trillion dollars of fresh investible resources over the next 6-8 years.

The ‘Trillion Dollar’ Headline Tickled Curiosity

Since a euphoric Modi government was scouting for big ideas in its first year, I got a call from the office of a very high ranking minister – I mean, really high ranking – to come by and make a presentation on India Sovereign Fund. I held their rapt attention for over an hour. Once I was done with the numbers, the top guy in the room said: “Tell me, in 50 plain words, how this idea can be sold to politicians, and don’t use any confusing numbers”.

I answered: “Here are the macro-economic benefits, without a single downside. A stronger rupee via the addition to forex reserves; lower inflation; lower interest rates and higher private investment; lower fiscal and current account deficits; and massive additional outlays for health, education and rural infrastructure”.

The top man’s eyes blazed with excitement. “Let’s do it”, he said. And as I picked up my presentation booklets to leave the room, he held my hand and said “leave one copy behind for me. I shall read it myself”.

I came away light-headed and elated. I thought I had made my immortal contribution to Mother India’s economic destiny. But I was rudely surprised when the finance minister, in the Budget speech that followed a few weeks later, talked about investing four billion dollars in National Infrastructure Investment Fund (NIIF), which was a very different animal; there was no mention of India Sovereign Fund!

But I did not give up. I wrote another note, proving how my idea could multiply NIIF’s impact by 50 times:

This time I got no response. After making a few more futile attempts, I gave up… until Prime Minister-designate Imran Khan triggered a wistful memory. I looked up the latest numbers, just as an academic lark. All data points had strengthened considerably since 2014. Total market capitalisation of 50 listed public sector companies had shot up to $ 250 bn; cash flows and dividend payouts were higher. If only the high ranking – I mean, really high ranking – minister had had the gumption to push India Sovereign Fund through; the trillion-dollar investment would have been a reality, not just a gleam in shut eyes

NOOO! Please Don’t Re-Nationalise India

Unfortunately, worse has followed. Status quo may have been a blessing compared to the kind of re-nationalisation we have seen under the Modi regime. An egregious attempt by four public sector shareholders to re-acquire control of UTI by ousting a marquee international investor is only the latest of several cynical policy moves in this direction. Remember how ONGC’s balance sheet has been raided to offload GSPC and HPCL on it? How LIC has been used as the milch cow (oops) to bail out IDBI Bank and ILFS? And now there’s talk of the life insurer flirting with Air India… no, please, NOOOOOOO!!

Prime Minister Modi and his fans will hate this, but just as cricket skipper Imran Khan had knocked the stuffing out of our men in flannels in the 1980s, he is looking set to KO our public sector policy a quarter century later. Uh oh!