INDIAN LABOR LEADERS OPPOSE UPA PLANS FOR PUBLIC

C O N F I D E N T I A L SECTION 01 OF 03 NEW DELHI 004308

SIPDIS

E.O. 12958: DECL: 06/08/2015
TAGS: ELAB ECON EINV PGOV IN
SUBJECT: INDIAN LABOR LEADERS OPPOSE UPA PLANS FOR PUBLIC
OFFERING OF BHEL STOCK

REF: A. NEW DELHI 994

B. 04 NEW DELHI 6463

Classified By: Charge Bob Blake for Reasons 1.4 (B, D)


1. (C) Summary: Leftist labor unions and the UPA's communist
allies have stepped up their opposition to the GOI's
announced plans for a public offering of 10 percent of Bharat
Heavy Electricals Limited (BHEL),which will raise
approximately $400 million dollars for the National
Investment Fund (NIF). The sale indicates a renewed UPA
drive for the sale of government assets within the scope of
the Common Minimum Programme (CMP),but the Left and Labor
remain opposed. The Left's labor federation, the Center of
Indian Trade Unions (CITU) is, along with other labor unions,
organizing protests against the planned sale. We expect the
protests to have little impact, indicating that labor's
ability to stop disinvestment is weakening, which will pave
the way for future public offerings. End Summary.

A Blue Chip Stock for the Public
--------------


2. (U) On May 26, the UPA government announced plans to sell
10 percent (24 million shares) of the public sector Bharat
Heavy Electricals Limited (BHEL),India's largest
manufacturer of power-plant equipment. This move is
controversial because it demonstrates UPA's desire to move
forward with the sale of government assets (or "disinvestment
in the local parlance) despite opposition from its Communist
coalition allies, who oppose the sale of "profitable" public
sector undertakings (PSUs). BHEL is a profit-making PSU with
market cap of $4.8 billion. Its profit increased 52 percent
in the year ended March 31, and sales growth for the current
fiscal year is predicted to reach 10 percent. Currently,
shareholders include the government (68 percent),foreign
institutional investors (23 percent),other institutional
investors (7 percent) and retail investors (2 percent). The
sale would reduce government holdings to 58 percent.


3. (U) Fund managers expect strong demand for BHEL shares
due to the company's strength, India's increasing demand for
power, and successful past public offerings. Finance
Minister P Chidambaram predicted that the response would be
similar to the sale of 10.5 percent of National Thermal Power
Corporation (NTPC) of October 2004, which raised a total of
$1.15 billion and attracted 3.6 times as many bids as offered
shares (Ref B).

Revenues to the National Investment Fund
--------------


4. (U) The GOI plans to place revenues from the BHEL sale
(expected to be approximately $400 million) in the National
Investment Fund (NIF),which is independent of the Finance
Ministry and separated from the budgetary process. Public
sector fund managers will manage the NIF, the earnings of
which will fund health and education programs (75 percent)
and revive viable PSUs (25 percent) (Ref A). The UPA hoped
to reduce opposition from its Leftist allies by having the
revenues of the sale accrue to the NIF rather than the
budget.

A Renewed Interest in Disinvestment
--------------


5. (U) Some analysts believe the BHEL sale indicates a UPA
desire to move forward with public offerings of shares of
other PSUs, which was stalled during its first year in power
due to Communist opposition. The BHEL sale will be only the
second such sale of the UPA government. The "Wall Street
Journal" cited Chidambaram's hope to raise up to $1.61
billion during the current fiscal year (April 1-March 31)
through sales of shares in other PSUs, potentially including
the Shipping Corporation of India and car manufacturer Maruti
Udyog Ltd., among others. In contrast, the BJP-led NDA
government raised $3.2 billion from such sales in its last
year in power in 2003-04.


6. (U) Another GOI goal from this sale is to encourage small
retail investors to enter the equity market. For this
reason, the stock will be split and 15 percent of the shares
sold (1.5 percent of total equity) will be reserved for
employees. Sale details such as pricing, timing, and the
ratio of the stock split have yet to be determined.

Ideological Opposition from the Left/Labor
--------------


7. (U) Opposition from the Communists forced the government
to delay the BHEL disinvestment until the fiscal year began
on April 1 (Ref A). The Communist parties denied
Chidambaram's public statement that they had been consulted
in the decision and asked the government to reconsider its
decision to sell BHEL equity. They asserted that the sale
was "directly contradictory" to the CMP. In a press release,
the CPM-affiliated CITU denounced the "retrograde move" of
"creeping privatization" (i.e. the incremental sale of
government shares of PSUs). Although the Communists
predicted widespread protest in response to the sale, our
sources do not foresee that they will bring down the
government over the BHEL case.


8. (C) In a June 1 meeting with Poloff, two CITU Secretaries
denounced the UPA for embracing the idea that "privatization
is a solution for everything," calling it a "loot of public
money," especially for efficient, profit-making PSUs like
BHEL. They slammed the GOI plan to place the proceeds of the
sale in the NIF as "sugarcoating," warning that the UPA plans
to use the NIF to encourage disinvestment by giving the false
impression that no money would be spent on health or
education programs without selling government assets. In
contrast, representatives of the Congress-affiliated Indian
National Trade Union Congress (INTUC) welcomed the sale, as
long as the government remained BHEL's majority shareholder.



9. (C) CITU have invited all trade unions to attend a
meeting on June 10 to devise appropriate next steps, which it
anticipates will result in a two-phase action plan. The
first phase will call on the GOI to withdraw the sale,
followed by national strikes if the government does not
agree.

Additional Concerns
--------------


10. (C) Aside from its ideological opposition to
privatization, Indian organized labor has other concerns
stemming from past experiences with privatization. First, it
is convinced that the private sector will dismantle public
sector enterprises in rural areas where 80 percent of Indians
live, due to poor rural infrastructure and the villagers' low
purchasing power. They fear that without a strong public
sector in these areas, the rural-urban divide will become
more pronounced. Secondly, they believe India's social
safety net is not strong enough to support the workers who
will inevitably lose their jobs or benefits. Third, they
fear that the government will not receive fair value for the
shares it sells.

Labor Can Slow, But Not Stop, Disinvestment
--------------


11. (C) T. Dyvadheenam, from the International Metalworkers'
Federation, admitted to us that while trade unions and the
Left are ideologically opposed to all disinvestment, they
will likely be unable to stop it. In light of this, he said,
trade unions and the Communists must work with the government
to negotiate the best deal for workers. For example, when
shares are reserved for workers, they should negotiate a
share price that is lower than market value, so that workers
can afford the shares. There is no indication that this will
happen in the BHEL sale.

Comment
--------------


12. (C) Communist claims to the contrary, the BHEL sale does
fall within the scope of the CMP, while few labor leaders
believe Labor is strong enough to stop limited privatization
efforts such as these. The Left's public outcry is a
political necessity to appeal to its constituents. The
predicted widespread protests have not materialized, though
some demonstrations at BHEL plants have taken place. The
level of response to a potential call for national strikes
may reveal to what extent the Indian labor movement can
constrain future public offerings of PSUs. Placing revenues
in the NIF will not be sufficient to reduce the Left and
labor's opposition to future privatization. In addition, the
government will have to address concerns about India's poor
infrastructure and improve the social safety net for workers.
BLAKE