In September last year, cabinet secretary Ajit Seth called a meeting of top officials across ministries to discuss the future of the 10 top loss-making public sector undertakings (PSUs). Their combined losses had topped Rs 24,500 crore in FY13 and they were being increasingly viewed as unsustainable. These included Bharat Sanchar Nigam (BSNL), Mahanagar Telephone Nigam (MTNL), Air India, Hindustan Photo Films, and Hindustan Fertilizer.
More recently, at the Aero India Expo in Bangalore, Prime Minister Narendra Modi was candid about what he expected from the 277 central public sector enterprises. “Frankly, our public sector needs to do much better than they are doing now. We have to exploit their huge assets and vast potential. At the same time, we have to make them accountable.”
Finance minister Arun Jaitley, too, minced no words when he said at the India Economic Summit in November that some PSUs could do better in private hands. “They are being sustained merely on government support. That is not a long-term solution. Taxpayers cannot pay for loss-making businesses.’’
But that’s not the only message coming from the government. The National Democratic Alliance, led by the Bharatiya Janata Party (BJP), has spoken, in equally glowing terms, of the lead role that PSUs play in India and their continued relevance to the economy.
Politically or ideologically, no government can argue against the idea or the relevance of PSUs. An outcome of India’s post-Independence economic ideology that saw the state at the centre of all economic activity, PSUs have dominated India’s economy for decades. Even after delicensing, their influence hasn’t waned. But the BJP, more than the Congress, the other large national political party, has been willing to question the role of PSUs in general, and the irrelevance of some. During its previous term, the BJP had even appointed one of its senior politicians as minister of disinvestment.
Understanding the role of PSUs in India’s future requires a degree of nuance. While the rise of private capital and of privately run enterprises may have been the dominant narrative, to dismiss PSUs out of hand is disingenuous, inappropriate, and unpragmatic.
Sure, there are some PSUs that don’t deserve sympathy. Not that they are at fault, but that the state has no role in being in those businesses. The conversations there should be about how efficiently and humanely these outfits can be shut down.
Have state-owned enterprises become dinosaurs with little relevance in this day and age of “market economy’’ and increased globalisation? Have they become millstones around the neck of the government, which is already constrained by poor GDP growth and high fiscal deficit?
The story of Hindustan Photo Films is instructive. Set up in 1960 to make film rolls and take on the likes of global major Kodak, it was declared sick in 1996 and recommended for closure in 2003. The trade unions went to court and got a stay order against the closure. While a revival plan was framed in 2010 by the United Progressive Alliance government, no action was taken. By FY13, it ran up losses of Rs 8,232 crore, about 40 times its paid-up capital.
The story of Kolkata-based Hindustan Fertilizer is no different. It was declared sick in 1992 and referred for restructuring. A revival plan was initiated in April 2007, but nothing came of it. The company no longer produces any urea, and has only eight workers on its rolls, while its negative net worth ballooned to Rs 8,550 crore in FY13.
Both these companies came up for closure at Ajit Seth’s meeting.
“There is no future for such companies in the current environment. These are fit cases of winding down,’’ says an official at the Department of Public Enterprises, which is overseeing the privatisation of state firms. He wasn’t there at the meeting, but reflects the position that the government has taken.
EQUALLY, THERE ARE other types of PSUs that have built positions of hegemony, are relatively well run, play a significant role in nation-building, and contribute handsomely to the state’s exchequer. The appropriate question to be raised for such companies is not closure, but how the government should increase its shareholder value. Leading on from there, should the government play the role of an active or dormant shareholder? What is the level of autonomy that PSU managements should be given? How should they be recruited? Should the companies be attached to individual ministries?
Analysts like Navin Agrawal, partner and head of advisory at KPMG India, believe that Modi seems to get it. He points to his track record as the chief minister of Gujarat.
When Modi took charge of Gujarat in 2001, a host of government-owned entities like Gujarat State Fertilizer & Chemicals and Gujarat Alkalies and Chemicals were in the red. He turned around their fortunes over time by first setting up a PSU-restructuring committee headed by Hasmukh Shah, former chairman of Gujarat Gas. He was aided by a bunch of economists, bureaucrats, and management experts. All ailing companies were referred to it.
So what did Modi do, based on the committee’s recommendations? He personally interviewed candidates for the post of chairman and other board positions, handpicked bureaucrats to oversee these companies, and then got the government out of the way. Once the right teams were in place, they were given full autonomy with clear targets, while simultaneously a robust monitoring system was built. Of the 12 state PSUs referred, eight turned around in a year. “Those PSUs that can be saved will be saved because Modi will create the right ecosystem for them to thrive,’’ says Agrawal.
But can the same magic be created at the centre? After all, as the Gujarat experience shows, the day-to-day interference by politicians through their ministries or by the bureaucrats themselves (in most cases they are board members) has become the biggest bane of these organisations.
U.D. Choubey, former chairman of GAIL, India’s largest state-owned natural gas processing and distribution company, articulates the issue differently. He says there is no clarity on the role of the state in a PSU, and it depends on the discretion of the government of the day, the minister or bureaucrat in charge, and sometimes even the managers and their willingness to bend over. “As a majority stakeholder of these PSUs, what the government can or cannot do is not clear. A clear ownership policy will ensure the accountability of the owner. Otherwise the government will continue to dictate policies through formal or informal channels,” he argues.
He adds that there's a need to redefine the ownership structure, separate ownership from management for managing PSUs professionally, and let them run their day-to-day operations.
A senior official with a Delhi-headquartered PSU who asked not to be named, says, “You cannot hold PSUs responsible for the shortcomings of the government.” Kolkata-based Indian Telephone Industries, manufacturers of telecom products like broadband equipment, for instance, wanted to change its technology from manual to electronic and collaborate with foreign players, but was denied permission by the government: A meek management (most of it appointed by the government) did not press its case. Today, it is not even a peripheral player in the growing sector. Again, by not allowing Hindustan Machine Tools to change from manual to electronic watches at the right time, the government scuppered any chance of its survival.
For loss-making telecom players MTNL and BSNL, the biggest issue is high employee cost, combined with the continued legacy of a domestic fixed-line business. BSNL has 25 times more employees than Bharti Airtel, the country's top telecom operator, with half the revenue, while MTNL has three and a half times more employees, with barely a tenth of Bharti's revenue.
The bottom line: The state’s uninspired interference is poison.
AT OTHER TIMES, the twisted logic of government policies hurts these companies. Where on earth would you find a government arm-twisting a monopoly like Coal India (it produces nearly 85% of the country’s coal) to sell substantially below the market price, and sign contracts with a penalty clause to keep fuel costs low for power generation units, many of which are private companies? It took a case by Britain’s The Children’s Investment Fund, a minority shareholder in Coal India, to show how selling below market rates was costing shareholders a whopping $20 billion (Rs 1.3 lakh crore) in annual profits. The fund subsequently exited Coal India.
Partha Sarathi Bhattacharyya, former chairman of Coal India, says no other company in the world “sells its produce at 60% below the market price, continues to make profits every year [Rs 22, 878 crore in FY14], and pays more than Rs 10, 000 crore to the government exchequer [dividends] every year”.
The bigger issue here: What is the tradeoff that the state can make between serving a larger public good vs. enhancing shareholder value today? Historically, PSUs (those that began life as state-owned units as well as those that were absorbed into the fold through nationalisation of private sector units) were mainly meant to serve the public good (employment, keeping prices affordable, etc.). Although the governing economic ideology has begun absorbing more free-market ideals, acts on the ground haven’t kept pace.
For instance, even when crude prices touched an average of $106 (Rs 6,700) per barrel last year, Oil and Natural Gas Commission (ONGC), the country's pre-eminent exploration and production company, managed to take home only $40.97 per barrel because it was forced to give a discount of $65.75 per barrel to oil marketing companies such as Indian Oil, Bharat Petroleum, and Hindustan Petroleum.
This amounted to giving away nearly Rs 56,300 crore, which not just hurt profits but also impeded ONGC's ability to invest in capital-intensive core activities. “Unless there is a clear subsidy-sharing formula, it is extremely difficult for us to plan the future. We are never sure of our cash flow,” laments D.K. Sarraf, the firm's chairman and managing director.
For the oil marketing companies, the challenge is different. Any delay in compensating them for selling liquefied petroleum gas and kerosene at discounted price means that these companies have to dip into their reserves for working capital needs, postpone further capital investments, and report losses quarter after quarter.
THE GOOD NEWS: The government has started the process of reducing the subsidy component in the petroleum sector. While prices of petrol and diesel have already been deregulated—prices are already market determined—kerosene and LPG are still regulated. And that’s still a heavy burden on these PSUs.
For profitable PSUs, there is also the sword of Damocles—dividends—hanging over their heads. It’s common for the government to force PSUs to cough up dividends (interim or annual), buy back shares, and also invest in other PSUs to improve deficit numbers. That insistence is often divorced from the PSUs' ability to pay a quantum of dividend that year. Some argue that it may be better if the state has a disinvestment schedule rather than insisting on arbitrary dividends.
"There is a need for a permanent dividend policy—an ad hoc policy will never work. Dividend outgo hampers the growth of the public sector because they cannot plan their expansion,” says Choubey. All would be well if the government were to simply raise cash by divesting its equity stakes to public investors.
Choubey’s solution is simple. “We need to find a new model where the government finances employees to buy stocks in the company they are serving in, lock up the money for three years, and then take the money and leave the incremental amount.” The government is not likely to fund this, and PSUs, once again, will have to find the backbone—and cash—to pull it through.
Restructuring of boards, therefore, becomes imperative if PSUs are to take independent decisions without fear or favour. Currently, more than half the board, including independent directors, is appointed by the government (read the ministry); so the government’s representation is always in a majority that can outvote the chairman on any decision.
“In a real sense, there is no autonomy, and decision-making takes a hit. We have been crying ourselves hoarse for autonomy for so many years without much effect,’’ says the chairman of a public sector company who did not want to be named. This despite the fact that the government’s shareholding in many of these companies has reduced from 100% to the range of 88% to 58%.
There’s also the perpetual threat of managers being investigated post-facto by a slew of agencies such as the Central Vigilance Commission, Comptroller and Auditor General, and Parliamentary Standing Committees. Private companies rarely come under their purview.
The logic trotted out is that PSUs are custodians of public money and hence need to be more accountable. But as the heads of PSUs have traditionally argued, even the private sector runs on public money since it raises capital from the capital markets, banks, financial institutions, and public shareholders. So unless “public money’’ is clearly defined, PSUs will always be at a disadvantage.
SO, CAN PSUs FUNCTION DIFFERENTLY? The answer is ‘yes’; it has even been detailed in the ‘Report of Panel of Experts on Reforms in Central Public Sector Enterprises’, or what has come to be known as the Roongta Committee report, after S.K. Roongta, former chairman of Steel Authority of India.
It calls for a radically new module, in which all PSUs would be held through a single holding company (SHC) structure. The government would own 100% of the SHC, but in turn could have varying stakes in various PSUs. The government would act as a venture capitalist.
The boards of the PSUs would also be reconstituted, with half the members from outside the government. Roongta says that the operating managers of the SHC would act like fund managers. “Their job will be to constantly churn the portfolio to optimise the returns for the government, obtain dividends, and divest stakes, if necessary.” The SHC would also decide on key staffing of the PSUs.
Choubey says this would help improve corporate governance and result in more transparency in reporting. Also, he believes, it will lead to swifter decisions and clear government ownership policies.
Although the implementation of the process may need some time as it requires much discussion among various stakeholders to thrash out various contentious issues like the legal framework and timing of the government’s exit, it will in one stroke solve the problem of ministerial interference and other issues associated with it.
The Roongta report is currently under consideration.
Whether it’s this report or any other that promises independence to PSUs, this may be a good time to implement it. As Choubey says, “Many central PSUs have not only survived, but actually excelled in the new age of greater liberalisation, globalisation, and competitive markets.” He reels out a set of statistics to buttress his argument. During FY13, the turnover of the 277 central PSUs stood at Rs 19.5 lakh crore, a 6.7% increase over the previous year, while net profit rose by 14.8% to Rs 1.1 lakh crore and net worth by 10% to Rs 8.7 lakh crore.
Even globalisation has worked in their favour: Foreign exchange earnings have increased 8.03% to Rs 1.38 lakh crore in FY13 and many of these companies are now among the world’s largest.
Choubey, who is currently director general of SCOPE (an apex body for all central PSUs), says inefficiency, sloth, and corruption are just not the hallmark of the government-owned entities. There are many private companies which are inefficient.
He says PSUs contributed Rs 1.16 lakh crore to the exchequer by way of profits and another Rs 1.61 lakh crore in terms of taxes, royalties, duties, and dividends, nearly 22% of the government’s revenue last year. “It is not fair to tar all PSUs with the same brush. There are success stories, and they will continue to play a vital role in the country’s economic development,” he says.
And that’s exactly why they need reform—because of the vital role they play.
