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PSUs: The Right Questions and the Wrong Ones

The two most important questions are almost never asked when the decision to disinvest or privatise a PSU is taken

Whenever any government in India announces its intention to privatise or otherwise dispose off any public sector enterprise (PSE), a heated debate starts off. The current target of trying to get Rs 1.75 lakh crore from disinvestment and privatisation in financial year 2021-22 has similarly triggered off a flurry of questions.

On one side are those who ask: Why is the government selling the family silver? From the other side of the aisle, the counter often is: Why should the government keep running this business? What business does a government have to be in all sorts of business?

Later, other questions will crop up. Is this the right time to sell? Is the government selling it too cheap? Is the government selling only to its cronies?

But the two most important questions never get asked. One, is running the PSE going to give the government better long term return on capital than it gets by cashing out and spending the money? And most important, if running the PSE is not generating adequate returns to the government, what is the real reason behind that?

A caveat: These questions apply only to the PSEs that are not considered to be of strategic national interest. Commercial criteria cannot be applied to any entity which is strategically important to the nation.

Most of the 339 central public sector units (CPSEs) are not considered of any national strategic interest. (There were 339 CPSEs at the end of March 2018, of which 257 were operational while 82 were yet to commence business).

The answers to these questions will move the debate away from ideology to a commercial decision framework. There is nothing really wrong with a government owning multiple businesses in various fields – provided they are making money and fetching it adequate returns.

From time to time, of course, the government needs to take a call on whether a sector or the company has no future because the technology or the business environment has changed. As an owner of a business, that is routine exercise. To give an example, there might have been a time when the government needed to set up a company or own a business dealing with photographic paper (Hindustan Photo Films). In a digital era, a business like this would make no sense. And any business owner would sell or shut it and use whatever money it fetches on other things.

That will leave the government with a list of only those PSEs which are in businesses that are still considered having a future. Here again, it can divide the companies it owns into two groups – those that make profits, even if marginal. And those that do not.

According to the last survey of CPSEs, out of the 257 functioning PSEs, 184 were profitable while 71 were loss making. From a purely commercial angle, therefore, the argument for not getting rid of the 184 profitable PSUs can be made strongly. How to make them more efficient and more profitable and make them give better return on capital would be the questions for the policy makers as far as those are concerned. Unless the government was planning to monetise them to put money in more lucrative areas which give better return on its capital, it makes more sense for the government to remain invested in them.

Of course, if can, from time to time, sell some of its shares to raise capital for other projects – possibly for infrastructure development or for some new strategic PSE for which money is needed. But if these companies give the government good returns annually, why get rid of them? Selling them would be akin to slaughtering the golden goose.

That would leave the 71 loss making companies where the question really is: what are the reasons for the losses? If it is simply bad and inefficient management, two further questions arise. Is inefficient management the only reason? And if yes, can it be fixed and turned around.

In many cases, it could be that there is no point in the government trying to turn around the company – the mix of capital requirements, the accumulated losses, the effort required to get a better management in place does not makes sense for the government given that it has many more important things to do. PSUs like Air India, MTNL or BSNL could have been turned around by the government many years ago – but it makes little sense to keep trying now. In such cases, getting rid of it at the best price it gets is the best decision of course.

But where PSEs are only making marginal losses because of bad structure or bad government decisions, it makes sense to see if they can be fixed properly. And there would be several companies that would fall in this category – PSEs that are still inherently good businesses.

If the government is honest in its introspection, it would realise that many of the problems that beset the loss making PSEs are because of the way it manages them. PSEs are still managed using archaic bureaucratic structures and are often asked to fulfil a social purpose or anything else the government wants rather without any concern for profits. While a social purpose is obviously very important for any PSE, it cannot simply ignore revenues, market share and profits. If it does, it will not be able to deliver on the social purpose either for very long.

While a large number of PSE employees at the bottom end are indeed less motivated or efficient or more complacent than their private sector counterparts, the PSEs have always thrown up excellent technocrats and managers. This is one reason why many PSEs are raided by private sector companies when they go hunting for engineers in complex projects. What ails PSEs in India is the structure in which they have to function – and not any intrinsic lack of competency.

The Indian government could look at Singapore where the PSEs are owned through Temasek, a holding company that takes decisions based on commercial principles. The companies Temasek owns are expected to earn their keep and give long term benefits. They do not have to suffer from day to day government interference.

Will it be possible to do this in India? The real problem would be that no politician wants to lose power over CPSEs run by their ministries. And no Indian government has actually contemplated freeing up the management of CPSEs to run their business on purely business and revenue and profit principles.

In the past, this government has shown that while it is ready to “disinvest”, it is not ready to “privatise”. The Oil and Natural Gas Corporation Ltd (ONGC) taking over the Hindustan Petroleum Corporation Ltd (HPCL) is a good example.That way, it had tried keeping its control while still meeting disinvestment goals projected in the Union Budget. The problem with this approach is that it uses up the reserves of a profit making PSE which is forced to take over another PSE. While this might give the government a one-time gain, it leaves the PSE making the acquisition with little capital for its own business purposes.

When India became independent, CPSEs were initially meant to be pillars of the economy. Later, many PSEs came into being when entire sectors were nationalised or when a badly run private company was taken over to protect its employees and others. Till the economic reforms of 1991, many PSEs continued to make money only because they were monopolies. Also, there was simply no other company in that specific area to serve customers.

But the business environment is now very different. Many of the original reasons for setting up PSEs have become redundant. At the same time, there are plenty of good PSEs that can do well if their managements are free to run the business without interference. And they can give the government a steady cash flow year after year if they are run well. This is something the government needs to understand before it starts selling off its family silver.

Prosenjit Datta

Prosenjit Datta is former editor of Businessworld and Business Today magazines

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