Get Sarkar Out, Stem PSU Rot with an Indian Temasek
There is nothing like facts to mirror reality. The gut-wrenching churn in the stock markets shows up the rot in the management of public wealth invested in the public sector. The market capitalisation of private sector HDFC bank is more than that of a dozen public sector banks, and the listed value of two private banks exceeds that of all the public sector banks. The market capitalisation of Reliance Industries is more than the market capitalisation of IOC, BPCL, GAIL and HPCL put together.
The Government of India is the largest business house—it dominates banking, makes scooters, steel, chemicals, fertilisers, and explores and markets petroleum products and even runs hotels. By definition, erosion in the value of state-owned companies translates into a fall in the wealth of citizens.
It would be seductive to argue that much of the rot in the public sector is about ownership. The truth is not so linear. There are failures and there are illustrative instances of successes—for example, in Singapore, Germany, France, Sweden, the Netherlands and South Korea. The Modi Sarkar may want to look up the seminal work of Mariana Mazzucato and Ha Joon Chang on the entrepreneurial state.
The cause of rot in India is mostly about the quality of management—or if you please, political management. PM Narendra Modi does not subscribe to the idea of privatisation. The rationale is political—about transfer of public wealth to private individuals, about creation of oligarchs. But why persist with political management, and perpetuate sloth that erodes public wealth? Why not get the sarkar out and shift PSUs to a sovereign platform to institute professional management and promote growth?
Facts best illustrate the magnitude of rot (source: DPE, Lok Sabha and Rajya Sabha). The Government of India owns 290 public sector enterprises of which 56 are under construction and 234 are operational. In 2013-14—the latest data available—public monies deployed in PSEs amounted to Rs 17.4 lakh crore. These PSEs delivered an output of Rs 20.6 lakh crore and employed 13.5 lakh persons.
How are the PSEs doing? Of the 234 public enterprises, 163 are making profits and 71 are making losses. The total profits in 2013-14 were Rs 1, 49,164 crore—a return on capital that is just above the cost government borrows at. Two-thirds of the profits come via monopolies— oil, coal, minerals, power generation and distribution. And profits are a function of cost and PSUs benefit from the legacy edge—many didn’t have to bid for rights to mine/explore/sell natural resources. To appreciate the point, review PSUs in aviation, telecom, banking or manufacturing.
The losses: Rs 20,055 crore or Rs 54 crore a day. Of the 71 loss-making companies–36 of them for the last five years—45 are listed as sick with cumulative losses of Rs 56,845 crore. The total losses of all 234 enterprises is Rs 1, 19,230 crore. And then there is the mess in the banking sector where banks were labouring under bad loans estimated to be at around Rs 7 lakh crore.
The rot is worse in the states. There are 863 public enterprises operated by the states. Of these, 389 reported profits, 20 were neither making profits nor losses, and 215 were making losses. Such is the state of sloth that of the 863 enterprises, only 624 furnished data. And in 2015, the most updated data available with the government pertained to 2009-10.
Systemic chaos is visible both in the organisation structure and its management. Government Inc organises public wealth chaotically. The 290 enterprises are housed under 41 ministries. Then there are banks and insurance companies under the department of banking. In August 2015, the government informed Parliament that “there are 24 CPSEs which presently do not have regular Managing Director/Chairman” and in December 2015, it revealed “77 posts of functional directors and around 470 positions of non-official directors are presently vacant”. Sure, some posts have been filled, but vacant posts are a perennial issue.
The key to efficiency is in professional, not political, management of public wealth, keeping enterprises out of what Sweden has so eloquently defined as out of “ministerial rule”.
A good beginning would be to take banks, insurance companies, even India Post and profitable PSUs, off ministerial rule and onto an autonomous sovereign platform with appropriate accountability. There are templates galore—Temasek in Singapore, KfW in Germany, APE in France, Crown Corporations in the Commonwealth, and OBIB in Austria, are all workable models to consider.
Even in a landscape of family-owned enterprises, India can boast of good professionally run banks and companies—many on the must-invest list of FIIs. The exit of ministerial diktat and creation of an independent board will lure and enable lateral induction of managerial talent, creating the impulse for professionalisation and transformation.
The milestones of an ideal glide path would be liberation, listing, separation of natural monopolies and others, consolidation because the one-owner-many-banks model defies logic... leading to an eventual transition from government ownership to public ownership with the government retaining a golden share in strategic sectors.
The big challenge for Budget 2016 is to find resources to propel growth. Big bang reforms are, and must be, about a bigger bang for the buck and this means efficient outcomes from deployment of public money. Unlocking the value potential of PSUs will deliver dividends that can be leveraged to create public services that India so desperately needs.
Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change