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Strategizing For Taking Indian PSUs On A Higher Growth Path
There is need to have an inclusive approach towards state PSUs to transfer new ideas, technology and knowledge in the public sector space to them also, to increase the net contribution of the PSU eco system towards the GDP of the country.
Photo Credit : Reuters
At the turn of this century India and China had three PSUs (Public Sector Undertakings) each in the Fortune 500. Today three Indian PSUs continue to figure in the Fortune 500 whereas the number has gone up to 43 for China. The Chinese success story accompanied by the accomplishments of SOEs (State Owned Enterprises) in many countries, especially South Korea, Singapore and Malaysia has reignited the interest of countries in the public sector even while pursuing a liberalized free market economy regime.
During nineties the refrain of the World Bank and International agencies was the privatization and corporatization of State Owned Enterprises. In sharp contrast, the World Bank today has a vertical for upgrading governance of State Owned Enterprises. The world over this period has unambiguously begun to acknowledge the rationale for the co-existence of the private and public sector. Contrary to the for-profit sector, the public sector is expected to have the greater good of society at heart while keeping its bottom line in profit. It is expected to make only reasonable profits, otherwise it has to short change either suppliers or consumers or maybe both. The best idea is to make the private and public sector compete and complement each other to get the best out of them.
Also, we should promote perfect competition practically possible in imperfect markets. From a national perspective we should strive to get rid of monopolies in the public and private sector to introduce as much competition as is desirable to increase the efficiency of corporations individually and most importantly, collectively.
Seventy years after independence, another issue to ponder over very seriously is about the value a line Ministry brings to the working of its PSUs. One view is that the autonomy and independence in day to day operations in PSUs is primarily curtailed due to the umbilical cord with their Ministries. Rather than being a benign symbiotic relationship between the PSU and its Ministry, it is generally seen as parasitic on the part of the Ministry. Often, origins of many acts of omission and commission of PSUs are traced to their Ministries. CEOs of PSUs share that if they are not seen in their Ministry regularly, officers who are expected to coordinate them start feeling insecure.
As a generalization, PSUs of certain Ministries like Defence Production, Petroleum and Power have done well whereas, Ministries of Fertilizers and Chemicals do not have that kind of an enviable record. The organizational culture in railways, a legacy of British India could not be created in Air India. Even today the culture is more professional in Bharat Petroleum as compared to GAIL or ONGC which came up after independence. Yet, there are stories of corporations like Hindustan Latex which have grown faster than comparable private companies while meeting the challenges of diversification and technology assimilation.
Integration and consolidation of companies should be done very carefully. There are many issues related to mergers of PSUs. Integration of Air India and Indian airlines has not been at all successful. Ideally, in an amalgamation or merger the strengths of PSUs should multiply or at least add up and their weaknesses should diminish. It has often worked the other way around where the strengths have diminished, and weaknesses amplified. We should be very clear about the effect of integrating or separating two or more public sector entities.
The government could quite safely consider moving its PSU framework to the Chinese or South Korean model where coordination for all PSUs is done by one stand-alone entity or a designated Ministry. There is hardly any downside of this decision except reducing the power and privileges of Ministers, Secretaries and middle level officers connected with PSUs. In addition, the CEOs and Boards of PSUs would not be reporting to multifarious agencies or individuals who do not have the required accountability.
In the decade of the 60’s the Korean nation gave the slogan ‘export or perish’. The underlying theme was that if their companies can meet global competition they will easily do well nationally. Even if they make reasonable profits globally, eventually they will flourish. No wonder that Korea has more than hundred state owned companies that are really like multinationals.
Two major variables while marketing products and services for any corporation are their cost and quality. Hindustan Aeronautics Limited (HAL) manufactures Light Combat Aircraft (LCA), combat helicopters and other equipment at about one third to one eighth of the cost of comparable products manufactured by European and American companies. However, their exports are only 3% of their total production. Likewise, Bharat Electronics (BEL) produces great night vision devices, electronic and surveillance equipment at costs much lower than its competitors in international markets. Yet, it is not able to really scale up its exports according to its potential.
The Ministry of External Affairs and overseas Indian Missions should be mandated to assist in pushing the sale of these products to countries in Africa, South East Asia and Central America which are friendly to India and where there is great demand for relatively cost effective electronic, surveillance, anti-insurgency and military hardware.
High Quality technical, financial and legal talent at relatively lower cost broadly is the USP of PSUs in India. Companies like RITES, WAPCOS, and EPI are highly competitive globally while bidding for international contracts in designing, drafting, construction, project management and consulting due to this man power. WAPCOS has provided consultancy and other services in nearly forty countries. Strategically, we should consciously focus on leveraging our high quality but less expensive human resource.
As a principle, the GOI should not have an equity stake of more than 51% in CPSUs. In those PSUs which are financially strong, the government should at the earliest dilute their stake preferably to the retail investor through the stock exchange mechanism to around 51% unless it is not expedient to do so for political, sovereign or reasons of financial propriety. Where listing is required the GOI should get those PSUs listed and dilute its equity to the minimum required levels.
The government should be not be shy, even aggressive, to bring down its equity stake even below 51% progressively where the country benefits from collaboration with other national or international players due to transfer of technology, infusion of fresh capital, leveraging of the global reach of multinationals etc. Maruti is a case in point. Here a win-win situation was created where the GOI successfully diluted its stake in a phased manner. Though the CEO and a handful of executives are Japanese, Maruti primarily remains an Indian company. Exporting cars wouldn’t have been successful under the brand Maruti, yet it was possible by marketing them overseas as Suzuki by leveraging the global sales- service, branding and marketing network of its collaborator Suzuki. The GOI has recovered many times over its initial investment in Maruti both directly and indirectly.
There are practically no justifiable reasons for shares of PSUs not to be listed for free and fair sale of their shares. The share value on a day reflects the intrinsic value of the share at that moment. It is a myth perpetuated over time that the shares if listed will do so below the fair price. In fact, because of the strength of the government they would be listed at much better prices as compared to their counterparts in the private sector. For instance, Bharat Petroleum has a dream share holding pattern which has given possibly one of the highest returns not only in the public sector, but the corporate sector put together in the last two decades. It should be expeditiously ensured that over a defined period all PSUs, whether in profits or otherwise are listed on the stock exchange.
Strategically, PSUs should focus on a short, medium and long-term vision considering the local and global business environment. Emphasis should be on increasing their operations if they are not making losses, don’t have decreasing productivity and are increasing or retaining their market share. In addition to their operational income, the PSUs should leverage other opportunities for generating revenue from advertising, lease, rentals, interest on deposits, use of land etc. The income from such activities in many cases could even be used to subsidize their primary mandate. There is a limit to which core operations can be made more efficient. In such a case non-operational income should be maximized for stakeholders to get the best return on their investment.
The realty check for PSUs has been taking place once a year in DPE through the MOU system since 1989. However, in countries like China concurrent evaluation of their Public sector undertakings takes place through SASAC. The idea is to pick up the warning signals as soon as any of the public sector undertakings is on a decline to initiate course correction. In such a situation this intervention prevents it from becoming sick.
We could also dispense with the existing weighted average formula for performance assessment of PSUs because critical or key variables for PSUs will vary according to sector, existing local and global scenario, macroeconomic local and global conditions, tariff regime in India and foreign countries, competitors, government policy, market imperfections and externalities.
The surest way to increase the bottom line in PSUs is to reduce expendable expenditure. ‘Money saved is money earned’. For example, most PSUs are making substantial expenditure on security personnel who are invariably hired from a private security agency. All PSUs put together, this expenditure would be quite considerable. Likewise, litigation across PSUs would be consuming a sizeable amount of funds.
There are examples not only in government, but even in the private sector in our country like the Pai Group, where even their top executives are not allowed air travel in business class or stay in hotels beyond three stars. Most companies maintain guest houses, many in multiple locations and cities while even their middle level officers stay in expensive hotels, forget about their CEOs and board members. In PSUs also, the government must direct them to use their existing infrastructure and in addition, economize on their stay and travel. This avoidable expenditure should be on the radar screen of their line Ministries and DPE.
Even in PSUs we can increase elements of privatization to the extent desirable. Many activities have already been outsourced and contracted out. Here we must very carefully draw the fine line while outsourcing, especially related to automation and computerization. A lot of information which should be held within the companies flows out to consultants or agencies to which technology functions are being outsourced.
Indian PSU’s have a global footprint in about seventy countries. In many cases Indian PSUs have invested in a very cavalier fashion without enough due diligence in the Middle East, South America, Central Asia, and Africa. When we make such investments, we must be mindful of the comparative advantage that our PSUs have over foreign companies. When any of our PSUs invest in Brazil or Mozambique they should have clarity about the competitive edge they have over indigenous companies and global players operating in that country. We must learn from the success story of companies like Tamasek Holdings, Singapore which has very successfully invested 27% of its equity in Singapore, 68% in Asia and 41% beyond Asia.
India is the only country across the world which has mandated CSR by the Corporate Act. Ideally, CSR should be used as a force multiplier to other developmental efforts in the country. It should leverage not only the financial resources of corporates, but also, their qualified human resource, infrastructure, machinery, materials, networks, outreach and brand equity. The CSR funds could be used to compliment flagship programs of government like Skilling India, Make in India, Swachh Bharat Abhiyan etc. Nearly Crores 4000-4500 are to be spent by more than 130 CPSU’s in the country. If they are strategic in using these funds many hitherto ignored areas like aspirational districts and low priority sectors like conservation of heritage, art and culture and sports could be focused upon.
The latest developments in Central PSUs should also trickle down to state PSUs as they operate in very critical sectors like power, transport, highways, infrastructure, medical and health etc. If we don’t take them along, many cross-boundary linkages become very weak. DISCOMS in the power sector in provinces which cannot pay central power companies for power purchases create a very anomalous situation where power plants of CPSEs have to back up despite heavy demand for power in the country. Likewise, the last mile connectivity cannot be ensured with Airlines and Railways unless there are vibrant State Road Transport Corporations.
The GOI should thus have an inclusive approach towards state PSUs to transfer new ideas, technology and knowledge in the public sector space to them also, to increase the net contribution of the PSU eco system towards the GDP of the country.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.