PSU Privatisation Effort Has Resulted In Decimal Impact

Indian state-owned firms (PSUs) emerged out of India's socio-economic structure. Capital was scarce. Confidence was low. Industry was in its infancy. 

The economic liberalisation of the early 1990s induced competition and displaced most flat-footed PSUs from their once-dominant positions. Many have regressed, from monopolies to insignificant players. The influence of Bharat Heavy Electricals Limited (BHEL) has diminished, The Bharat Sanchar Nigam Limited (BSNL) is now a fringe player. Public ports now account for just a third of trade. The over 1000 PSUs owned by state governments, are in an even worse condition. Many amongst them exist to ‘employ’ and payroll. 

*Contribute Meaningfully, Vital & Integral to the Socio-Economic Structure  

They support several initiatives like Jan-Dhan, and strategic sectors like defence, infrastructure, ports etc, offer products and services that the private sectors cannot or may not want to. They gross about Rs 30 lakh crores, but are declining. The PSUs possess assets valued at an estimated $900 billion, and yet the return on capital is less than five per cent and diminishing. They contribute about Rs 5 lakh crores to the exchequer by way of taxes, dividend and duties.   

Even in a thriving economy, around two-thirds of the PSUs incur losses. Three in every five of these have experienced three consecutive years of losses, highlighting a rapid erosion of value. They employ over a million people, and are ‘managed’ by executives who have advanced through the bureaucracy. 

State-owned banks have done better than other PSUs and continue to play a critical role for the millions of unbanked rural Indians and the less privileged and bottom-of-the-pyramid urban Indians. But their dominance is under threat. They are growing at a rate lower than the market. None of them are the preferred choice of the well-heeled. 

The Crux study across 48 PSU enterprises highlights that PSUs are inferior performers across most metrics, even when shielded by regulatory frameworks, or supported with subsidies, and entry barriers. Most struggle with productivity. State-owned enterprises (SOE) often operate with limited transparency. The mission is opaque and invariably stems from unclear, even conflicting goals.  

*Not Aligned to the Larger Goal  

There is an ordinate and excessive focus on ‘administration’ that promotes a conservative, risk-averse and ‘procedures over outcomes’ culture. The system rewards status quo. Only the brave make financial decisions. Talent is in short supply. The CEOs take home no more than a mid-level executive in the private sector. 

While PSUs should and cannot disregard socio-economic initiatives, the leadership must challenge legacy obligations such as subsiding unrelated and non-core businesses that impede financial performance and erode balance sheets. 

*Focused Portfolio, Effective Communication, Strategic Allocation  

The PSUs should openly articulate their objectives and establish a transparent mandate by negotiating with the government and other stakeholders. Defining and communicating the financial targets and creating a holistic roadmap to achieving them offers several advantages. Firstly, transparency promotes accountability, ensuring that government officials uphold their commitments, especially when things go south. Secondly, it generates public and stakeholder support, particularly crucial when political backing is fragile. Lastly, it instils pressure within the organisation to deliver on set targets.  

*Privatisation Predicament 

Prime Minister Narendra Modi’s strong message for privatisation had rekindled hope. However, the disinvestment strategy has fallen short and achieved nothing substantial. It has hurt the reform process. Shutting down ‘sick’ and dysfunctional firms, is underway but that is more in the nature of cost saving, less on revival and capital and asset optimisation. It’s unlikely to move the needle.  

The PM faces significant resistance both within and outside the government. Privatisation efforts have remained elusive. The endeavour as result, has largely been ‘one step forward, two back’, and cautious. The major hurdle is inward, and particularly from the ministries overseeing the PSUs. Ownership and patronage provide a sense of entitlement; and are difficult to ‘let go’. Additionally, labour unions affiliated with political parties are actively obstructing the reform measures.  

The implementation has been apathetic, half-hearted, and indifferent at best. Disentangling bureaucrats from the boardrooms will be challenging, and protracted. 

A shift from public to private holds significant potential; effective implementation could be a multiplier. Privatisation can enhance efficiency and productivity, leading to higher profit ratios, effective capital utilisation, better quality. It will optimise stakeholders’ value.  

A Crux study articulates that privatisation however is not a panacea, nor the only solution. Merely transferring ownership to the private sector is not always accretive, nor necessary, unless judiciously carried out. As an example, Russia's privatisation programme, heightened economic inequality as assets were illicitly acquired by a select few. Similarly, privatisation in Mexico led to rampant abuse of market power. Successful privatisation requires the presence of strong institutions to ensure fair and efficient outcomes.  

The study suggests ‘whole of the part’ (certain functions within the PSUs) privatisation would reduce cost, increase quality and customer satisfaction, and enhance value. The salami tactics (‘piece by piece’) will be less opposed and could be a ‘fulfilling’ journey to the destination. However, it runs the risk of poor design and ineffective implementation. The study recommends a cautious approach and careful evaluation of each privatisation deal to ensure favourable outcomes.  

*Beyond Ownership 

The Crux study concludes that there is a need to have a holistic look at the role of public sector enterprises. For those that are strategic and cannot be privatised, the government must realign the policies accordingly in a way that it ‘owns’ them but does not manage them. It must appoint a board that fosters autonomy, enables governance, and let’s go. The top leadership must implement modern management practices and establish performance-based incentives leadership. 

The key lies in creating a fair and competitive environment that promotes excellence and competitiveness. The PM may have tactically decided not to conquer the privatisation hill. He must be armouring for the war ahead.