The Telegraph
Since 1st March, 1999
Email This Page
- Government control of PSUs can succeed only with distancing

The Congress has finally backed off on the sale of another 10 per cent of the government holding in Bhel and agreed not to sell any more shares in any navratna or 'profit-making' enterprises.

This comes after more than two decades of discussion and argument about the role of government as owner of public enterprises. Does government or private ownership matter'

In the foreword to a book titled Reforming State-Owned Enterprises, edited by me, P. Chidambaram wrote: 'Looking at the issues in a pragmatic way, ownership of the enterprise is perhaps not so important as the efficiency and productivity of that enterprise...(T)he only way the enterprise, regardless of its ownership can survive is if it is competitive, productive and efficient. The state stepped in (creating and running public sector undertakings) not because it wanted to own for the sake of ownership but it did so because it wanted to serve certain larger public objectives. In the 1950's and 1960's, at any rate, in India, it was concluded that these larger public objectives could not be served without owning the enterprise. Today we know that may be possible, some of these larger concerns can be served, without owning the enterprise.

'Should there not be a return for the money that has been put in'...If they do not give an adequate return, it is an inefficient use of public resources.'

It is accepted that this inefficiency is because the government does not leave managers to manage public enterprises. The government has demonstrated its incapacity to distance public enterprises from the ministers and administrative officers. The reasons for the lack of distancing vary: the government's accountability to parliament requires close involvement in decisions, the power hunger of the representatives of government, and the benefits to individuals and political parties from public enterprises. Over the years, many methods were tried out, without success, to distance the government from management: memoranda of understanding between government and the enterprise; holding companies leaving subsidiaries free to manage; joint sector companies with both private and public participation and management with the private partner; and navratnas (that would have greater autonomy in decision-making). None successfully and permanently distanced the government from major decisions on investment, technology, top-level appointments, compensation packages, union agreements, new project locations and purchase decisions on materials and equipment.

The dividend distribution by public enterprises is much lower than by similar enterprises in the private sector. Governments at the Centre and the states earn little on their large investments (less than the interest they pay on borrowed funds used for the investments). Consequently, they also are short of funds for physical infrastructure and social investments in health, education and other services. Huge subsidies in running public enterprises, openly as in electricity and water, or hidden as with many others, are another reason for finding ways to take enterprises out of government control. Most are inefficiently run, visibly so in electricity, or with inefficiencies hidden behind administered and cross-subsidized tariffs.

Bhel has been a 'profit-earning' enterprise. It has better return on investment and other financial parameters than many other public enterprises. But there is little detailed comparative information on its performance vis-'-vis technical parameters with other companies in the same fields. While it has introduced some technologies, especially in power, through technology purchases overseas, it has made little investment in research and development. Bhel has continued to enjoy price preference in relation to competition and access to much cheaper capital than private enterprises. There is pressure on other public enterprises (like NTPC) to buy equipment from Bhel and remain wedded to older technologies.

This is so with other such 'profit-making' public enterprises. For example, the Airports Authority of India is profitable and has sizeable cash reserves. But our airports compare poorly in the number of take-offs and landings per day in comparison with similar-sized airports elsewhere, are pitiful in their overcrowding, lack of modern equipment, with serious deficiencies and personnel shortages in air traffic control, atrocious baggage handling despite high landing charges.

Things are much worse with our airlines. They are rapidly losing market shares to private operators, consequently have huge unused spaces in our otherwise crowded terminal buildings, have little consistency or management attention to on-time performance, are terrible with passenger baggage, and survive because of government patronage and lower fares. But government control and bureaucrats as managers ensure that there is no distancing from government.

Are governments and the left serious at least about closing the loss-making enterprises' The bureau created by the present government, headed by the classic ideologically left-wing old bureaucrat, P.K. Basu, for the rehabilitation of sick public enterprises, has said no. He does not want sick enterprises to be sold or closed, but to be rehabilitated. He ignores the sorry experience of the last many decades when rehabilitation meant more government money going down the drain. The National Textiles Corporation is an example of a major loss-maker into which the government has poured crores of public funds and failed to turn around. The communists will in practice prevent closure and sale of sick or loss-making enterprises since it will affect their important constituency, the non-working workers, in such enterprises.

In fairness, even the National Democratic Alliance government was reluctant to do so. The sadhvi minister, Uma Bharti, rose to the defence of the monopoly of the hugely inefficient Coal India. This loss-making public enterprise has a monopoly on what is claimed to be among the largest coal reserves in the world. But it has succeeded in creating huge power shortages by its inability to supply power generators with the coal it was committed to. The mindset of keeping public enterprises with the government is costing the country dearly.

The NDA government preferred wholesale privatization, since the sale proceeds would be maximized if control passed to the private buyer. The UPA government chose to disinvest some government equity in public enterprises. It was thus retaining government ownership and control while opening the enterprise to the discipline of transparency and good governance imposed by private shareholders. The sale proceeds would go into an investment fund, and the interest be used for spending on health, education and other social expenditures.

The government's dominating ownership has also enlarged it, with more ministers, bureaucrats and supporting staff. The duplication in decision-making, with enterprise decisions being second-guessed in the ministries, has resulted in a process that is slow, conservative, risk-averse and unambitious. Public enterprises cannot be entrepreneurial. They are poor on customer service, backward in technology, unsuccessful when they do engage in research and development, provide low returns on government investments, are overstaffed, they underpay the top management and are a haven for corruption.

If ideology dictates that control should not be handed over through privatization, the enterprises can at least be independently managed professionally, with shareholder interests being protected by following the best rules of corporate governance. But that does not happen. While government agencies like Sebi lay down rules for good corporate governance, they are enforced only for the private sector. The public enterprises, state-owned banks and insurance companies do not bother to follow those rules.

Chidambaram was correct. Ownership may not matter but control does and if government control cannot be distanced from management, privatization is the only answer.

Email This Page