Reviving a loss making PSU

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Reviving a loss making PSU

In the last seven decades, CPSUs have contributed significantly towards making India self- reliant in their respective fields. In addition to physical assets, these have developed significant competencies with regard to human resources, intellectual property, research etc. and have always served the national priorities, over narrow business interests. Following the advent of economic reforms since 1991, the Government has aimed at creating a vibrant and dynamic market with the open entry of the private sector in most industry and services sectors barring a few strategic sectors. This strategy has been immensely successful and has helped create a strong and flourishing market with dynamic entrepreneurs.

The policy of opening up to FDI has made India an attractive investment destination as one of the most open economies in the world. In this context, CPSUs which have made a stellar contribution to the nation, lack competitiveness on account of multiplicity of goals. While CPSUs in some sectors continue to serve the purpose of national interest, others have been continuously making losses over the years. It is pertinent to mention here that certain CPSUs came into being decades ago by taking over private sector enterprises which were facing operational losses in order to protect jobs. In the present scenario, loss-making CPSUs which suffer from operational inefficiencies or face technology obsolescence are seen as a drain on Government resources and the right remedies for them could unlock significant potential for the Government in meeting its social sector obligations. This is substantiated by the fact that the total loss made by the loss making CPSUs during 2016-17 is ₹ 25,045 crore as compared to ₹ 30, 759 Crore during 2015-16.

Periodically assessing the need for a CPSU

A thorough evaluation of CPSUs must be undertaken, in the context of the present-day environment. Only CPSUs which serve a strategic national objective or are present in sectors where the market has failed, should be retained. Other CPSUs should either be divested or closed down. Likewise, all CPSUs intended to be set up / in the process of being set up must also be evaluated using this filter. Further, other options (such as, offering short-term incentives to private players, partnering or incubating entities with a clear roadmap to divestment, etc.) must be considered before setting up a new CPSU.

 

Permitting operationally flexibility and control

Given the current dynamic environment, whether in terms of market, customer or technology, the ability to make rapid decisions is critical. The management should be given operational freedom, including selection of personnel, as in the case of private players. CPSUs must adhere to the highest standards of governance. However, excessive scrutiny from the Central Vigilance Commission and the Comptroller Auditor General, coupled with the threat of Central Bureau of Investigations often leads to stalled or over-cautious decision-making. Distinction must be made between mala-fide action and taking a business risk. The former needs to be punished, while the latter, protected. Further fraudulent and mischievous complaints (complaints with mala-fide intent) against CPSU management personnel should be penalised.

The private sector, while subject to statutory audits, is not faced with these levels of scrutiny, and thus can afford to take higher business risks.

Empowered and autonomous Board

Empowered CPSU boards, comprising independent experts, will enhance the quality of decisions, overall management supervision and governance, while ensuring that nearly all strategic decisions are taken at the Board level and not passed on to the respective Ministry thereby increasing the speed of decision-making. For instance, the Board must be sufficiently empowered to take nearly all strategic decisions such as formation or dissolution of partnerships / joint ventures, mergers / acquisitions, appointment of CEO, creation of below-board level positions, etc. The Board must also be permitted to appoint new directors to replace retiring Board directors, as is the case with private organizations.

 

Principles for analysis

The financial performance of sick and loss making CPSUs is unsatisfactory, and many have requested for and received periodic support from budgetary resources. Over the years, this has become a significant drain on limited resources of the Government. Many of these CPSUs are in control of valuable resources (e.g. land, buildings, etc) that are, in many cases, not being put to good use. Given the significant budgetary outgo for these enterprises, and the potential for more efficient uses of capital, land and labour deployed in such enterprises, action needs to be taken to ensure efficient usage of resources by the enterprises. Therefore, the primary objective for such CPSUs should be to device strategies that will help in efficient and effectives use of resources that CPSUs already control and the additional resources government may invest in them.

Assessment of productivity of CPSUs

Although it could be argued that strategic sales should not be considered for financially healthy CPSUs even if they are low priority CSPEs, this is a very narrow perspective. Financial performance is only a partial indicator of a firm’s health. What really matters in a decision about strategic sale is productivity of a firm. If, for example, the private firms in the same sector are found to be more productive, changing ownership of a government-owned firm in the sector would be socially beneficially, as it would enhance the productive usage of the resources in the firm. Moreover, weak low priority CPSUs that are not found to be at a high risk of becoming sick or incipient sick in the near term should be also categorised in terms of their productivity to identify those that should be sold in short to medium term. Hence, productivity measures can be used to classify such CPSUs, and prioritise the strategic sales.

 

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