Change the law to set PSUs free PDF Print E-mail
Monday, 30 September 2019 00:00
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Parliament or Supreme Court must remove ‘instrumentality of state’ clause for PSUs that function in competitive markets

If Air India loses Rs 5,000 cr a year – they rose 38% to Rs 7,365 cr in FY19 – the discounted value of 5-years’ losses is Rs 20,800 cr; paying a firm to take over AI may be a better idea

Even if the government was to embark on a massive privatisation drive—as opposed to today’s PSU-buying-another-PSU—it is unlikely that more than a handful will get sold. Apart from the fact that just 10-12 PSUs were sold at even the height of the privatisation drive during the Vajpayee years, it is not certain there are that many buyers, especially among India’s mostly cash-strapped industrialists.

And, even where there is a buyer, the unacceptably large, and heavily unionised workforce in these PSUs will probably be a big deterrent, especially where there are other alternatives available. If there are, by way of example, few takers for the more successful Jet Airways, which had a lot less debt, what are the chances there will be even that many for Air India, given the size of its workforce? And who would want to buy an MTNL or a BSNL when, due to their massive workforces and shrinking revenues, their salary bills—relative to their turnover—are 10-12 times those of the private sector?

With the caveat that the government is unlikely to be able to offload too many PSUs—there are around 340 central PSUs, and probably two to three times as many state-government PSUs—there can be little doubt the government needs to spend even more effort to fix their performance. A look at the market value of PSUs makes this very clear. Even while the government refuses to privatise, PSUs in areas like telecom, banking or steel—essentially, in all areas where they are not a monopoly—are losing market share. And, while doing so, they are also losing value; since Narendra Modi assumed office in May 2014, the share of PSUs in the country’s overall market-capitalisation has fallen from 22.5% to 11.6% since, while overall BSE market capitalisation rose 61%, that of PSUs fell 17%. This means a notional loss in the value of PSUs of Rs 15 lakh crore in the last 5+ years! If PSUs are losing their market share anyway, every day of delay in selling them off, or fixing their performance, means they are losing value.

Even more unfortunate, in most sectors in which PSUs have a monopoly, such as coal mining, or dominate, like oil, their performance is so poor that the country has to make huge imports to meet consumption needs. In which case, it wouldn’t be an exaggeration to say that privatisation of PSUs will, over the medium term, lead to a lower import bill. Indeed, in a situation where imports are allowed freely, it is unlikely that privatising even a monopoly PSU will lead to a private sector monopoly; in fact, if privatisation leads to more production, as happened when the ‘monopoly’ HZL was privatised, the country benefits from this transaction.

While most advocacy of privatisation, both within and outside the government, sees this as a revenue-generating exercise, this is completely the wrong way to go about it. The obsession with revenue-maximisation, it is fair to say, in fact, is what led to the destruction of the once-robust telecom sector. Obviously, the government can’t have a one-size-fits-all approach, but an example or two should make this clear. If Air India’s losses are Rs 5,000 cr a year—they actually rose 38% to Rs 7,365 cr in FY19, just a year before Jet Airways shut down—this means a loss of Rs 25,000 crore over 5 years; if you discount that at, say, 10%, that’s a net present value of Rs 20,800 crore. In such circumstances, giving a bidder money to take over Air India is the optimal solution; in other words, the privatisation program must build in the possibility of negative bids. If, however, a profitable PSU like BPCL is to be sold, the government can expect a good value since it will take a long time for any private sector competitor to build up such a franchise of petrol pumps in the heart of most cities.

But, since the vast majority of PSUs can’t be sold, the real productivity boost for the economy will come from fixing these PSUs. The first rule, or one of the first, has to be that the government cannot interfere in their running; setting up a Banks Board Bureau has ensured little government role in appointing senior officials in PSU banks, for instance. Another has to be to allow them the freedom to retrench staffers, and hire the best; nowhere does this apply more than in the case of banks,with most PSU banks being massively over-staffed, and with people who do not necessarily have the skills needed for modern banking. Even more important, is the issue of what is called L-1-itis, or the rule that requires PSUs to float tenders for almost anything. This ensures PSUs can never negotiate terms with suppliers, or potential partners since the losers can, legally, challenge any contract as being unfair—under the Constitution, PSUs are seen as an instrument of the state, and so, have to offer equal access/opportunity to everyone. ONGC’s attempt to tie up with PSUs in Brazil and Norway, for deep sea drilling expertise, were scuttled on precisely these grounds.

The government, then, needs to either get Parliament to amend Article 12 of the Constitution, or approach the Supreme Court on this, to say that PSUs are not an ‘instrumentality of state’ under certain circumstances. The SC’s rulings on this are not consistent. In PB Ghayalod vs Maruti Udyog, in 1991, it ruled that since there was a substantial foreign ownership, and the partner had various rights, the company was not an arm of the state. In Mysore Paper Mills vs Mysore Paper Mills Officers’ Association, in 2002, it ruled that the PSU was to be considered an arm of the state. But, in Pradeep Biswas vs Indian Institute of Chemical Biology, in 2002, the SC said that for an entity to be an instrumentality of state ‘it should have been entrusted with such functions as are governmental…by being of public importance or being fundamental to the life of people and hence governmental’. The simple rule the government must push for is that wherever the PSU is not a monopoly, and there are private competitors, the PSU will not be considered an ‘instrumentality of state’ since it is not fulfilling a ‘governmental’ role, as it were. If this is not fixed, no matter how much freedom the government gives PSUs, they will never really be free to operate.



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