Will the government let PSUs be run professionally? - Part III  

April 10, 2012

The Coal India case underlines the need for professional autonomy, creation of a reasonable distance between the Ministries and the PSUs and a clear definition of the obligations of the PSUs. This is the concluding part of the series on state-owned companies

EAS Sarma

Over the years, despite the inefficiencies and the diseconomies that arose from these controls, the public sector undertakings (PSUs) have become important drivers of the economy. During the four to five decades of their existence, no government has ever paid any serious thought to introducing major public sector reforms so as to ensure that they could function efficiently and deliver the outcomes expected of them in an effective manner.

An essential element of the government’s 1991 economic reform strategy was to reduce government’s ownership in PSUs so as to provide them greater commercial freedom. The policy statements that followed from the successive governments year after year have often been self contradictory, devoid of a clear focus and usually in conflict with the avowed intention of reform.

Initially, a distinction was sought to be made between ‘profitable’ and ‘non-profitable’ PSUs, though the profitability of a PSU would really depend on the pricing policies dictated to them by the government. In some cases, the government tried to disinvest PSUS in favour of strategic partners and, in other cases, it tried to follow the Thatcherite path of opting in favour of a wider pattern of ownership in the hands of a large number of small retail investors. Whenever the strategic-partner route was taken, the ownership of the concerned PSU slipped into the hands of an influential group for a consideration that fell short of the potential value of the PSUs assets. The second alternative, that is, wider retail ownership, met with a limited success, as the government’s intentions remained ambiguous.

The government tried to group the PSUs under the ‘strategic’ and the ‘non-strategic’ categories but the definitions of these terms underwent changes whenever the governments changed. In particular, there was no attempt to make any distinction between the PSUs like CIL, ONGC and others that managed the country’s scarce, non-renewable resources such as oil, gas, coal, iron ore, bauxite, etc, and the other PSUs.

In the absence of such differentiation and without any clarity in the objectives, PSU disinvestment became a bone of contention among the political parties. Whatever halting disinvestment that took place after 1991 was usually done by the then ruling political parties, more in stealth than as a part of a well thought out long term strategy. Instead of deploying the disinvestment proceeds in more viable long-term investment opportunities, successive governments used them to fill the widening budgetary gap between the revenue and the unproductive expenditure, thus frittering away the gains, if any, of disinvestment.

While, on the one side, the government tried to withdraw its presence from the PSUs in favour of a private enterprise, on the other side, it was occasionally forced to seek the help of PSUs to take over the failed private enterprises, as it happened when the PSU lender, Oriental Bank of Commerce (OBC), was asked to save the depositors and the customers of the much touted, later scam-ridden Global Trust Bank in 2004. The critics of the reforms are justified when they described the whole process of disinvestment as “nationalisation of the losses, privatisation of the profits”.

Against the above background, it is high time that the government realises that it cannot do without some PSUs like CIL, ONGC, IOC and others for quite sometime, as long as it believes that such PSUs have important social and national obligations to discharge in the vital sectors in which they function. In the case of such PSUs, disinvestment may prove counter-productive, as it has become evident in the case of CIL. Even in the case of CIL, from the foregoing analysis, it is evident that a laissez faire approach to exploitation of India’s depleting resources is neither desirable nor can it be sustained in the long run. Demand management in any economy is as important as supply management. When this is realised in practice, PSUs like CIL will be in a position to play the legitimate national roles they are expected to play.  

Excessive control over the PSUs is in itself counter-productive. PSU reform calls for professional autonomy, creation of a reasonable distance between the ministries and the PSUs and a clear definition of the obligations of the PSUs. The different government departments, including the PMO should also respect the professional autonomy of the PSUs and the sanctity of their board-managed structure, apart from respecting the law of the land. They should refrain from interfering with the day-to-day functioning of the PSUs. Those who have a conflict of interest should not be permitted to be a part of the PSU boards. Sooner these reforms are taken up, the better it is for the economy of the country.

Dr EAS Sarma, IAS, is a post-graduate in Nuclear Physics (Andhra University) and in Public Administration (Harvard University) and a Ph.D from IIT, Delhi. As a Union Secretary he has held the portfolios of Power, Economic Affairs and Expenditure. He quit the government in 2000 over differences regarding policy issues with the National Democratic Alliance government. He is the convener of Forum for Better Visakha (FBV), a civil society group set up in 2004.