Revamping Public Sector Units

Public sector reforms within India are limited in their approach, and are vastly different from many other countries.

Public Sector Units (PSUs) in India have been amassing losses, both at the Central and State levelù79 State-run companies had an accumulated loss of Rs 55,656 crore in 2012-13; while at the same time, investment in these companies is approximately Rs. 1.57 lakh crore. It is estimated that a further Rs 10,000 crore will need to be invested to keep these companies going.

PSU reforms have been a critical element in programmes for revamping the regulatory framework in countries the world over and are also included in India´s reform agenda. However, realisation of these changes has been sluggish. Public sector reforms within India are limited in their approach, and are vastly different from many other countries wherein these reforms have involved an overhauling of the PSUs through privatisation along with the shuttering of loss-making units.

Instead of outright privatisation, the previous government initiated a limited process of disinvestment of government equity in public sector companies, with the government retaining 51 per cent of the equity and also management control while the public was offered a remaining stake. It was believed that the materialisation of private stakeholders along with trading of shares of the PSUs was geared to make the management of the PSUs perceptive of commercial profitability. However, these measures have seldom produced the desired results. The government has failed to initiate any closures. Instead it has implemented an objective process for determining whether a unit should be closed or not has been initiated pursuant to amendments to the Sick Industrial Companies Act, 1956 (´SICA´) to bring sick public sector companies under the purview of the Board for Industrial and Financial Reconstruction (´BIFR´) in the same way as private sector companies are covered. However this too has failed to produce the desired results as the meaning of the term ´sick´ is too broadùa unit or a company (having been in existence for not less than five years) which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth. Further an industrial unit is only regarded as potentially sick or weak, if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment.

Since then Finance Minister Arun Jaitley, during the India Economic Summit organised by the World Economic Forum in November 2014, announced that the government was open to the idea of privatising loss making State-run companies and promised to pursue economic reforms and ensure a corruption free and fair business environment. A number of PSUs have looked to the primary market to raise further capital to finance their investment plans. In the case of Gujarat, there has been respite. The government managed to successfully turn around certain units making heavy losses and once considered sick into highly profitable units. The Gujarat State PSUs are currently the most profitable units with a cumulative profit of Rs 5,800 crore. The first step towards reform was the constitution of a reforms committee headed by Hasmukh Shah (the ´Committee´).

The report of the Committee found that one of the biggest hurdles for the management of the PSUs was lack of autonomy. It was observed that the board of these units often comprised of politicians who did not possess the requisite experience or qualification to sit on the board. This resulted in inefficient decisions being made and implemented at every level. Owing to this finding, bureaucrats were handpicked by the then Chief Minister as members of the boards that headed these PSUs. The boards were given autonomy and a separate team for monitoring their progress was set up. In an attempt to increase accountability and transparency, the board was directly responsible for its actions. Even recruitment to the PSU was made rule-driven. This exhibited the idea of having a standard operating procedure that was laid down on all fronts.

Some of the notable PSUs that experienced a turnaround are:

Gujarat State Fertilizers and Chemicals (GSFC)

GSFC is touted as one of the biggest turnarounds by a PSU. The company was on the brink of a cash crunch between 1999 and 2001. This was attributed to many reasons-increased cost of energy, technical hiccups and delayed commissioning of new plant after an 8-year gestation period and resultant increased project cost, excess outflow of interest. The turnaround for GSFC began from the financial year 2003-04. On account of the tough policy decisions, the company worked on strategies that assisted in enhancing its productivity, bringing down costs through technical innovations and improved management information systems. Such measures were fully supported by the government of Gujarat which in turn gave the company full autonomy.

The company implemented a Corporate Debt Restructuring (CDR) scheme. However, with its turnaround, GSFC approached the CDR cell a second time to accelerate the debt repayment. The debt, which was scheduled to be completely paid by 2013, was re-paid in 2006.

Gujarat Alkalis and Chemicals Ltd (GACL)
GACL was incorporated on 29th March 1973 in the State of Gujarat by Gujarat Industrial Investment Corporation Limited (GIIC). GALC, not unlike GSFC, was making tremendous losses but under the reforms brought about under the last Gujarat government, the company managed to salvage itself. This turnaround was made possible due to the implementation of a CDR plan and reduction of overall borrowings. Interest costs too dropped substantially from Rs 124 crore in the preceding financial year to Rs 93 crore in FY 2003. This was on the back of reduction in borrowings to the tune of Rs 140 crore. Another reason was that the company switched to using low-cost resources in their power plants.

Post the turnaround, the company has enhanced capacity at its caustic soda plant at Vadodara at an investment of Rs 7 crore. It also commissioned its calcium chloride plant at Dahej with an investment of Rs 7.5 crore to utilise the industrial waste discharged from its phosphoric acid plant.

It is not unlikely that the Central government will now use the Gujarat model at a national level for the sick and/or loss-making PSUs. Additionally it may choose to look at other ways of improving PSUs such as granting ownership of the PSU to the employees. It is possible that the management and the employees may be better motivated if they have a financial stake in the PSU they are working in. Therefore, the operation of an employee stock option scheme may be explored. Another major feature of manpower in PSUs is lack of professionalization and adequate training. It may prove to be useful to bring in more professional management especially at the senior echelons of the enterprise. Frequent transfers that plague the PSUs reduce the sense of involvement of the top management with the units. To combat this, a proposal was floated in 2013 to fix the tenure of three years for chief executives of companies run by the Central government in order to improve accountability, transparency and efficiency. Currently the Public Enterprises Selection Board oversees hiring for State-owned firms. The appointment of board-level executives takes a minimum one year to be completed and is as such, a time-intensive process. These steps combined with the foregoing may succeed in bringing the PSUs out of the red once and for all.

However, a complete turnaround of PSUs may prove to be challenging given the constraints under which they operate. This is because PSUs fall within the purview of the Right to Information Act, 2005 (RTI)- A committee set up to review the effect of the RTI on PSU banks found that coverage under the RTI Act inhibits the PSBs´ ability to compete with their counterparts in the private sector as the latter are not covered by the same law. Apart from the time to be devoted to satisfying the information needs of the RTI, there is a danger that competitors can use RTI (and possibly sensitive) information from banks.

The Comptroller and Auditor General of India (´CAG´), the external auditor of Government-owned corporations, has also been active in holding the PSUs accountable for non-performance and bad investment and business decisions. Under the Companies Act 2013, the CAG may appoint an auditor in a government company and may also conduct a supplementary audit. The CAG called out fuel retailers for overcharging customers by charging notional levies like customs duty on fuel they sold. The CAG may also point out other deficiencies in its reports. The 2013 review of the 2012 Audit Reports of CAG shows that the State PSUs incurred losses to the tune of Rs 1,831.01 crore and infructuous investment of Rs 3.21 crore which were controllable with better management.

In granting greater autonomy to PSUs, their accountability should not be watered down. There have been several instances where PSUs have failed to commence projects after awarding bids to private players. Termination rights within these agreements are limited and therefore the CAG has recommended that State governments should formulate guidelines or PSUs entering into joint venture agreements with private entities. Additionally the government should consider terminating agreements to protect the financial interests of the State as per applicable rules and statutory provisions.

Another reason could be the increasing vigilance of the Competition Commission of India (CCI). In 2013 the CCI penalised Coal India Limited by levying a fine of Rs 1,773.05 crore for allegedly abusing its dominant position in the supply of the dry fuel. The CCI found that CIL (and three of its subsidiaries) were operating independently of market forces and enjoyed an undisputed dominance in the market for production and supply of non-coking coal.

While reducing losses of these PSUs it is incumbent for the government to keep in mind the reason for their existence-provision of services to the public at affordable rates. With the cost of living ever increasing, striving for profitability of PSUs should not be at the cost of making services available to the public.

DISCLAIMER: This article has been authored by Aakanksha Joshi, who is an Associate Partner and Tarini Menezes, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.