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Mainstream, VOL LVIII No 51, New Delhi, December 5, 2020

The Wasteland of Public Sector Enterprises | Govind Bhattacharjee

Saturday 5 December 2020


by Dr Govind Bhattacharjee *


From only five to 444 Central and 1136 State PSUs, the public sector in India has grown phenomenally since independence. Paralysed by excessive government interference and politicization, Central PSUs have been systematically bled by successive governments and their excess cash squeezed out to finance government’s burgeoning fiscal deficits and populist agenda. But post 1991, with the State’s role being redefined as a facilitator rather than a producer, most PSUs are today trapped in the no-man’s land between the State and market. In this changed scenario, while a few Central PSUs have excelled, the State PSUs have lost their reason to exist. Saddled with colossal losses, most are either sick or dysfunctional, and serve no purpose except extending state largesse to bureaucrats and politicians. Reforms of the PSUs have so far only taken the path of privatization and sellouts, unaccompanied by necessary reforms in the regulatory framework. Global experiences tell us that for revival, they need to be depoliticized and their management professionalised and debureaucratised, with the government having an arms-length relationship with management. It is also essential to reduce their numbers drastically and separate the Government’s roles as shareholder, policy-maker and regulator, along with changing their holding structure. 

Jawaharlal Nehru hailed the Public Sector Undertakings (PSU) as temples of modern India. Nehru was deeply influenced by the centralised planned economy model of the Soviets, based on State-ownership of the means of production and distribution, which he introduced in India. With deep knowledge of history, he must not have been oblivious of the experiment of another Asian nation, Japan, at rapid industrialization during the Meiji era of 1868-1912, which completely transformed the Japanese state and society, through modernisation and Westernisation. The Meiji restoration was characterized by a State-led focus on engineering and scientific education, establishment of a private banking system and encouraging private investment in infrastructure and manufacturing through imported technology. But after steering the economy successfully on the road to rapid industrialization during the Meiji era, Japan gradually withdrew its State control from the economy. It supported and encouraged private business houses to grow, mature and take control of industries and businesses, which ultimately made the tiny island nation an economic powerhouse and the second-largest economy after the United States, even after absorbing the shocks of a devastating loss in World War II. It remained so till the 2010s, before China overtook it.

The HMT Story

India’s growth trajectory was quite different from Japan’s. The crisis of 1990s led to a wave of transformational reforms ushered in by the New Industrial Policy of 1991, which liberalized and opened up the economy to the private sector. But for a long time afterwards, rather than gradually withdrawing from production, the Indian State continued with its control over a large swathe of industry. Some of the companies which grew as monopolies in the absence of competition have in fact become too big to be divested of State control, but not too big to fail.

In 1961, several employees of HMT Watches, a newly created division of another Central Public Sector Undertaking (CPSU), Hindustan Machine Tools Ltd, that was established in 1953 with a factory in Bangalore, were sent to Japan to undergo training with its Citizen Watch Company, to develop skill and competence in micro-engineering to give India cheap wristwatches, and possibly a sense of punctuality in a country left way behind by time’s onward march. The same year, the first batch 500 “Citizen” men’s watches and 300 “Sujata” women’s watches were produced in Bangalore collaboration with Citizen Watch Co, initially only by assembling imported components. The first batch of these watches was in fact released by Prime Minister Nehru himself. Over the next decade, as HMT developed indigenous capabilities, it was making a full 84 percent of the watches in-house. Most Indian’s at that time had proudly sported an HMT watch. At one point HMT was commanding over 70 percent of the Indian watch market share, employing thousands of workers across its five factories, around which developed small townships. It was a success story of the Nehruvian model, to inculcate capability, self-sufficiency, and pride. HMT truly became what its advertising slogan proclaimed, “Timekeepers to the Nation”.

Today, however, all lies in shambles among the desolate ruins of a success story gone haywire. The townships all lay deserted, as HMT Watches could not withstand its first serious competition with private sector in a liberalised economy. Unable to anticipate the market trend that was giving way to automatic quartz watches, it continued with its old mechanized products, surrendered its immense market share in no time, accumulated colossal losses and slowly withered away. On May 1, 2016, the last of its employees were sent into voluntary retirement as the Company was declared defunct. The plight of HMT Watches, in many ways, symbolizes the plight of the public sector enterprises in India in general, save a few remarkable exceptions. Despite the pretensions of operational autonomy of the PSUs, it is a story of excessive government control and politicization of these entities and their milking by successive Governments to fund their own populist agenda - not to mention their regular and systematic extortion by politicians and bureaucrats. Disinvesting Government stake while retaining control over the CPSUs has now become a standard operating procedure to finance the burgeoning fiscal deficits of the Centre.

Bleeding of CPSUs

Take the case of Hindustan Aeronautics Ltd. (HAL) which has been in the news, courtesy Rafale. It is presently facing an acute cash crunch because of lack of orders from the Government despite the Government’s assertions to the contrary. Being a PSU under the Ministry of Defence, Government has been its only buyer. As of 31st March 2013, 2014 and 2015, HAL had cash and cash equivalent for Rs 13378 crore, Rs 16935 crore and Rs 17671 crore respectively. Then, in the next three years flat, the cash rich company was struggling for cash to pay salaries to employees, after being forced to buy back its shares from the Government. During 2015-16 and 2017-18, it bought back its shares for a total amount of Rs 6394 crore. This, and the payment of dividends of Rs 3013 crore out of a total net profit of Rs 6546 during 2015-18 without leaving sufficient reserves, saw its cash and cash equivalents dwindling to only Rs 6525 Crore in March 2018. In October 2018, it cash balance was less than Rs 1000 crore, not enough to pay the salaries of its 29,000 plus staff, and it had to borrow from the banks. It was the same case with all cash-rich CPSUs like Coal India, NMDC, NALCO, MOIL, BEL, BDL etc., whose surplus cash was squeezed out by a Government perpetually looking for funds to contain its soaring fiscal deficit. Share buybacks has become one of the most preferred modes for the Centre to meet its disinvestment target.

As per the guidelines issued by the “Department of Investment and Public Asset Management” (DIPAM), the new avatar of the erstwhile “Department of Disinvestment”, in May, 2016, every CPSU with a net worth of at least Rs 2,000 crore and a cash and bank balance of Rs 1,000 crore is mandated to exercise the option of share buyback. As a matter of principle, there may be nothing wrong in this, but the business or capex requirements of the companies always become a casualty. Non-interference in the autonomy of PSUs is a pure myth; PSUs function under a regime where their management remains permanently and unquestioningly compliant to the directives and orders of even middle-level Government functionaries.

Nehru wanted the public sector to scale the “commanding heights of the economy”, a phrase that was coined in 1922 by Vladimir Lenin. To Nehru, the only way to overcome the endemic poverty and food crisis inherited from Colonial rule was through overwhelming state control over economy in the Soviet style. PSUs were established to serve broad macro-economic objectives of achieving higher economic growth, self-sufficiency in production, import substitution and long term equilibrium in foreign trade, besides meeting other socio-economic obligations. In the book The Commanding Heights: The Battle for the World Economy (1998), Daniel Yergin and Joseph Stanislaw recounted the incredible story of a CPSU, Hindustan Fertilizer Corporation, which was part of the 26 percent of Indian economy that was state owned during the seventies. Its gigantic plant at Haldia, built during 1971-79 with public funds used machinery from nine East-European countries with financing from export credits. For a dozen years, 1200 employees clocked in every day, but the plant never produced any fertilizer because the East-European machinery did not fit in; yet everyone pretended, for twelve years, that the plant was operating until it was closed in 1986 and finally shut down in 2002. The book tells the story of the battle between the government and the marketplace, and most of our PSUs, especially those owned by the state governments, are today haplessly trapped in the vast no-man’s land between the state and the market.

Nehru’s Fabian socialist vision, spelled out in the Industrial Policy Resolution of 1956 which aimed at

“the adoption of socialistic pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services should be in the public sector.” This formed the plank of industrialisation efforts during successive plans till 1991 when the command-control economic structure was found to be too overbearing and had to be dismantled. The New Industrial Policy of 1991 redefined the role of the public sector in view of its increasing sickness and limited its role to strategic priority areas like essential infrastructure, defence, exploration and exploitation of natural resources, development of technology and capacity in crucial areas where private sector investments were inadequate. It was based on the new realism that public enterprises had to function in commercial lines and compete with others in an open economy, which required a redefinition of their roles, activities and obligations.

Liberalization and Privatisation — The New Social Contract

It cannot be denied that CPSUs had indeed helped the infant nation during its formative years. Save a handful of companies, private sector, inherently averse to risk, was then almost non-existent, and could not be expected to invest in infrastructure and heavy industries that entailed long gestation periods, more so in an insular economy. At the beginning of the First Five Year Plan, there were only five Central (CPSUs) with total investment of Rs 29 crore. PSUs have grown luxuriantly since then, to as many as 444 including 6 statutory corporations in 2016-17, with total investment of Rs 16 lakh crore in equity and long term loans. But the philosophy behind them has undergone a sea change, with redefinition of the State’s role as catalyst and facilitator rather than producer or distributor.

In this changed paradigm of free market capitalism dominated by deregulation, liberalization and privatization, the PSUs have been forced to submit to the market discipline and open competition from domestic and international players. Protected and supported all along, and unprepared for such sudden exposure, many have perished, throwing thousands out of job. Both UPA and NDA governments since 1990s have followed the policy of disinvestment and privatization of the PSUs. It started initially with offloading of minority shareholding and cross purchases among the PSUs which did not alter the majority shareholding pattern, but the process gathered aggressive momentum since 2000. By 2004, Government’s majority stake in many profitable PSUs like MFIL, BALCO, CMC, HTL, VSNL, PPL, ITDC, HCI, HZL, IPCL etc. were sold away, mainly through strategic sale allowing management control to pass onto monopoly industrial houses, like BALCO and Hindustan Zinc to Sterlite, VSNL and CMC (via TCS) to Tatas and IPCL to Reliance giving it control over 80 percent of the country’s petrochemical market. Since then, under both UPA and NDA Governments, shares of most Navratna and Miniratna companies have been disinvested, including the shares of our most prized and profitable companies like ONGC, SAIL, NALCO, NTPC, BHEL etc. This has been criticised as “selling the family silver to pay the grocer”, while sick and unprofitable ones like Air India are being propped up by public funds. This is neither good economics nor good politics. A new concept, the so called Public private Partnership (PPP) is now ruling the roost to address the massive deficit in infrastructure - roads, ports, railways, airports etc., which actually shifts the State’s responsibility from ‘public’ to ‘private’. As the various CAG reports show, the terms of these partnership are often heavily skewed in favour of private players at the cost of national revenue confirming what many believe the PPP to be the ‘privatization of profits and nationalization of losses’. A tell-tale example of the disastrous consequences this PPP model can bring to the economy has been seen in the recent IL&FS fiasco, about resolving which nobody seem to have any clue so far. Government had to step in to bail out a company involved in outright fraud over the last 30 years.

Privatisation, or returning public assets to the private entrepreneur, what Friedrich Hayek called the “spontaneous order”, has been universally equated with reform of the public sector. The process is necessarily disruptive, accompanied by job losses and workers’ miseries to which no answer has been found. The neo-liberal model destroyed the social compact and diluted the concept of welfare state. As public assets are passed on to private hands which are often powerful conglomerates, economic and political power in society get redistributed and restructured. This process took away some of our best performing PSUs, and the remaining ones were left to carve a niche for themselves in a hostile environment. Some negotiated the process of adjustment to the new reality with aplomb, while many perished and others are still languishing.

Debates about the merits and means of privatization is far from settled anywhere. But while many CPSUs have well-adjusted themselves, the State Public Sector Undertakings (SPSU) fit nowhere in the changed paradigm. They are indeed in a sorry state - a helpless pawn in the hands of unimaginative and greedy bureaucrats and politicians. SPSUs are devoid of logic, vitality, sustenance and a raison d’être, and by consuming scarce resources of the states, they are also impeding their growth. They constitute the wasteland of the states’ economy.

Central versus State Public Sector Undertakings

Let us consider the performance of SPSUs vis-à-vis that of Central PSUs. 212 of the 444 CPSUs earned net profit of Rs 1.6 lakh crore in 2016-17 while 157 incurred net losses of Rs 30,700 crore, SAIL (loss - 3187 crore) and MTNL (loss - Rs 2941 crore ) leading the pack of the loss-making entities. 188 CPSUs had accumulated losses exceeding Rs 1.23 lakh crore over the years, and the net worth of 77 companies has completely been eroded by their accumulated losses. The Government earned Rs 46,000 crore from selling a part of its stakes in 25 of these CPSUs during 2016-17. Of the 7 Indian companies that made into the coveted Fortune 500 list in 2018, four were PSUs: Oil India (ranked 137), ONGC (197), SBI (216) and Bharat Petroleum (314) — others being Reliance industries (148), Tata Motors (232) and Rajesh Exports (405). While 46 CPSUs are listed in the stock exchange, 57 were either defunct or under liquidation or did not make their accounts, so their operational results remained indeterminate. CPSUs contributed Rs 3.86 lakh crore to the public exchequer in 2016-17 in taxes, cess and dividends, earned forex worth Rs 87,616 crore through exports while paying Rs 4.59 lakh crore on imports on royalty, technical knowhow, interest, consultancy etc. They provided regular employment to 11.31 lakh people during 2016-17.

If that is a mixed bag of performance for the CPSUs, the performance of the SPSUs is indeed dismal. In March 2017, there were 1136 functional SPSUs in India, with total public investment of Rs 14.55 lakh crore. During the year, they received total budgetary support of Rs 2.25 lakh crore in the form of government grants and subsidies. SPSUs had a total turnover of Rs 9.41 lakh crore during 2016-17, which was 6.57 percent of their combined GSDP. But more than a quarter of these companies — 292 out of 1136 - had their net worth completely eroded — some, by many times over. Only two State PSUs, Gujrat Mineral Development Corporation and Punjab Communications Ltd. are listed in the stock exchange, as per available data.

Performance of the State Public Sector Undertakings

Out of 1136 working companies, only 541 had earned some profit in 2016-17, and the total profit earned by them amounted to Rs 18,415 crore, while the net losses of all working PSUs amounted to Rs 84,118 crore. Their accumulated losses amounted to a whooping Rs 4.65 lakh crore as of March 2017. Only 117 of the profit making companies had declared some dividends, and paid total dividend of Rs 1253 crore during the year. The total manpower employed on a regular basis by the SPSUs as of March 2017 was 17.4 lakh.

Dysfunctional State Undertakings

Apart from 1136 working SPSUs, there are also 319 non-working SPSUs, which produce nothing and are neither liquidated. The State Governments have invested Rs 6420 crore in these PSUs, all of which are virtually defunct. Many of these companies had stopped working for ages now — e.g. the non-working of companies of Kerala have been dysfunctional for 11-33 years, those of MP for 6-26 years, of Tamil Nadu for 14-24 years and of Rajasthan for 1-17 years.

A pattern can be discerned in their distribution among the states. 12 out of 29 Indian states accounted for 78, 86 and 79 percent of all working, non-working and total SPSUs respectively in 2016-17, as shown in Table 5. Leading the list is Kerala, followed by Uttar Pradesh and Karnataka each of which had more than 100 SPSUs each, followed closely by Gujrat and West Bengal. Kerala also had the largest number of working SPSUs, 37, whose capital bases had completely been eroded, followed by West Bengal’s 29. Both these States were ruled by the Left for a long time, and their political compulsions and philosophy contributed to reckless creation of SPSUs without consideration of viability. Not that the non-left ruled states fared much better; Punjab had 19 of its 30 companies and Rajasthan 19 of its 45 companies with negative net worth.

No accounts - no accountability

The accounts of working as well as non-working companies have been in arrears for a number of years. At one account per year per company, SPSUs have over 2600 arrears in accounts. For some non-working companies, the arrears date back to as many as 51 years. Many companies have never prepared their account since inception, and what happened to their assets and cash balances is anybody’s guess. Without accounts, not only that their assets and liabilities and profit/ loss position cannot be ascertained, but any possible fraud, misappropriation or scam would also go undetected for years. The companies also cannot be liquidated for want of accounts, by settling their liabilities, partly or wholly, by selling off the assets.

Liquidation proceedings have, in fact, been instituted against many non-working companies, but most of these are lying with the Official Liquidator for decades together (Table 7). Section 270 of the Companies Act, 2013, prescribes two modes of winding up of a company and its liquidation: voluntarily, by passing a special resolution which is simpler but used rarely, or by tribunal through appointment of an official liquidator who will liquidate its assets to pay off the liabilities. Since many of the SPSUs have never prepared their accounts, their assets and liabilities remain unknown, without which it is well-nigh impossible to liquidate them through tribunals. Liquidation proceedings have been initiated against 134 non-working SPSUs leading nowhere, with proceedings against many companies going on for 30 years or more. Obviously, for Governments, this is not a priority. Only a handful of them have been closed by following the voluntary winding up route.

Mindless Profligacy 

But the picture really turns bizarre when we look into the activities of the SPSUs which defy all logic, as if they were created as permanent losing concerns. A large number of SPSUs were established in the so-called promotional and welfare sectors. UP has 103 SPSUs (38 non-functional) which include Finance and Development Corporation for Backward Classes and Scheduled Castes, Development Corporation for almost everything from Fishery, Poultry, Piggery, Livestock, Sugarcane and Seed to Police Housing and Small Industries, Welfare Corporation for Women and Ex-Servicemen, etc. Almost similar areas also span Bihar’s 74 PSUs (40 non-functional), besides, they also include Corporations for Film Development and Finance, Beverages, Panchayati Raj Finance, Medical Services and Infrastructure, Development of Fruits and Vegetables, Pharmaceuticals and Chemicals, Textiles etc. Kerala’s 130 PSUs (15 non-functional) include Development Corporations for the welfare of almost every conceivable segment of humanity - Christian Converts from Scheduled Castes and Recommended Communities, Handicapped Persons, School Teachers and Non-Teaching Staff, Artisans, Palmyrah Workers, Women, Backward Classes, Minorities, Scheduled Castes and Scheduled Tribes, and even one for Forward Communities. The primary activity of all these companies is to provide loans to the members of these communities for entrepreneurial and sundry purposes, which are refinanced by the Government under various schemes, and their only income is from interest. The purpose can be easily served through the existing network of public sector banks, by channeling the government subsidy through them or through other Governments’ existing delivery mechanisms without creating separate companies. The financial sector companies lack the economy of scale and are hopelessly short of the massive capital requirements as well as techno-financial expertise needed for making an impact on the specific sectors like infrastructure or MSME - scheduled commercial banks are in a much better position to do this effectively, economically and efficiently. Financial and welfare needs of specific sectors can be addressed much more efficiently by banks and financial institutions.

Needless to say, no state has the necessary expertise or resources to manage these diverse and disparate range of activities. Poultry, piggery, fishery etc. are better left to individual entrepreneurs or firms that know how to make these profitable. There are government ministries and departments to take care of the welfare of backward classes, minorities and disadvantaged sections. Development and production of films, pharmaceuticals, seeds, chemicals, textiles etc. are not activities mandated for the state. No wonder that these companies do not serve any useful purpose, and most have accumulated huge losses eroding their capital bases many times over. The real reasons for the creation and continuance of these corporations is only to provide cushy parking places for senior bureaucrats, MLAs and powerful politicians as Chairman and Managing Directors so that state largesse can be extended to them through cars, perks and privileges which add to the losses at the cost of the taxpayers. In a country that professes “maximum governance and minimum government”, these are the apparatuses for appeasement of potential trouble makers.

Global Scenario

It may be useful to draw lessons from the other countries which have managed their public sector well. Public sector is still dominant not only in emerging economies, but in the developed countries as well. In 2011, more than 10% of the world’s largest firms were state-owned (204 firms from 37 countries) and their combined turnover represented more than 10% of the combined sales of the Forbes Global list of 2,000 largest companies, equivalent to 6% of world GDP. Even today, many governments spanning both developed and developing world own or control majority shares in mammoth public sector undertakings which are established global brands, like Baowu Steel and China Mobile (China), EdF (France), ENI (Italy), Posco (South Korea), Pertamina (Indonesia), Gazprom (Russia), Petronas and Khazanah (Malaysia) etc. Many countries have become global industrial powers through state patronage and active participation, protection and support to PSUs. Some of the biggest companies — like the thirteen biggest oil companies in the world are still in the public sector.

Yet since the decade of 1980s, a consensus was emerging that ‘State capitalism’ had by and large failed. Public sector was being equated, not always appropriately, with low quality of products and services, mismanagement of resources and distribution of patronage. The prevalent thinking was that excessive Government protection to them was killing competition and impeding growth, leading to flight of capital and talent. Emphasis was back again on the realization that individual freedom and free enterprise were what build the ‘wealth of nations’, through the ‘invisible hand’ of the market, even in communist countries and socialist governments in Spain, Italy, France, Sweden etc., and Governments embarked on privatizing the State Owned Companies (SOEs) during the decades of 1980s and 1990s. UK was one of the biggest privatizers.

During the post WWII years, socialist governments in UK had embarked on large scale nationalization and by 1979, the share of public sector in its economy had risen to 10 percent, before large scale privatization began, which became the defining policy of the Conservative Party’s eighteen-year-rule between 1979 and 1997, eleven of those (1979-1990) under Mrs. Margaret Thatcher. In the largest public offering in its history, British Telecom was privatized in 1985, followed by privatization of Jaguar, Britain’s state-owned auto manufacturer, selling of public stakes in British Sugar, Britoil, British Aerospace, British Petroleum, and privatizing the subsidiary operations of British Steel, British Rail and British Airways. Their impact on employment was enormous, even though some jobs shifted to the private sector. Similar privatization also took place in France, Italy, Netherlands, Germany, Sweden, Denmark, Portugal, Turkey, Japan and South Korea. Even in the emerging economies in India, Malaysia, Sri Lanka and Bangladesh, privatization became the avowed Government policy since the late 1990s.

China began a policy of reforming its SOEs in 1990s, which then controlled about 75 percent of Chinese industry, but had become bloated, debt-ridden, corrupt and inefficient. It accorded top priority to the reform of sick enterprises by ‘grasping the large and letting go the small’, since small enterprises accounted for most of the losses. Thousands of small enterprises were privatized, displacing large number of workers, while large enterprises were provided additional Government support by way of tax and debt relief, capital infusion, liberal import licenses, besides facilitating domestic and international listing. Between 1997 and 2003, the number of public enterprises plummeted by 37 percent and their employment declined from 110 million to 69 million. But the reforms paved the way for China’s accession to the World Trade Organisation (WTO) in 2001, and emergence of China as an export giant which mitigated the labour market shocks to some extent. SOEs had in fact become the drivers of China’s economic growth. In 2003, a holding company, the State-Owned Assets Supervision & Administration Commission (SASAC) was created to manage the SoEs. The agency, which controls nearly 100 of the largest SOEs, lies “at the heart of China’s industrial deep state”, as most listed SOEs have formal executive relations with the ruling Communist Party of China, and hence subservient to political authority like in India, that has its inherent contradictions.

Unlike other countries, China did not go for widespread privatization of its large SOEs, probably realizing the disruption this would cause in its socio-economic fabric, given its heavy dependence on them. It preferred instead an incremental, gradualist approach to reform, not to dilute but rather to reinforce State control in order to transform the SOES into giant international players in a socialist market economy led by them. But private enterprises were also allowed to flourish and open competition was encouraged. When China opened its economy in 1978, Chinese public enterprises employed almost 80 percent of urban workers; the ratio had declined to 14.3 percent in 2017. During the same period, their share of industrial output fell from 78 percent to under 20 percent, while private firms had flourished, accounting for almost all of jobs created in 2017.

But the performance of the SoEs as a whole also trailed way behind the private sector. While profits of private-sector enterprises rose 18 percent between 2011 and 2016, profits of SoEs plunged by 33 percent, along with increases in their NPAs. China has now embarked on a “mixed ownership” model, allowing non-state enterprises and foreign investors to take stakes in SoEs. In 2016, 69 percent of central SOEs and subsidiaries had adopted “mixed ownership”, and ore are embracing it. SoEs still play a very imprint role in China - they accounted for a quarter of national assets and 14 percent of GDP in 2016 — and dominate several strategic sectors; they are considered crucial for achieving the goals ‘Made in China 2025’ policy, which aims to build high-end manufacturing industries across all key sectors. In the latest reform in China under Mr Xi Jinping, the thrust has been consolidation within industry verticals, which resulted in a drop in the number of central government-owned enterprises from 113 in 2013 to 96 in 2017.

The crisis of 2008 pushed most of the big, listed public enterprises across the world into a tailspin. Their share of global market capitalisation shrunk from a peak of 22% in 2007 to 13% in 2014, profits nosedived and bribery and corruption scandals erupted in many giant public enterprises, like Petrobras in Brazil in 2014. Private players started capturing the market once dominated by the State in emerging economies, like Xiaomi displacing China Mobile, and private mining companies eating into the market-share of the SoEs, like BHP Billiton and Rio Tinto vis-a the State giant Vale in Brazil. Unlike the privatization drives of 1980s and 1990s when the state controlled firms were sold outright in Europe and Latin America, under the new model, private investors were given only a subordinate role, while the state kept the controlling stake and decision-making powers. Investors seemed to prefer this model with Government standing as a guarantor and underwriter of loans should they turn bad, and invested more than $500 billion between 2000 and 2012.

State capitalism obviously has its limits, though it has produced some global champions. To counteract the global slowdown after 2007-08, state controlled banks had resorted to large scale lending in China, India, Russia, Brazil and Vietnam. The resulting NPAs are now exacting their toil from our banking system. State companies soak up capital from the market by crowding out private borrowers, and are not particularly efficient in using it. They promote cronyism and are not only risky for the economy, but also underperform private businesses by a huge margin. They are the primary drivers of “a dangerous rise in economy-wide debt.

Lessons from Abroad

The international experiences show that economic risks arising from a large public sector can be mitigated either by complete state sellouts, or by establishing robust mechanisms to keep SOEs at arms’ length from the government, while assiduously barring serving Government bureaucrats and politicians from exercising control. Only a few countries have succeeded in this. They depoliticized their enterprises, professionalized their management and gave substantial autonomy by freeing them from bureaucratic interference, with the Government’s role being limited to issuing broad directives on policy issues, while leaving all strategic, tactical and operational issues to the SOE-management.

For better corporate governance of PSUs, a clear separation between the Government’s policy, regulatory and shareholder functions is a sine qua non. Singapore’s Temasek model effectively meets this end. As a holding company for all public sector incorporated in 1974, Temasek professionally manages its subsidiary companies by appointing qualified managers and technical experts in their Boards. It procures or sells the assets of the group through global investment and disinvestment. The Government only manages the policy and stands at arm’s length from the holding company. The Temasek model has created national champions from among the state owned enterprises like Singapore Power as well as global brands like Singapore Airlines, SingTel, DBS, Keppel etc. A similar model was proposed in India in 2011 by the Government-appointed Panel of Experts on Reforms headed by Mr. S K Roongta which proposed a single holding structure (SHS) for CPSUs, in the form of a holding company, which would manage investments and disinvestments, and appoint the Boards of its subsidiaries, much like the Temasek model. But no Government took any action on its recommendations.

Many countries have insulated their ailing PSUs from politicians and bureaucrats, like Sweden and Thailand. They have created a Directors’ Pool from where all Board members including Chairman and Managing Directors are appointed. The reforms have turned most of their PSUs into profitable entities, and many of them have grown to become global brands. Strengthening the appointment procedures through such objective institutional processes and empowering the management to act autonomously, while making them accountable to the Government/ Parliament for achievement of commercial and non-commercial targets have worked wonders.

In India, reforms so far have involved outright privatization of CPSUs, unaccompanied by the necessary reforms in the overall regulatory framework in which they operate. The boundary between the Government’s role as the owner and regulator also remains blurred. Privatisation, corporatisation or unbundling of activities as in the power sector, have been driven primarily by public finance considerations. Funds raised through disinvestment have been used to reduce fiscal deficits and public debt. Change of ownership from public to private is supposed to bring the efficiency of PSUs to the level of well-run private companies, but there are many examples to show that change of ownership is no guarantee for better performance in terms of higher efficiency and profitability, unless accompanied by suitable market/ regulator reforms. The wave of privatisation in UK during the 1980s and 1990s was followed by the creation of several regulatory bodies, like the Office of Rail and Road, the Office of Gas and Electricity Markets, the Office of Communications, the Water Services Regulation Authority, and the Financial Conduct Authority. Reforms of the regulatory frameworks and the markets are crucial for the performance of both PSUs and private companies, ensuring a rule-based competitive structure covering entry, exit, bankruptcy and competition among existing companies.

Summing up

The 1991 reforms liberalised the economy by restricting the role of the PSUs to a few strategic sectors, while progressively opening up other sectors to private investment and FDIs. This was followed by privatisation and disinvestment of PSUs, listing them on stock exchanges and empowering the better-performing ones by giving them Maharatna, Navaratna and Miniratna status with substantial autonomy which helped them grow. But the reforms were carried only for the CPSUS, while the SPSUs continued to languish helplessly in an environment of rent-seeking and favour-dispensing political gamesmanship.

1136 SPSUs are too many for 29 states to manage; so also are 444 Central PSUs. For revitalising them, it is imperative first to identify the sectors the State must withdraw from, reduce their number drastically and then revamp the structure and management of the remaining ones. Wherever feasible and where synergies exist, Centrals PSUs may be persuaded to manage the SPSUs which otherwise are likely to remain unviable. For rejuvenating the PSUs, their wholesale privatisation is not necessary. The essential prerequisite is to depoliticise them, professionalise their management by appointing experienced managers and shield them from politicians or bureaucrats. Holding structure of PSUs also needs to be reworked, by following the best practices cited above, like the Temasek Model. Their wholesale privatization is not a precondition, and not even necessary, for their revival and rejuvenation.


  • Yergin, Daniel & Joseph Stanislaw, The Commanding Heights: The Battle for the World Economy, Simon & Schuster, New York, 1998.
  • Goyal, Malini, What India Can Learn from Singapore & China’s Successful PSU Models, The Economic Times, June 08 2014

(Author: Dr Govind Bhattacharjee was Former Director General, O/o the CAG of India, New Delhi and author of "Public Sector Enterprises in India, Evolution, Privatisation and Reforms" (Sage, 2020).)

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