Devalued ratnas

Print edition : October 19, 2012

The NTPC's thermal power plant in Rihand, Uttar Pradesh.-RAGHUVIR SRINIVASAN

Successive governments at the Centre have failed to provide a level playing field for the public sector Maharatna companies. The scales are often tilted in favour of the private sector, ignoring the larger public good.

AS a corollary of the ideological drift in the 1990s from envisaging the public sector as the custodian of the commanding heights of the economy to relying on market-based growth, the Government of India introduced the Navratna scheme in October 1997. The aim of this scheme was to make Central Public Sector Enterprises (CPSEs) more competitive by conferring on them greater autonomy and insulating them from political interference. The Navratna model, however, was based on the ideological assumption that the public sector must emulate the private sector and be driven by the profit motive. The boards of Navratna CPSEs were given autonomy in the areas of capital expenditure, investment in joint ventures, mergers and acquisitions, and human resource management.

In a move to professionalise the functioning of public sector enterprises further, the United Progressive Alliance (UPA) government took a policy decision in December 2009 to create a separate category called Maharatnas among CPSEs. The main objective of the Maharatna scheme was to help mega CPSEs expand into global giants. The Department of Public Enterprises set the following conditions for a company to be considered for Maharatna status:

1. Having Navratna status already;

2. Listed on the Indian stock exchange with minimum prescribed public shareholding under Securities and Exchange Board of India (SEBI) regulations;

3. An average annual turnover of more than Rs.20,000 crore in the last three years;

4. An average annual net worth of more than Rs.10,000 crore in the last three years;

5. An average annual net profit of more than Rs.2,500 crore in the last three years; and

6. Should have significant global presence/ international operations.

At present, there are five Maharatna companies Coal India Limited (CIL), Indian Oil Corporation Limited (IOC), NTPC Limited, Oil and Natural Gas Corporation Limited (ONGC), and Steel Authority of India Limited (SAIL). Also, there are 16 Navratna companies at present.

A critical look at government policies towards public sector enterprises, especially towards the Maharatna companies, however, suggests that despite the token move towards professionalisation, successive governments headed both by the Congress and the Bharatiya Janata Party (BJP) have failed to provide a level playing field for the public sector and to expand its capacity through policy interventions in areas where its core strengths lie. This is most evident in the critical sectors of coal and power where a state-directed utilisation of natural resources for infrastructure development and promotion of the greater public good should have been the guiding principle instead of the squandering away of resources to incompetent private players whose sole motive is to maximise profits.

In conceptualising the role of the public sector, it is important to consider the conflicting models of an enterprise driven purely by profit and one with the larger social purpose of bringing about public good. Speaking to Frontline, Surajit Mazumdar, Associate Professor of Economics at Ambedkar University, Delhi, explained: A motive of public good may often not be a profit motive. The policy of creation of Maharatnas is based on the assumption that the only mandate of the public sector is to garner profits. Following liberalisation, the CPSEs are being moulded in a way that makes them function like private sector companies. This is done by engaging them in a coercive process of competition and by creating a mechanism for them to raise money from the market. One needs to question if that is the sole motive of the public sector.

R. Ramakumar, Associate Professor at the Tata Institute of Social Sciences, Mumbai, stressed the need for the government to participate in economic activity. He said: Following liberalisation, it has been realised over a period of time that there is a need for coordinated economic activity to steer the economy in a certain direction for which the instrument of planning is significant. Anarchic economic activities by private players result in production not being socially conditioned.

A demonstration by coal miners against privatising the coal industry, in front of the Coal India Limited headquarters in Kolkata in December 2007.-ARUNANGSU ROY CHOWDHURY

The policy of creating the categories of Navratna and Maharatna companies, therefore, needs to be seen against the backdrop of a gradual abandonment of the instrument of economic planning and the lack of consolidated efforts at strengthening the public sector. While superficial attempts at professionalising the companies continued, there was no serious attempt at steering economic growth in a certain direction through strengthening the core competencies of public sector units and allowing them a level playing field with private competitors. This is most evident in the recently exposed scams in the allocation of coal blocks and power projects where incompetent private developers were favoured over the government entity, leading to inadequate utilisation of natural resources for the public good.

The attempt to provide greater autonomy to the CPSEs remains an unfinished project, with the government still controlling key policy decisions affecting them. Also, it has proved to be a double-edged sword with the induction of independent members on the board of directors of several CPSEs, some of whom are from private competitors in the same domain. This has resulted in a strategic backdoor restructuring of CPSEs to increase the influence of private entities with vested interests.

Ashok Rao, president of the National Confederation of Officers Associations (NCOA) of CPSEs, questioned the degree to which granting Navratna status has strengthened the public sector. He said: The bringing in of independent directors on the boards of companies has been done in a non-transparent manner. There are instances where competitors in the same domain have been named as independent directors. This is a clear conflict of interests. Unless the principal contradiction is resolved, there cannot be a clear policy direction. Are you thinking of public sector companies as instruments of governance or merely as profit-making corporations? For instance, for oil marketing companies the prices are administered by the government and they do not have the power to control the rate of returns. They have limited autonomy. The common man is more concerned about the price of oil than about IOC making profits.

In 2004, a committee headed by Arjun Sengupta and appointed by the Congress-led UPA government recommended full managerial and commercial autonomy to CPSEs. However, the report also recommended that all major decisions be taken by the board of directors, at least half of whose members would be independent directors. It wanted to insulate CPSEs from parliamentary interference and recommended a negative list, where the government would have no say in pricing, distribution, import/ export and promotion of employees. The sticking point lay in the recruitment of independent directors, which could essentially be seen as a move towards moulding CPSEs as private entities. The attempts at completely insulating CPSEs from parliamentary interference also raised concerns about their accountability to the public.

Speaking to Frontline, Tapan Sen, general secretary of the Centre of Indian Trade Unions (CITU), said: The report was the beginning of an attempt to undermine and denigrate the public sector. Sen also criticised the condition that a company had to be listed on the stock market in order to be categorised as a Navratna company, which he felt was a disguised tactic to push for disinvestment. If we compare a private sector company and a public sector company of approximately the same profitability, the shares of the PSE cannot be freely traded in the market. The requirement for being listed in the stock market is thus an indirect push for disinvestment.

The policy decisions in the sectors of coal and power amply illustrate the limitations of the Maharatna model for a substantial strengthening of the public sector and consolidating its role as an instrument of governance and large-scale sustainable development. Despite being granted Maharatna status, CIL and NTPC have been victims of ad hoc policy decisions of the UPA government, which has failed to utilise the resources of the government entities for the public good.

Coal India Limited

In 1973, the mining of coal was nationalised with the objective of preventing unbridled mining by private parties with the mere intention of earning profits. The rationale for nationalisation of the important natural resource was to attain a fuel-energy balance.

However, after the opening up of the economy there was not enough encouragement from successive governments to develop the technologies of extraction that the company specialised in. Ashok Rao said: The primary resource of India is high-ash coal. Only BHEL [Bharat Heavy Electricals Limited] and CIL were developing the technology of fluidised bed-boilers and coal gasification project to extract this coal in the 1980s. However, after liberalisation there were no efforts from successive governments to develop these technologies further. This shows how successive governments did away with a comprehensive thinking on energy security by not trying to develop our primary resource. Instead, there was allocation of coal blocks to private entities which did not have any expertise in the area.

With the Comptroller and Auditor Generals (CAG) report highlighting the delay in competitive bidding leading to a loss of Rs.1.86 lakh crore to the national exchequer, there is a need to question the policy of allocating coal blocks to inefficient private players. CIL continues to be the largest producer of coal with a production of 434 million tonnes last year.

D.D. Ramanandan, president of the National Coal Organisation Employees Association, said: The handing over of a prime natural resource to private players can be seen as an indirect privatisation of the coal industry. If a vital natural resource is handed over to incompetent private players, it threatens the energy security of the country. The All India Coal Workers Federation has demanded the cancellation of all coal blocks allotted for captive mining purposes.


The NTPC is facing challenges as a result of the introduction of the process of competitive bidding for allotting power projects instead of a concerted drive to allow utilisation of coal blocks by the company for large-scale power generation. Despite being granted Maharatna status in 2009, the degree to which NTPC can take decisions in large-scale investments is still limited.

Padamjit Singh, chairman of the All India Power Engineers Federation, explained how the process of competitive bidding has worked out to the disadvantage of NTPC and power generation at large. The NTPC was earlier setting up power plants as a Central government body for capacity addition and augmentation of power in the States. The tariff was approved by the Central Electricity Regulatory Commission. The process of competitive bidding paved the way for private players who initially quoted much lower tariff rates than NTPC simply to win the project, but subsequently demanded higher tariff rates. In some cases, they did not even start production after winning the project. In the Krishnapatnam power project [Andhra Pradesh], Reliance Power asked for a revision of the tariff rate after bidding and winning the project. In Sasan [Madhya Pradesh] and Mundra [Gujarat], the NTPC bid was nowhere close to the price quoted by the competitors, he said. For the ultra-mega power project at Sasan, NTPC had quoted a price of Rs.2.75 per unit of power whereas Reliance Power won the bid at a price of Rs.1.26. A deadline of January 2011 was set to bring all power projects under the competitive bidding regime.

Tapan Sen questioned why NTPC had bid so high when it was already managing three power plants in the vicinity. This has cast doubts on the professional integrity and competence of the company. Also, it needs to be asked if they were under pressure from the Ministry to bid deliberately higher and pave the way for the private player. NTPC manages three power plants at Singrauli, Vindhyachal and Rihand close to Sasan.

While the private operators can sell power at much higher rates, NTPC does not have the mandate to do so. Also, NTPC continues to supply to State Electricity Boards, which cannot afford to buy power at a higher rate because then they will have to pass on the burden to the consumers, Padamjit Singh explained.

Moreover, NTPC has limited autonomy in making large-scale investments as these are subject to the approval of the Cabinet Committee on Economic Affairs.

NTPC also faces an acute shortage of coal, which has limited its capacity for expansion.

This is significant in a scenario where coal blocks have been allocated to companies that are yet to start production. A comprehensive policy of allocation of coal blocks to the government entity to meet energy needs would have served larger public interests. NTPC should be allotted more mines because it is producing power for most of the country, Padamjit Singh said.

Even in an environment where the government has been going all out to push for policies of disinvestment, the CPSEs have continued their growth and expansion. In a paper titled State-owned Enterprises in India: Restructuring and Growth, Sushil Khanna of the Indian Institute of Management, Calcutta, argues that CPSEs have kept pace with the accumulation and investment in the private corporate sector, both in the manufacturing and services sectors. The study states that despite the price controls on several commodities, the profit-making CPSEs have shown exemplary performance in the past 10 years, with an increase of 274 per cent in capital employed and 380 per cent in profits after tax.

The Public Sector Enterprises Survey (200910) showed that of the total of 217 CPSEs, as many as 158 showed profits. In 201011, there was an increase of 17.74 per cent in the total income of the PSEs and a growth of 9.66 per cent in the net worth of all CPSEs.

However, policy decisions in major sectors, including power and energy sectors, continue to be tilted in favour of private players. The scheme of designating companies as Maharatna and Navratna has not gone beyond tokenism to embrace a holistic approach towards development where planning as an instrument of policymaking is used to foster equitable growth and the larger public good. The proper utilisation of natural resources and a concerted effort at infrastructure development can be brought about through strengthening the already expansive operations of major public-sector units in the country.

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