The Government's promise of greater autonomy for 'Navaratnas' and 'Mini-Ratnas' has not been backed by financial and policy support, factors that contributed to the PSEs' success over the years.V. SRIDHAR
THE autonomy package announced by the Union Government to nine public sector enterprises (PSEs) that were given special "Navaratna" status was extended, although to a limited extent, to 97 smaller public sector enterprises, "Mini-Ratnas", on October 3.
The announcement on giving special status to some PSEs, made by Union Finance Minister P. Chidambaram during the course of his presentation of the last Budget, was greeted with enthusiasm. Chidambaram said that the move drew inspiration from the commitment made in the United Front Government's Common Minimum Programme to extend support to public sector units that enjoyed "comparative advantage" in their fields to become global players. There was hope that the loosening of bureaucratic controls would enable the selected companies to compete more effectively with private and multinational companies in the liberalised environment.
However, the promise of greater autonomy for these companies has not been backed by financial and policy support, factors that contributed to their success over the years. Although the Government has said that these companies would turn into global players, there are fears that these PSEs would be competing for business with multinationals that enjoy far greater financial strength.
Although the Government still retains a controlling stake in these companies, it has already diluted its equity in many of them. Critics fear that part-time directors, friendly to private and multinational lobbies, will steer these PSEs closer to serving their interests.
The list of Navaratna companies includes Indian Oil Corporation Ltd (IOCL), ranked 257 in Fortune's Global 500, and two other Indian oil companies, Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL); Oil and Natural Gas Corporation Ltd (ONGC), the premier oil exploration and crude oil producing company; Steel Authority of India Ltd (SAIL), India's largest integrated steel producer; Indian Petrochemicals Corporation Ltd (IPCL), the country's biggest integrated petrochemicals company; Bharat Heavy Electricals Ltd (BHEL), the biggest power equipment manufacturer in India; National Thermal Power Corporation (NTPC) which produces about one-fourth of the power generated in India; and Videsh Sanchar Nigam Ltd (VSNL), the sole provider of international telephone services in India. Many of these companies were started in the 1950s and 1960s, when self-reliance was an important element of public policy. In 1996-97, these companies had a combined turnover of Rs.1,43,961 crores and made profits of Rs.8,128 crores.
On July 4, 1997, Union Industries Minister Murasoli Maran, disclosed some aspects of the autonomy package and said that more would follow later. Greater managerial and operational autonomy was to be achieved by inducting "eminent non-official part-time directors" and making these enterprises "board-managed companies". The package enables the Navaratnas to undertake capital expenditure without any monetary ceiling. Although it has been stipulated that the Navaratnas would not get budgetary support, they have been given freedom to raise funds from domestic and international debt markets, subject to approval from the Reserve Bank of India or the Department of Economic Affairs.
On October 3, Maran announced an autonomy package for 97 "Mini-Ratnas", which fall in two categories. Forty-eight public sector enterprises fall in Category I. To come under Category I, an enterprise has to have made profits in the three preceding years and its pre-tax profit has to have been at least Rs.30 crores. Further, it has to have a positive net worth. Forty-nine enterprises have been identified in Category II.
The eligibility criteria for Category II are the same as for Category I except for the Rs.30-crore pre-tax profit condition. Besides the conditions set above, to be eligible for Mini-Ratna status, a company cannot be in default of loans borrowed from the Government. Mini-Ratnas will not be dependent on budgetary support or Government guarantees. Like Navaratnas, Mini-Ratnas are also to be board-managed and have non-official directors.
The Navaratnas have been allowed to enter into joint ventures with Indian or foreign companies or form subsidiaries in India or abroad, subject to some restrictions. A Navaratna may invest not more than Rs.200 crores in equity in such joint ventures; the investment in any single joint venture is not to account for more than 5 per cent of a company's net worth; further, the investments in all such ventures by a company should not account for more than 15 per cent of its net worth. The Navaratnas are also free to enter into technical collaborations. According to the Government, these measures will help the Navaratnas make strategic alliances with multinationals. The limit on a Mini-Ratna's investment in equity in joint ventures and subsidiaries is Rs.100 crores.
The Gas Authority of India Ltd (GAIL) and the Mahanagar Telephone Nigam Ltd (MTNL), which had applied for Navaratna status, have been given the Mini-Ratna status (Category I).
It is clear that the only criterion for separating an elite group from over 250 companies was the size of profits each company earned. Many manufacturing companies, including those that have developed specialised industrial skills, have not been given autonomy.
On July 22, the Department of Public Enterprises (DPE) issued a memorandum stating that the autonomy package would take effect only after the appointment of non-official directors to the boards of the Navaratnas. A senior official in a Navaratna enterprise told Frontline that "nothing can be done under the Navaratna package" until the board is expanded to accommodate the non-official directors.
Maran told Frontline that a Search Committee consisting of the Chairman of the Public Enterprises Selection Board, the Secretary, DPE, and other "eminent non-officials" would soon select non-official directors of these companies. He said that the package enabled these enterprises to "fight well, earn more profits and take quick decisions" in the competitive situation without having to "wait at the doors of the politicians and bureaucrats in Delhi."
M.K. Pandhe, general secretary of the Centre of Indian Trade Unions, says that the package has created a "situation in which the managements of the profit-making companies are compelled to woo the private sector", in other words, to ask them to interfere in the way these units are run. Pandhe expressed fears that this is another route to privatising these companies, "supplementing the process of privatisation through disinvestment."
Some professional managers of PSEs told Frontline that the package was an attempt to ensure that the shares of PSEs fetched a better price when they came up for disinvestment. With economic growth faltering and with customs duty realisations being far below Budget estimates, the Government may be under pressure to maximise realisations from the sale of shares in order to manage the fiscal deficit. In 1996-97, the Government realised only Rs.500 crores from disinvestment, as against the Budget estimate of Rs.5,001 crores. Chidambaram plans to raise Rs. 4,800 crores from disinvestment in 1997-98.
The Government is already committed to diluting its stake in IOCL this fiscal year. The disinvestment panel had stipulated that this could be done only after freeing petroleum prices. This condition was satisfied with the recent hike in petroleum prices. The shares of public sector shares (barring those of NTPC, in which there has been no disinvestment by the Government) have consistently out-performed the National Stock Exchange Index of 50 Companies.
Two recent studies conducted by UTI Securities Exchange Ltd (UTISEL) have shown that contrary to the widely propagated negative image of PSEs, the "performance of the private sector has not been considerably better than that of the PSEs." The studies reported that more than 50 per cent of the PSEs reported profits between 1990 and 1995 and form the "ballast of the Indian economy". It also revealed that 40 per cent of all loss-making PSEs were sick private sector companies that had been "taken over" by the Government.
Significantly, the UTISEL studies showed that although both private industry and PSEs were generating similar rates of return on capital employed between 1990 and 1995, the PSEs performed much better in terms of utilising internal resources as a proportion of capital outlays to finance asset-formation. During these years, while the weighted average ratio for the private sector was 34.16 per cent, the PSEs returned 38.57 per cent. In 1995-96, more than three-fourths of the funds for PSEs came from internal resources to finance asset building. In other words, the PSEs were able to utilise scarce financial resources more efficiently by investing their surpluses to build assets. This happened at a time when budgetary support to PSEs was almost stagnant in real terms. Between 1992-93 and 1996-97, Plan investments in power, coal, heavy engineering and steel PSEs increased marginally from Rs. 10,915 crores to Rs. 11,186 crores, indicating a decline in real terms.
Another significant feature of the disinvestment process is that after disinvestment, equity will have to be serviced through regular dividend pay-outs. This may impose limits on the Navaratnas' ability to plough back profits into tangible investments.
Indian private industry has been criticised for its repeated forays into the capital market for cheap funds. The UTISEL study blamed this tendency on the "low cash-flow productivity". It observed that the private sector had used funds raised from equity issues in the domestic market and Global Depository Receipts (GDRs) abroad at a premium, in order to "shore up negligible profits after interest and tax."
The PSEs' problems, caused by lack of financial support from the Government, have been compounded by the Government's liberalisation policy. The policy of bringing down import duties has had a wide impact. For example, the cut in import duties has put domestic steel producers at a disadvantage. These companies, already affected by faltering economic growth, have had to compete with cheaper imported steel, often sold in India at prices lower than the cost of production in the countries in which they were produced. Thus, most of the steel companies, including SAIL, performed badly in the last financial year.
Functional autonomy and freedom from general political interference have been the longstanding demands of PSE managers. But the commercial practices that the PSEs have had to adopt in the liberalised environment have proved very costly to these companies. For instance, the terms under which Indian oil companies have formed alliances with international oil companies have allowed multinational oil companies to use the retail outlets of Indian companies to market their automotive lubricants. Thus, IOCL has allowed its Servo brand to be challenged by Mobil at its own retail outlets across the country.
There is also a tendency among the PSEs to form joint ventures for undertaking new projects which could well have been undertaken by the parent PSE. For example, IOCL's new refinery in Paradeep is to be established by a joint venture company in which IOCL and a Kuwaiti company are to have equal stakes of 25 per cent each. Indeed, Pandhe argues that if the Government really wants to transform these PSEs into global giants, there is a case for more investment rather than more disinvestment by the Government.
According to K. Ashok Rao, president, National Confederation of Officers' Associations of Central Public Sector Undertakings, the appointment of outsiders as part-time directors is likely to affect the interests of the PSEs. He said that this had been attempted at BHEL and it had ended with the director starting his own turbine manufacturing unit.
According to Ashok Rao, if the Government was really serious about turning Indian companies into global players, it would have established a Navaratna fund to provide financial muscle to these companies. This, combined with an active technology acquisition policy, would have helped them become competitive in the global market.
Public sector executives have for long maintained that bureaucratic controls and procedures have affected the competitive abilities of their enterprises. They cite the case of SAIL, for example, which had to wait for seven years before obtaining the necessary clearances for its modernisation projects to manufacture hot rolled coils. While SAIL waited for the clearances, the competition had already upgraded their technology.
While the Government, as a majority stake-holder in the PSEs, has a right to have its representation on the boards of these companies, the bureaucratic form which this representation usually takes - typically through two Joint Secretaries from the Ministries under which the PSE functions - has affected the commercial performance of these units. Pandhe alleges that SAIL's poor performance last year was in part caused by the fact that Steel Ministry forecast a demand that turned out to be higher than the actual demand. He says that SAIL, as a commercial undertaking, was well equipped to make its own forecast.