There’s this factory that employs 1,200 people. Every day, those people head to the factory, every day they knock off work after their mandatory hours, every month they get paid. In the factory, they make fertiliser. Except, for 12 years, they have not produced any fertiliser of saleable quality. But those 1,200 people still come to the factory, they still put in their hours at work, they still get paid.

When we read this, we thought for a moment it was parody. Then wondered if this was a story from the heyday of Communist Russia. And then read again, because this is right here, right now. Well, the story of the fertiliser factory is from 1991, but not too much has changed since then. In his 2002 classic, Naked Economics: Undressing the Dismal Science, Charles Wheelan, American author and economist, discusses the case of Hindustan Fertiliser Corporation, which had not produced any saleable fertiliser in 12 years or more. “When the government is bankrolling the business, there is no need to produce something and sell it for more than what it cost to make,” wrote Wheelan.

In these days, when everyone is a WhatsApp economist, it’s easy to dismiss Wheelan’s critique as American capitalist-speak. Except, Wheelan is the founder of The Centrist Project, a group that funds independent candidates in the U.S. to run for office. Basically, he’s a proponent of neither right-wing nor Left economic ideology. Enough reason to take him seriously.

What’s scary about the Hindustan Fertilisers story is that it is not an isolated case. Back-of-the-envelope calculations show that more than 100 public sector undertakings, central and state, have been surviving on government largesse for years without producing anything. The roll-call of these PSUs is damning. There’s Bengal Chemicals & Pharmaceuticals, the country’s first pharma company, set up in 1902; there’s the ‘timekeepers to the nation’ HMT or Hindustan Machine Tools, which made losses of Rs 121.6 crore; Hindustan Photo Films (HPF) with losses of Rs 2,528 crore... And then there are state-owned enterprises, many of which are also loss-making.

To add chaos to the confusion is the fact that of the hundreds of central and state PSUs, only 95 are listed and declare results within the timeframe specified by stock exchanges. The others have no such compulsion, and their financials are declared towards the end of the 18 months allowed by the Registrar of Companies for unlisted companies to declare results.

Looking at the latest audited financials (March 2017), there are 93 companies with net losses of Rs 34,618.7 crore. Because of the compliance leeway, it makes sense to add financials from March 2016, which shows 65 PSUs with a combined net loss of Rs 67,734.8 crore. With total PSU losses of Rs 1 lakh crore staring at us, alarm bells ought to be ringing hysterically. To help put that in context, Rs 1 lakh crore is what could fund the government’s ambitious health insurance scheme, which government insiders have taken to call NamoCare. It could also help take care of at least half the recapitalisation of PSU banks. And now let us reiterate that Rs 1 lakh crore plus is what the government is losing every year thanks to PSUs.

Can the country afford this steady bleeding? More pertinently, does it have any means to staunch this haemorrhage? If not, would a clean amputation not make more sense? It’s not that these are particularly new questions; for more than a decade, there have been voices against the government getting so involved in business.

Ajay Dua, former secretary in the ministry of commerce and industry, is one of those voices. He says the government’s presence in certain critical sectors such as defence, currency, nuclear energy, and areas which have multiple usages like electronic equipment manufacturing both for civil and defence purposes is fine. “Beyond this, the government has no business to be in business,’’ he says.

Public sector undertakings today are almost synonymous with losses, bloated workforces, and a casual attitude to productivity. It wasn’t always like this. Back in the early days of independent India, PSUs were seen as the way in which the country could achieve economic prosperity. Not only would they provide employment, they would provide products and services that the nascent private sector could not. Therefore, companies like HMT and HPF.

The government of the day also believed that sensitive sectors such as defence, mining, and the like were better kept out of the private sector. It was all in keeping with the socialist nature of the country. For an almost uninterrupted seven decades, the Congress and its allies controlled the government at the centre. The party stayed close to the ideals of Nehruvian socialism, which meant a paternalistic state that controlled most of the means of production while allowing selected private companies to flourish.

“Many of these companies have lots of land with them, but selling these assets is not the same thing as selling the business. Moreover, you can’t keep selling the land to keep these dead assets alive.” 
Neeraj Gupta, secretary, DIPAM

But with the world showing an interest in entering one of the largest markets, it soon became difficult for the government to justify the increasingly unproductive PSUs. Also, as the domestic private sector began to gain muscle, the reason for the existence of many PSUs no longer existed, says Dua. “Now that the private sector has shown its eagerness and capacity to run these sectors it is only natural that the government withdraws from these sectors,’’ he says.

The government has many reasons for wanting to keep PSUs alive. There’s the matter of employment; millions of people are employed by PSUs. The flip side to that is that the erstwhile strong labour unions have become huge roadblocks to increasing productivity or, indeed, sale of the PSUs. There’s also the whole issue of nationalism, another of this government’s favourite words. An Indian company, set up by and for the benefit of Indians, should not be allowed to fail, goes one line of thinking.

95: Total number of public sector enterprises that are listed

There’s also the matter of money in the form of the hefty dividends paid every year by PSUs to the government. Last year, we had written about how the government seems to view dividends as the gift that keeps on giving. But even the mythical akshaya patra could eventually run dry.

“The best time for a strategic sell-off of a PSU is when that unit is still profitable and when it can fetch a decent price, rather than waiting till it turns loss-making.” 
Shaktikanta Das, former economic affairs secretary

It’s not that governments haven’t tried; disinvestment has been a word bandied about for decades, and every year, the disinvestment target only grows. The idea was that selling government stake in these crown jewels (variously called navratnas and maharatnas) will boost the country’s bottom line and generally add some heft to its budget.

India can take some comfort in knowing it’s not alone in the move to get out of business; globally, 2018 looks like it’s going to be the year of privatisation. Brazil has announced sweeping plans to sell off everything from the mint to the state lottery, to raise revenue and boost infrastructure investment. One of Brazil’s biggest success stories is that of Embraer, which after privatision has become the world’s third largest commercial aircraft maker.

“The government should not worry whether the new buyer can run the company, but only ensure that the bidding condition like the welfare of the employees are met.”
Prithvi Haldea, founder chairman, Praxis Consulting

Something similar is happening in France as well. The government there has announced a privatisation drive to raise $11.2 billion to boost industry and innovation. According to a McKinsey report, the French government has stakes in 81 companies, from defence player Safran to carmaker Renault.

Russia and China too have made similar privatisation moves. Clearly, India has company.

“I believe there is still a market for HMT watches,because of its antique value. How to market them should be the government’s challenge.”
Munesh Khanna, former head of investment banking, N.M. Rothschild & Sons

The Indian numbers are depressing, however, making it somewhat difficult to understand how privatisation will pan out here. In 2016-17, maharatna Steel Authority of India (SAIL) incurred a loss of Rs 2,833 crore, despite registering an 8% increase in sales to 13.11 million tonnes, its best so far. Air India doubled its operating profit to Rs 298.03 crore in FY17, but saw its net loss widen to Rs 5,765.2 crore compared to Rs 3,836.8 crore a year earlier. Telecom player Bharat Sanchar Nigam reported reduced losses of Rs 3,879 crore in FY16 (the latest available figure) despite revenue growing by 4.4%.

Things are not much different at state-level PSUs. In Maharashtra, out of 87 PSUs, 22 were non-operational; the state government has pumped in Rs 938.9 crore in these closed units. Uttar Pradesh had 39 non-working PSUs, some of which were closed nearly 40 years ago; the government, meanwhile, poured Rs 1,062.3 crore into these till FY16.

“Now that the private sector has shown its eagerness and capacity to run these sectors, it is only natural that the government withdraws from these sectors.”
Ajay Dua, former secretary, ministry of commerce and industry

The list is depressingly long. Every state has its share of moribund PSUs into which money is still pumped. The reason for such pathetic performance is simple, yet that simplicity can be deceptive.

The obvious answer is what the minister of state for heavy industries and public enterprises, Babul Supriyo, recently told the Lok Sabha. “Some common problems for losses in CPSEs include old and obsolete plants and machinery, outdated technology, low capacity utilisation, excess manpower, weak marketing strategies, stiff competition, heavy interest burden, high input cost”... It’s pretty much what economists have been saying for a while.

What can the government do now? As far as loss-making PSUs are concerned, the government has only two choices, says Neeraj Gupta, secretary, department of investment and public asset management (DIPAM): liquidate or sell. “Of course, many of these companies have lots of land with them, but selling these assets is not the same thing as selling the business. Moreover, you can’t keep selling the land to keep dead assets alive. It does not really make sense.”

There are others who believe that selling a PSU’s assets is a good way forward. Munesh Khanna, former partner at audit and advisory firm PwC and former head of investment banking at N.M. Rothschild & Sons, says there are many ways to make money from lossmaking PSUs. “HMT has so much land that it can be used to create a smart city,” he says.

The government clearly agrees. In late December, the cabinet decided to sell the excess land owned by Bengal Chemicals to “meet the outstanding liabilities and implement the voluntary retirement benefits to its employees”.

Like Gupta, Khanna also says that not all PSU businesses need to be sold, even if land and other assets go. The government, he says, needs to think of innovative ways to revive iconic companies. “I believe there is still a market for HMT watches because of its antique value. How to market them should be the government’s challenge,” he says.

Kiishore Soni, founder of Kishore Soni & Co, a New Delhi-based accounting firm which deals in corporate restructuring, is one of those who isn’t sure selling the business is even possible. “Once a factory is closed, the only thing that is left is the land and the boundary wall of the company. All other assets would be only on the books because every valuable part of the machinery, if it has not disappeared already, would have been stolen by someone or the other.”

The government, meanwhile, is still thinking of selling PSUs, and has tasked think-tank NITI Aayog to provide a roadmap for strategic sell-offs. That body has come up with a blueprint to sell 74 loss-making PSUs. The total budgetary support provided to these 74 units just from 2004-16 was to the tune of Rs 53,772 crore; despite that, they still had losses of Rs 33,960 crore on their books (63% of the total budgetary support).

76: Number of PSUs that are not functioning or yet to start functioning.

However, selling a PSU is far easier said than done. Considering the losses that the majority of these companies report, will there be any buyers? Former economic affairs secretary Shaktikanta Das points out that the best time for a “strategic sell-off of a public sector unit is when that unit is still profitable and when it can fetch a decent price, rather than wait till it turns loss-making”.

Prithvi Haldea, founder chairman of Praxis Consulting and Information Services, the go to person when it comes to public issues, could not agree more. He points to PSUs like ONGC and GAIL, saying that what is profitable today can turn loss-making tomorrow like SAIL.

More important, Haldea says that disinvestment that is practiced in India—one PSU buying shares of the other—is not necessarily a good idea. “After all, the government—whether state or centre—will continue to be de facto promoter of these companies, run them in its own way on the taxpayer’s money.”

If the government wants to hang on to certain sectors, says Dua, it needs to behave like an investor. Ideally, this means it should let an independent board and professional management run the show and pay for their own mistakes. He explains that the French government adopted this strategy with great success, citing the example of power major Areva. Despite owning a stake in the company, when Areva realised some months later that it had miscalculated the cost of setting up a nuclear plant in Finland by as much as €2.8 billion, the government did not intervene. Areva had no choice but to sell its transmission and distribution subsidiary, Areva T&D, to pay off the losses.

Brazil took a different path when it privatised Embraer. The government retained what it calls a ‘golden share’; that’s one share, but one that gives the government veto over certain sensitive projects.

These international precedents could help, but unfortunately, the government here has to contend with a host of issues peculiar to PSUs, including the role of labour unions. In the Bengal Chemicals case, for instance, the union approached the Calcutta High Court and got a stay order on the sale of land. This despite the fact that the proceeds from the sale were intended to pay employees.

Assuming that the government can overcome such problems, how can it conduct a sale in a way that benefits all stakeholders? Experts are divided on this. Haldea believes the government should enact a law to explain the reasons for continuing in certain industries. Others say a policy document is enough; formulating legal tenders could be needlessly time consuming.

Owning PSUs like KIOCL, formerly Kudremukh IronOre Company, gives the government some control over natural resources.
Owning PSUs like KIOCL, formerly Kudremukh IronOre Company, gives the government some control over natural resources.

So what should be the process of a correct strategic sell-off so that questions of impropriety/connivance with a bidder are not raised later? The trick is to design a transparent process of bidding, both for domestic and international bidders. To get a bit technical, the beginning can be to draw up a standard template which provides complete details of the bidding process, those who can and those who can’t participate (some foreign bidders or defaulters); set bidding conditions; and, most important, set stringent penalties for those who violate the terms of the bidding process.

Shaktikanta Das adds that the bidders’ technical and financial competence should be tested before a company is sold off to either a foreign or an Indian private player.

Most of the experts we spoke to say the proceeds of any strategic sell-off should be put in an escrow or separate account intended to safeguard employees’ financial interests. “It is imperative that the government keeps its commitment, whether in terms of paying the voluntary retirement scheme or the compensation package worked out in conjunction with workers, because many workers may suddenly find themselves out of a job,’’ says Haldea.

Putting the proceeds of the sell-off in an escrow account is not always the best answer, feel others. As long as the employees are given their due share, the money can also be used to repay more expensive loans or used in whatever way the government wants.

While some believe that setting a floor price—the minimum amount that bidders must fork out for any asset—could keep many bidders away, Dua believes that a minimum price is important to keep all controversies at bay. “While investment bankers doing the road show could set the floor price, other investment firms can be roped in to authenticate the price,’’ says Kaushik Dutta, founder director of New Delhi-based think-tank Thought Arbitrage. He was involved in a number of strategic sell-offs during the earlier BJP-led National Democratic Alliance government.

Again, to ensure complete transparency in the bidding process, a well-qualified team should to be set up to answer all queries from bidders but only online. The government should also set a time for the bids to come in. And the time and day should be announced for bid opening and announcement of the winner. And finally, there should be stiff penalties, which can include personal or bank guarantees that can be invoked by the government, in case the winner fails to honour the bid.

Lastly, as Haldea points out, the government needs to come out with a couple of pilot projects first because there can be a number of imponderables that might not have been factored in. “Once the problems and pitfalls are identified, the government can go full-scale ahead with its strategic sell-off plan.”

While devising a generous compensation package, it is important to keep in mind several factors regarding employees—including the number of years in service, position in the company, number of dependents in the family etc—because it will generate a lot of discontent and give an opportunity to the union and the workers to take legal action.

The more important part is actually finding the right buyer. Das says non-functioning companies can be sold to any bidder because the value then lies in the real estate it holds. He says the government can use the proceeds more fruitfully. However, he adds, functioning companies, loss-making or otherwise, should be sold only to those bidders who have an interest in that business. “You can only sell the airline business to another airline. One has to keep both business and the employees’ interest in mind. Otherwise the government itself can use the real estate of these units to set up schools, colleges, hospitals and for other infrastructure purposes.”

In fact, even in the case of loss-making enterprises, Haldea argues that, “the government should not worry whether the new buyer can run the company, but only ensure that the bidding condition like the welfare of the employees are met’.’ The idea is to get rid of the deteriorating asset at an early date—with every passing day loss-making companies lose value—and hence setting stringent conditions, will only lead to a corresponding decline in the value of the assets and less monetary benefits for the government.

The only way to sell loss-making but functional companies is to waive unsecured loans like debentures, for instance, or convert them into equity for new buyers. “More importantly, it will also have to waive-off all the accumulated interest on the principal amount. Therefore, the government even in most optimistic terms will have to take a 50% to 60% haircut on the principal amount,” says Soni

The question now is whether strategic sell-offs will actually happen in India. Government officials seem most hopeful not only because of the repeated rhetoric by the prime minister and the finance minister about the need to privatise these loss-making units, but also because of the number of measures already taken in the past couple of years. These include sweetening the VRS package—it will be based on the 2007 pay scales; all dues and salary arrears will be settled at the time of separation. Moreover, a number of ailing CPSEs like PEC, Bharat Wagon & Engineering, Hindustan Machine Tools, and Bharat Pumps and Compressors have already been identified, for closure.

Getting rid of these units and restructuring the more viable ones would not only plug leakage of public funds but also help the government redeploy scarce managerial talent and money in more viable enterprises; provide higher social security outlays for the poor and the underprivileged, but also set right the infrastructural bottlenecks that have been a big hindrance in India’s growth story.

(The article was originally published in the March 2018 issue of the magazine. )

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