Government of Gujarat promoted companies: A success story

The latest Fortune 500 India 2022 list has supposedly surprising set of companies that are often not part of the conventional wisdom of efficiency, good corporate governance and a strikingly high return on capital. 

These are state government run enterprises. There are six of them there. Of these five are companies promoted by the Government of Gujarat (GoG) and one from Tamil Nadu. 
 

The list is otherwise dominated by private sector entities. There are also 56 companies owned by the government of India. The companies in the Fortune 500 list are ranked by total income (revenue) based on the full year audited numbers. As the list shows GSPL is at 105th, GSFC at 192nd, GNFC at 203rd, GACL at 403rd, and GMDC at 486th. This is not a onetime presence either. Since 2019, four out of these five companies have figured in the Fortune 500 list. GMDC is the new entrant in the 2022 edition. Four of them have improved their rank this year as compared to 2021.
 

The presence of these companies raise several questions- What explains their significant presence in this list? Did the State inherit these companies or did it promote them as part of well thought out strategy? Do these companies perform as well as the private sector companiess in various metrics other than total income like profitability, net worth, productivity etc.? Is there something unique about the business model of GoG promoted companies and /or the business ecosystem in this state? Does the socio- cultural milieu play a role in success of business entities, irrespective of the ownership pattern? The answers will hopefully bring out reasons for the continuing success of these companies and how the results can be replicated. 

Some of the striking features of these companies are that four of the five have a much higher ranking in terms of profits as compared to their total income rank. In fact, their average ranking in profitability is a staggering 91 positions higher as compared to their ranking in terms of income. GNFC, GACL and GMDC have stunningly impressive bottom-lines, as Table 1 shows. 

This is quite an achievement considering that while the private sector operates for maximization of profits, government promoted companies in contrast are supposed to be less profit centric in their business decisions and so believed to be less efficient. Clearly, the impressive profitability numbers of GoG companies shatter this stereotype. In fact, when compared with peer group companies in the four separate industry categories they feature in, it is noticeable that their performance is better than most of the peer group companies belonging to the private sector or the GoI owned companies.

This  is all the more remarkable since none of them enjoy a monopolistic presence. They compete in highly competitive industry verticals with multiple private sector companies, GoI owned companies and MNCs. Moreover, the state government does not give any preference in its purchase policy while procuring goods produced by these companies. No special incentives or tax rebates are provided to these companies either, nor is the market access automatically guaranteed. 

The companies have achieved this level of performance for a long time through financing their capital projects and managing working capital very efficiently. Resultantly, they are debt free and do not have any interest burden, as of now. Apart from the initial capital infusion by the State Government, they are not dependent on the state government for the any financial support. All of them have ambitious capital expansion plans and are funding their ongoing projects through a judicious mix of debt and equity. Their average Debt to Equity ratio at just 0.04 is far better than the average of all Fortune 500 companies at 1.61. The same story is visible in terms of Net Worth where four of these companies have a much higher rank than their ranking as 

per revenue. Their combined average rank as per Net Worth is 104 ranks higher as compared to their rank as per Income. Similarly, the average rank in Total Assets is 48 positions higher than their rank as per income. Table 2 demonstrates that individually and as a group, the performance of GoG companies is much better than the average performance of Fortune 500 companies in all the three important indicators. 

The unique success of the companies can be attributed largely to the conducive business friendly socio- cultural milieu, strong support from the political leadership and efficient public administration in Gujarat. The state is consistently ranked among top three in terms of attracting capital investment including foreign direct investment. Its performance in Ease of Doing Business ranking is equally impressive. Labor unrest and IR issues in Gujarat are amongst the least in India. 

It seems that GoG has ingrained the concept of Creative Destruction in its decision making, fully imbibing the logic that not all entities will succeed in a competitive market. There are bound to be failures and the management has to be brave enough to either innovate or close uncompetitive units. Many companies set up in the 1960s and 1970s were scaled down and in some cases shut down once they outlived their utility. In fact, even within these five Fortune 500 listed companies, many verticals were shut down even if it meant either letting go of their staff through VRS or re-deploying them. The other reason is that the state government, in its capacity as the promoter, has adopted a no interference approach with respect to the day to day functioning of these companies. 

The Boards of these companies are populated by leading Industrialists; Vice Chancellors; subject expert academicians from IIM / IITs; financial experts and eminent bureaucrats which creates a diverse professional team to steer decisions without fear and favour, in the interest of the small shareholders and institutional investors. The model establishes that the overall business friendly culture of a society has positive externalities for successful running of enterprises, whether belonging to the Private sector or those promoted by the Government. 

Mukesh Puri is a serving IAS officer. Views expressed are personal.