Privatising sick PSUs: who would like to buy them?

The legalisation of Euthanasia or mercy killing is a hot topic of debate across the globe.While the debate pertains to terminally ill patients, the same logic can be extended to terminally ill companies. Should a sick company be allowed to shut down or given a dose of liquidity in an attempt to revive it?

 

Reports today suggests that the finance ministry under Arun Jaitley is willing to revive such sick companies. Thankfully, rather than deploying tax payer money, the government is contemplating influx of funds through privatisation. The move offers hope to 79 state-run companies that have accumulated losses of Rs 55,656 crore.

 

But the big question is who will buy these ailing public sector companies.

 

If one looks at the reasons behind the poor condition of PSUs, it boils down to poor governance, either on the part of the government, which is responsible as its promoter, or its management, which is responsible for running the company.

 

The reasons for downfall of Air India - which accounts for some of the largest losses among PSUs -  are well documented. Careless decisions on the part of the government have pushed the company beyond recovery. Almost every year a fresh dose of funds is announced in the budget to keep the airline afloat.

The same is the case with the two telecom companies. In the smaller among the two, MTNL (Mahanagar Telephone Nigam Ltd)'s wage bill is higher than its revenue. BSNL has 25 times more employees than Bharti Airtel, the top telecom operator, but earns half the revenue. MTNL has three and a half times more employees than Airtel, with barely a tenth of the revenue (Read here).

 

It does not take an MBA from the Big Four consulting firms to identify the problem with these telecom giants. Worse, it is highly unlikely that these telecom companies will find a private sector suitor to invest unless the flab is cut. Reports say that government is willing to pump in even more money to revive these companies, an act that would only mean throwing good money after bad.

 

There are many such PSUs that are either beyond repair or require tough decisions to be resuscitae them. Thankfully government has recognised this fact and has decided to shut down six PSUs which it felt were beyond hope.

 

There is still room for reviving other PSUs by taking the right decisions and getting their act together. Take the case of British India Corporation’s non-operational textile unit in Kanpur which manufactures army uniforms. Ironically, the UPA government approved a $13 million rescue package for the company by allowing it to import new machinery but did not allow the company to sell its own land to raise money to buy raw material. As a result, the machines have never been used. But the employees not only get their regular salaries but also overtime allowances and bonuses!

 

Most of the public sector companies have similar stories of illogical decisions which have brought them to their current status. As Mohan Guruswamy, chairman of the Centre for Policy Alternatives and former official in the finance ministry points out in a recent media report, “The litmus test of whether (Prime Minister Narendra) Modi is a reformer is what he does with these companies (sick), not what he does on allowing more foreign investment.”

 

Modi has been credited with reviving state public sector units in Gujarat by giving them management independence and strategic fund infusion.

 

Freedom to operate and bringing in experienced managers is key to reviving sick units. A committee headed by NTPC chairman Arup Roy Chowdhury has said that revival of sick PSUs can be done with the help of cash-rich PSUs. Not only will the cash from these units be put to use, but also their experience. The key word however, will be independence of operations.

 

These sick units need money and freedom to make decisions. By giving cash rich PSUs the opportunity to do so, the government can hope to recover the investment by privatising them when they finally become profitable.