Restructuring should precede PSU disinvestment

Most of our decades-old public sector undertakings (PSUs) carry baggage from the past, which stands in the way of realising their full potential. The government being the sole or majority owner, it pays the price for PSUs performing below desired levels.

PSUs set up for commercial reasons like oil refineries and metal makers should be seen differently from government organisations pursuing non-financial objectives such as Doordarshan or India Post.

But there is no longer any global sanctity that a basic mass-oriented service like postal should remain in the government domain. Hasn't the UK government privatised Royal Mail last winter, braving opposition from many quarters? Margaret Thatcher, who gave a mighty push to government disengagement from business, once famously said: "What! Flogging off Her Majesty's Mail, cheap and to a bunch of spivs?" More recently the Conservative government was savaged by UK's public accounts committee for undervaluing Royal Mail in a rush to privatise. What is, however, relevant for us is that ahead of selling shares Royal Mail was shaped up to improve its marketability.

DISINVESTMENT DIARIES

• The disinvestment target of the government for 2013-14 is Rs 58,000 crore.
• The UPA government failed four years in a row to mobilise the target amount by way of share sale.
• This happened because appetite for PSU shares was not robust in a lacklustre stock market.
• But disinvestment secretary Ravi Mathur says, "If market capitalisation remains what it is, we will exceed the target."
• The government is likely to exercise the soft option of depending on the market instead of undertaking restructuring of PSUs ahead of their share sale.
• Restructuring will improve valuation of PSUs, heightening investor interest.

Year after year, New Delhi is having ambitious share sale programmes for PSUs. Non-tax revenues generated by way of unloading minority stakes keep the Budget deficit in check. Disinvestment target for 2013-14 is an ambitious Rs 58,000 crore. The United Progressive Alliance (UPA) government failed four years in a row to mobilise the target amount by way of share sale. This happened because appetite for PSU shares was not robust in a lacklustre stock market. The disinvestment secretary Ravi Mathur is exuding confidence that "if market capitalisation remains what it is, we will exceed the target." This is proof of the government exercising the soft option of depending on the market instead of undertaking the more challenging job of thorough restructuring of PSUs ahead of their share sale. Restructuring, though, will considerably improve valuation of PSUs, heightening investor interest.

This was seen in many cases in the UK. Floatation of British Airways (BA), electricity and water in the UK was all preceded by a series of reforms leading to improvements in their financial performances, shedding of surplus manpower and infusion of commercial culture. The way Lord King prepared transition of BA from a public corporation to a public limited company in the early 1980s merits emulation by PSUs everywhere, including India. Sadly our PSU chiefs were not bold enough in the past to dispense with burdensome legacies, for fear of falling foul of entrenched power groups.

Steel Authority of India Limited (SAIL) Chairman Chandra Shekhar Verma says, "We are finally finding to our relief that in the new order in Delhi, attempts could be made to blowing cobwebs off many PSU ways of doing business."

Take National Aluminium Company (Nalco) where chairman Ansuman Das has the mandate to take care of the bottom line than be bothered about the PSU tag. Without that kind of freedom, Das could not have kept a portion of Nalco smelting capacity idle. This initially caused concern to the steel and mines ministry resulted in higher profits for Nalco in 2013-14.

How many chief executive officer's are ready to seize the freedom to reinvent PSUs? Making an oblique reference to one bothersome legacy, Verma says, "SAIL, with a saleable steel production of 12.88 million tonnes (mt) in 2013-14, provided Rs 9,579 crore for employee benefits expense, equalling 22 per cent of total expenditure or 18 per cent of turnover. In this regard, SAIL is at a disadvantage vis-à-vis the country's other major steelmakers."

For the same year, Tata Steel with production of 8.93 mt spent Rs 3,673 crore on employee benefits account and the respective figures for Vizag Steel are 3.80 mt and Rs 1,751 crore. After years of manpower rationalisation SAIL is still left with nearly 98,000 heads but with major skill gaps at some strategic points. Its labour productivity last year was 278 tonne crude steel per manyear.

"Labour productivity is improving. But what we need is quantum jump. You will find SAIL labour productivity rising to 400 tonne per manyear once we are through with the Rs 72,000 crore modernisation and expansion. As a result, our earnings before interest, tax and amortisation will improve by at least $23 a tonne of crude steel," says Verma. In a major break with the past, SAIL will now take up brownfield expansion only when "CEOs of respective plants will have at their disposal clear sites not invaded by illegal occupants or any other encumbrances".