The Public sector can be a new engine of growth for India. A very large amount of capital is invested in India's public sector. These companies have the scale to become global scale players if managed well but are constrained due to the way they are managed.
The main constraints are in acquisition of best talent, interference in decision making, poor capital allocation resulting from interference of the government in the running of business and using these companies as milch cows for political ends by using them to provide subsidies for political ends. As a result of these companies earn poor rates of return on capital and are unable to grow fast, create employment and make investments and work to their full potential. These companies are also easily hamstrung by their private sector competitors by suitably "incentivizing" the political leaders concerned. The current trajectory of management may lead to bankruptcy of many of the PSUs and create great financial stress for banks and the governments. BSNL and Air india are heading down this road rapidly and they need to be rescued quickly.
Many of these constraints are seen as having fatal flaws by the stock market. As Peter Drucker put it succinctly, Profitability is the sovereign test of the enterprise. Many of these enterprises have failed the test soundly and are not seen as investment worthy by the stock market.
We need to create a program to convert these companies from being Public sector companies to becoming more like the HDFC, ICICI or IDFCs. The government could hold either 26% or a golden share and create safeguards to prevent mismanagement but the companies need to have autonomy in running the company. The divestment of these stakes could happen as the efficiency of operations improve so that the government would receive a fair compensation for the stakes. There should be complete autonomy in acquisition of talent, capital allocation and efficient management of the enterprise to earn the best possible return. These factors should be cast in stone and non-negotiable and irreversible. The government needs to create a clear mandate of corporate governance and commit to not changing it. The companies should be made to sign agreements with the government to provide affirmative action to the extent it will not affect their efficiency but they should be free to implement in the manner they wished. These agreements should have a long tenure of 25-50 years and should not be changeable during the interim period.
Our national policies regarding licences and permissions in these sector should mimic the kind of policies favoured by countries such as USA, Hong Kong, Australia towards their dominant corporations.
The cost of governmental interference and hampered operations is quite stark. For example: the market cap of HDFC Bank which was started in 1994 has a market cap of Rs 160,000 crore. While SBI which is almost 150 years old has a market cap of Rs 120,000 crores despite being almost four times as large as HDFC in assets.
We could also think of inviting private participation in these companies through limited stakes i.e, any private sector group could participate through stock ownership and board participation. There is a precedent for this in the banks started by different communities where different groups got together to manage banks such as Tamilnadu Mercantile Bank and these groups cannot hold more than certain % of the voting share as per the articles of association.
If we do this, we could think of converting our struggling PSUs into world scale businesses with great vitality.
If we visualize these transformations, we can understand the possible improvements possible.
The investments have already been made into these companies/assets. All it takes is to change the rules by which these are managed. These are much more easier to do than attract even a fraction of the investment it would take to create these companies. The profitability improvements can provide steady source of capital for investments for growth for which we are going around with begging bowls to attract FDI. Better management of these companies will add to the tax revenues of the country.
We have massive fiscal deficits. There is no more money left for creating any more engines of growth. We may need to scale back many of the programs we already have. In such a scenario, this measure is one of the lowest hanging fruit.
There is another problem facing us. Our stock market is severely lacking depth. Once the top 40-50 companies are well priced, there are no good companies available at reasonable valuations for investors to buy into. Any further investment by Foreign Institutional Investors only increases the valuation of these companies pushing the valuations into stratospheric levels. This also pushes away the retail investor from the stock market as s/he is not able to find steady blue-chips which would pay dividends. A slow divestment of these transformed PSUs would transform the Indian stock market and make it a very attractive place for our retail investors and world wide investors. It will also drastically reduce crony capitalism.
This is a zero cost and zero investment change which can provide a good impetus to our economy.
The main constraints are in acquisition of best talent, interference in decision making, poor capital allocation resulting from interference of the government in the running of business and using these companies as milch cows for political ends by using them to provide subsidies for political ends. As a result of these companies earn poor rates of return on capital and are unable to grow fast, create employment and make investments and work to their full potential. These companies are also easily hamstrung by their private sector competitors by suitably "incentivizing" the political leaders concerned. The current trajectory of management may lead to bankruptcy of many of the PSUs and create great financial stress for banks and the governments. BSNL and Air india are heading down this road rapidly and they need to be rescued quickly.
Many of these constraints are seen as having fatal flaws by the stock market. As Peter Drucker put it succinctly, Profitability is the sovereign test of the enterprise. Many of these enterprises have failed the test soundly and are not seen as investment worthy by the stock market.
We need to create a program to convert these companies from being Public sector companies to becoming more like the HDFC, ICICI or IDFCs. The government could hold either 26% or a golden share and create safeguards to prevent mismanagement but the companies need to have autonomy in running the company. The divestment of these stakes could happen as the efficiency of operations improve so that the government would receive a fair compensation for the stakes. There should be complete autonomy in acquisition of talent, capital allocation and efficient management of the enterprise to earn the best possible return. These factors should be cast in stone and non-negotiable and irreversible. The government needs to create a clear mandate of corporate governance and commit to not changing it. The companies should be made to sign agreements with the government to provide affirmative action to the extent it will not affect their efficiency but they should be free to implement in the manner they wished. These agreements should have a long tenure of 25-50 years and should not be changeable during the interim period.
Our national policies regarding licences and permissions in these sector should mimic the kind of policies favoured by countries such as USA, Hong Kong, Australia towards their dominant corporations.
We could also think of inviting private participation in these companies through limited stakes i.e, any private sector group could participate through stock ownership and board participation. There is a precedent for this in the banks started by different communities where different groups got together to manage banks such as Tamilnadu Mercantile Bank and these groups cannot hold more than certain % of the voting share as per the articles of association.
If we do this, we could think of converting our struggling PSUs into world scale businesses with great vitality.
If we visualize these transformations, we can understand the possible improvements possible.
- converting a BHEL into a GE
- converting a Coal India or NMDC to Rio Tinto or a BHP
- converting a BSNL into a Vodafone
- converting a BPCL/HPCL or IOC into Shell or Exxon Mobil
- converting SBI into a HSBC or even a HDFC Bank !!
- convert SAIL into a world leader in Steel
- convert National Fertilizers into a Yara
- convert IndiaPost into a Fedex ?
- convert Air India into a Singapore Airlines
- convert our PSU defence companies into world scale arms manufacturers
The investments have already been made into these companies/assets. All it takes is to change the rules by which these are managed. These are much more easier to do than attract even a fraction of the investment it would take to create these companies. The profitability improvements can provide steady source of capital for investments for growth for which we are going around with begging bowls to attract FDI. Better management of these companies will add to the tax revenues of the country.
We have massive fiscal deficits. There is no more money left for creating any more engines of growth. We may need to scale back many of the programs we already have. In such a scenario, this measure is one of the lowest hanging fruit.
There is another problem facing us. Our stock market is severely lacking depth. Once the top 40-50 companies are well priced, there are no good companies available at reasonable valuations for investors to buy into. Any further investment by Foreign Institutional Investors only increases the valuation of these companies pushing the valuations into stratospheric levels. This also pushes away the retail investor from the stock market as s/he is not able to find steady blue-chips which would pay dividends. A slow divestment of these transformed PSUs would transform the Indian stock market and make it a very attractive place for our retail investors and world wide investors. It will also drastically reduce crony capitalism.
This is a zero cost and zero investment change which can provide a good impetus to our economy.
All the state public sector undertakings in Gujarat are dynamic and profit making entities. How come they are whereas the rest of the country cannot produce them?
ReplyDeleteThey are treated as milch cows by many vested interests. The national interest has been forgotten. The Gujarat State PSUs are doing well because the Chief Minister of Gujarat has taken many steps to fix the problems that ail them and has made them run efficiently. Their performance before 2001 and after 2001 are markedly different. This is proof that nothing is wrong with the concept of PSUs. The failures of the political class have been heaped on the poor managers in the PSU who have no really decision making power or autonomy when it comes to serious issues.
ReplyDeleteThank you.
ReplyDelete