State Owned Enterprises in India

Reform and Resurrection of PSE in India: Political Economy of Transformation Globalization, Restructuring and Growth

Sushil KhannaIndian Institute of Management CalcuttaDec 2013

Our Questions How do we understand the political economy that thrust the commanding heights of the Indian economy on SOEs?

How have SOEs responded to shift in Indian Economic Policies towards market oriented neo-liberal regime? What role (new or old) do SOEs still play in the economy and Indias growth surge?

Our Questions What has been the factor behind their recent resurgence with large internal resources for investment and as main financiers of the Five Year Plans?

If our understanding that they are now important drivers of accumulation and growth in Indian economy is correct, what is the future role we can expect them to fulfill?State & Indian Industrialisation Strategy 1950-1980sSavings and Investment (5-10 % GDP)

Smitchka /Compact between Emerging State and indigenous bourgeoisie (Tata-Birla Plan)

Drive to raise Savings and Investment from States Budgetary Resources.SOEs in Indian DevelopmentSince 1956 Industrial Leap for SOEs

SOEs invest and dominate key sectors Commanding heights of economyenergy, petroleum, minerals, atomic energymetals, (steel, aluminum, copper etc)capital goods, heavy engineering

Private sector to focus on consumer goods, intermediates (cement etc)

Role of SOEs in Indian GrowthMake India self reliant (import substitution)Build infrastructureGenerate surpluses for further investmentPrevent concentration of economic powerDevelop backward regions

Public Sector and Indian Growth 1955-85Public sector main investor and site of capital accumulationTill 1990, accounted for 50 per cent of investment Household sector provides 70 per cent of savings and 30-36 per cent of investmentPrivate Corporate sector marginal had low savings (10-15 per cent) and accounted for 15-20 of national investment.

Understanding Political economy of Public Sector Dominance?In no other former colony, with market economy, did `bureaucratic capital manage to appropriate and invest more than half the economic surplusWe borrow Hamza Alavais characterization of post colonial state that has a significant role of bureaucratic-military oligarchy that gains relative autonomy be playing and dividing other sections of ruling classes like indigenous bourgeoisie and landed interests Deregulation & Liberalisation 1991-New Industrial Policy opens up all sectors to private and FDI investment(except defence & atomic energy)Sick SOEs to be referred to BIFR and budgetary support to be withdrawnSpecial support to lay off workers (about 450,000 laid off)Disinvest minority shared to stock market investors while retaining majority controlPromise of Greater Autonomy

SOEs and PrivatisationClamour for complete privatisation by advisors, chambers of commerce & World BankBhagawati and Srinivasan (1993) were vocal in arguing that fractional sale of equity is useless in forcing PSE managers to improve and enhance efficiency and privatisation that transfers control and management to private sector was needed. Mobilisation by SOE workers and other constituents prevented large scale privatisation.SOEs and Privatisation 1998-2004Attack on PSEs gathers momentum after BJP returns comes to power Disinvestment Comm under GV Ramakrishna recommends sale shares in all PSE to bring govt. shareholding to 26%NCAER- So Many Lost Years: The Public Sector Before and After Reforms

SOEs and Privatisation 1998-2004BJP Govt announces that except Atomic Energy, Rail and Armament (considered strategic); in all others govt. will sell majority stock.Privatisation by BJP led governmentSells 12 profit making SOEs and 18 hotels to private sectorProcess draws widespread criticism and few firms and hotels re-sold at higher prices. Restructuring of sick SOEs2004-10 : Congress government with Left support. End of privatisation.BRPSE formed to revive loss making SOEs Only those that fail to turn around to be sold or privatisedMany firms restructured with write off of losses. About 26 SOEs turn profitableHowever, no articulation of any new role of public sector enterprises.

Why No Privatisation?Though successive governments committed to liberalisation, public opinion polls show majority apposed to privatisation and liberalisation.Sale of assets invited public scrutiny and charges of nepotismSuccessive governments defeated at pollsSOEs still important to step in where private sector is shy e.g. Power, roads etc.Crowds in investmentLarge investor and can dislocate growth

Our Analysis of PSEsAre PSEs really as inefficient as made out by their critics? Are they a drain on national resources?

How have they suddenly emerged as cash rich entities, pay large dividends to government (and private shareholders), and have also emerged as the main financiers of the FYP?Our Analysis of PSEsWhy are they now net lenders to other sectors, and despite large resources, unable to invest upto their full capacity?

How do we understand the political economy of this resurgence and relative stagnation?

Our scope of PSE analysisPublic sector in India is spread at many levels: departments and departmental entities like railways and non-departmental enterprises, both at centre and state level.Our analysis of PSEs is limited to Non-Departmental Non-Financial Enterprises owned by Central Government. Central PSEs account for 85% of assets of all non-depart entities (rest states) Resurgent Private Sector & Receding Public Sector By end of 20th Century, private corporate sector emerges as the dominant site of accumulation, replacing public sector at all levels

Share of public sector in national savings and capital formation, continues to decline YearHousehold StrPrivate CorpPublic SectorTotalSavingsGCFSavingsGCFSavingsGCFSavingsGCFPer cent of Total(Base Year : 1999-2000)55-5673411017174110010065-6663301116275410010075-766533815285210010085-8669281024214910010095-96693020391131100100(Base Year : 2004-05)05-067034233972310010008-0970342636426100100Per cent of TotalAscendancy of Private CapitalTable shows that by late 1990s, private corporate sector emerges as the largest investor (along with household sector)Private sector savings rise from 2 % of GDP in 1980s to 8.5 per cent by 2008Public sectors share in investment declines from 50 to 25 %Does it mean the eclipse of state sector in Indian growth?

Eclipse of Public Sector?In reality, the breakup of public sector savings (and investment) by institutions, throws up some startling insightsIt is the large deficit of government (`public authority in National accounts) that hides the increasing savings of non-departmental enterprisesPSEs (non-departmental enterprises) now command cash surpluses exceeding Rs. 300,000 crores

India: Savings by Institutions Current Prices (2004-05 Series) Public SectorYearHsholdPvt. CorporatePublic AuthoritiesNon-Dept-Enterp.Total GDS1955 - 195610411342202714221960 - 196112262815096320791965 - 1966259640590018540861970 - 19714531672122039768211975 - 1976979010833299893150661980 - 198118116233942781857265901985 - 198636666542637837539534141990 - 199110860315164(6169)168101344081995 - 199619858559153(6493)380192892652000 - 200146375081062(90644)613775155452005 - 2006868988277208(58279)14723412351512010 - 20111749311602464(99212)2293672481931Scope of Non-Departmental PSEsThe 220 or so non-financial Non-departmental enterprises CPSE, incorporated under Companies Act, many listed on the stock exchange, have continued to grow at an increasing paceOf these 200, about 40 are sick private firms taken over; another 24 are `promotional bodies, like NE Horticulture Marktg, Cottage Ind., India Exposition Mart, Trade Promotion Orgn. (constitute the bulk of loss making PSEs)

Changing Role of CPSE Corporate Sector?Till 2004, their profits and savings are the largest source of public savings. Till 2004, they exceeded, the private corporate sector savingsEven today the largest contribution to the FY PlansProfits after tax of these exceed Rs. 1.25 lakh crores a year, 5 times larger than losses of 60 loss making CPSEs)

Savings of the Private & Public Corporate Sector 1990-2012Savings of the non-financial Private & Public Corporate Sector 1990-2004

Savings of the Private & Public Corporate Sector 2000-12PSE Investment (GCF)Lags Private SectorAs National Accounts data does not provide GCF data for non-financial non-departmental enterprises, nor for non-financial private corporate sector, we construct a series by subtracting banking, insurance and real estate from GCF by institutions series There is little doubt that though non-departmental non-financial public enterprises invest at increasing pace, they begin to lag behind private enterprises since 2005PSE Investment (GCF)Lags Private SectorOn Efficiency of PSEs and Private Corporate SectorThe mythology that public sector is a drag on economy and losses of PSEs are the cause of fiscal crisis continues.So Many Lost Years (NCAER) was the only serious attempt to compare public and private sector performance using Prowess data, which concluded that PSEs were grossly inefficient. Results based and questionable methods We too attempt a comparison of private and public sector using PROWESS Our analysisWe select all non-financial firms with sales above Rs. 1 bn. in PROWESS from 1991-2011 (accessed in Oct 2012) and segregate them manufacturing and services into private sector and public sector based on their ownership classification We calculate return on capital employed and return on sales using profit after tax. Data Description (number of firms used to compare pvt and public)YearManufacturingServicesPrivatePublicPrivatePublic1991651423141996141379923200122337210332006383434134220114394249535Manufacturing Firms: Return on Capital Employed Private Firms and SOEs

Manufacturing Firms: Return on Capital Employed Private Firms and SOEs

Service Industry Firms: Return on Capital Employed Private Firms and SOEs

Service Industry Firms: Return on Capital Employed Private Firms and SOEsOur Analysis and its ConclusionIn manufacturing, the ROI of CPSEs is superior to private sector since mid 1990s.

In services, it lags private sector till late 1990s, rises to match private sector service firms, and the plunges into large losses.Key players in this segment: IA, AI, BSNL, MTNL, Shipping Corp, Container Corp, Konkan railways.

Understanding the resurgenceIn our opinion, there is no theoretical argument why private sector should show superior performanceManagers run, both private and PSE firms, and it is the governance mechanism that characterizes outcomesIn India, PSE also seen as mechanism to give subsidies, or price stability through price controlsTheir low prices for goods and services constituted a `barrier to entry for private firms.

Understanding the resurgenceBut late 1990s were characterised by not only drive for privatization, but also facilitating entry of private sector in sectors dominated by PSEs. This required dismantling price restrictions that had hobbled PSEs all these years. Also recovery of dues from other government entities; contract enforcement etc.

Political Economy of DeregulationThe early 1990s characterised by opening the economy to foreign investment. For a while, foreign lobbies dictate policies, like in power sector, petroleum, telecom, but most of these efforts did not result in successful entry (telecom, Enron etc) The Congress party supported coalition government had granted greater autonomy to PSEs ( Maharatna etc.) and listing requirement required independent directors.

Political Economy of DeregulationBy 1998, BJP also began a process of changing policies to facilitate entry of private sector in state monopolised sectors like power, power distribution, petroleum extraction, refining and marketing, air transport, telecom, ferrous and non ferrous metals, mining etc.Private lobbies asked for better returns; international prices for the tradable. Some planned entire output for global markets if Government did not provide for global prices for output (Reliance)

Political Economy of DeregulationFor Electricity sector reforms began with SEB dues to power producers. Though there were few private producers, the largest amounts were owed to the CPSE like NTPC, DVC, NHPC etc. (payment to states own generating stations still an issue)Aluhwalia Comm recommended a mechanism for settling past dues and an escrow account for monthly purchases from power producers(2001 SEBs owed Rs. 414.73 billion to various Central PSEs)42Political Economy of DeregulationElectricity Act which provided for license-free generation and in rural areas distribution tooOpen access in transmission and gradually distribution, power trading etc.In 2005 Govt announced open bidding for UMPS with captive mines.This facilitated expansion of recovery of huge dues to CPSEs and a dramatic change in their fortunesPolitical Economy of DeregulationSimilarly, 2001 saw the dismantling of the Administered Price Mechanism(APM), by which all entities in petroleum were promised world prices for their produceAll these boosted the profits of CPSEs in the power and petroleum sectorSo is the superior performance of CPSEs in manufacturing due to their monopolistic position?We compare unit prices charged by private and CPSEs in each sector

Power Sectors: Comparing TariffsUsing data from CMIE Prowess, we were able to get Revenue/unit of power sold. The data is based on disclosure of revenue from power segment and total units of power soldSince the figures are not always disclosed by the companies, of the 400 power or related companies, ~300 had patchy data . Very few had data over the years. We present the data from few chosen public and private sector companies (with some intervening missing data)Power Sectors: Comparing TariffsData in Rs/Unit

Company & Segment (Rs/Unit)2003200420052006200720082009201020112012CPSC/SPSCN T P C1.4591.3831.5461.6571.8662.0132.182.2422.655Gujarat Urja VikasNm2.1782.422.6143.1142.93.1113.468AP Power Disbn2.482.433.4733.874Bangalore Elec. Supply Co.3.6873.8123.8883.1843.9374.4014.472Tamil Nadu Elec. Board2.8522.8822.9672.9072.902Maharashtra Power Gen. Co.1.6671.8151.9942.442.815Gujarat State Elec. Corpn.2.0132.1192.3272.7382.8142.998W.Bengal Power Devp. Corpn.1.7361.8131.7461.8851.7962.2742.792.936Andhra Pradesh Power Gen.Corpn.1.7091.4531.3521.3361.386Punjab SEB2.6292.582.5352.437PrivateTata Power3.2412.8773.1493.2643.7284.8044.2964.1584.8485.675Torrent Power3.7823.8424.3564.5164.5054.969Adani Power3.713.112J S W Energy2.5672.7222.6882.7883.8184.4786.0014.4414.4544.199Jindal Power2.2065.6895.362G M R Power Corpn.4.3894.9836.1837.3377.3758.43848Operating Performance - PLFs

Source: CEA Annual Report; Unit %Plant Load Fa201020112012Central 85.64 85.12 82.12 State 71.13 66.77 68.43 Private 82.41 76.70 76.19 IPP 85.68 80.97 67.27 All India 77.68 75.08 73.32 49Power Sector: ROEsSource: CMIE Prowess. All Figures in Rs. Mn. except ROE (in %)Note: We have considered companies with Sales more than Rs. 3,000 Mn in 2012 and Positive PAT

Crude Oil Sale PriceCompany 200720082009201020112012CPSCin Rs/TonONGC 15,242 16,066 17,129 19,929 19,554 21,998 Oil India Ltd. 11,699 13,235 14,468 17,130 17,163 17,991 PrivateReliance Industries Ltd. 11,258 28,976 37,159 37,700 40,477 Oil Refineries: FinancialsYear (Rs Mn)Total SalesTotal AssetsMean ROETotal SalesTotal AssetsMean ROE1995 758,355 329,375 21.3 60,101 167,396 11.1 1996 976,736 456,537 19.3 66,186 221,247 10.2 1997 1,007,622 483,109 19.3 99,736 266,975 9.3 1998 1,212,604 504,557 21.2 108,965 311,798 9.5 1999 1,660,961 683,338 19.9 160,771 330,830 12.7 2000 2,179,919 809,824 19.3 231,969 342,904 11.9 2001 2,029,379 850,593 17.5 456,965 624,238 9.5 2002 2,273,647 943,385 29.7 503,885 691,551 8.6 2003 2,478,545 1,010,768 30.6 564,200 787,894 9.3 2004 2,863,477 1,151,143 17.2 742,262 869,951 11.2 2005 3,621,069 1,456,088 8.8 897,737 981,194 9.1 2006 4,436,391 1,688,374 19.7 1,188,277 1,306,102 10.0 2007 5,052,909 2,100,964 14.7 1,399,214 1,706,841 13.1 2008 6,079,841 2,344,111 6.2 1,881,445 2,562,822 0.7 2009 5,389,342 2,645,334 15.2 2,427,395 2,684,511 7.0 2010 6,650,627 3,053,711 12.7 3,120,624 3,140,962 4.3 2011 8,388,809 3,560,279 7.7 4,030,437 3,338,075 -17.0 2012 9,436,173 3,767,239 10.7 4,680,112 3,669,380 -36.1 Steel Prices (Rs. 000/ton)Company Name (Rs '000/Ton)2007200920112012Steel Authority Of India Ltd.31.240.838.342.1Rashtriya Ispat Nigam Ltd.25.836.935.141.8Tata Steel Ltd.32.440.639.9Essar Steel India Ltd.30.739.539.441.7J S W Ispat Steel Ltd.28.940.636.839.8Services CPSEs? As a group they show lossesTwo entities, Air India and BSNL account for bulk of lossesBoth were prevented from adding capacity in time, when they were leading in market shareBSNL had 24% of mobile market due to its pan-India network and IA had turned profitable through cost reduction and capacity addition thru leasing

Future of PSEsExperience of Air India and BSNL shows that regulators or owners of CPSEs can be influenced to work to the detriment of the CPSEs to benefit their private sector rivalsSuperior performance of CPSEs is entirely due to private lobbies working to enhance their profitability through change in regulations and product prices, which has inadvertently also benefited CPSEsFuture Role of CPSEsThere is no Strategic Vision for Public Sector despite their superior performanceThey are looked as Cash Cows to be milked to meet budget deficitNot sure they will not be sold offIn the meantime, large strategic gaps in Indias industry and services

Strategic GapsToday India carries only 7 per cent of its foreign trade in Indian ships (39% in 1990)All large ships importedIndian Public (also Private ) Sector totally absent from several new industriesChip Fabrication (Semiconductor Ltd)Solar cellsTelecom EquipmentAircraft manufactureAlmost all heavy defense equipment

SOEs in Indian Growth SurgeThough the share of Public Sector in total investment has fallen, SOE share in corporate sector investment is still high.

Till 2005, SOEs largest investors in manufacturing and services.

Private sector surge in investment maybe due to takeovers abroad SOE PerformanceROA doubles by 2005Total profits & Dividends up by 4 timesRetained profits up by 8 timesLargest single investor group in industry and servicesTheir share of GFCF is higher at 10 per cent of GDP (comparable to entire private corp sector)

ConclusionSOE reforms and autonomy have strengthened SOEs. Their profitability and performance has improvedThey have played an important role in India growth surgeFuture role??