Jun 08 2014 : The Economic Times (Kolkata)
Reimagining the PUBLIC SECTOR
Malini Goyal
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A look at the various global models that can help make India's state-owned undertakings leaner and meaner The government may need to incubate new strategic PSUs that are critical but where the private sector may not have the investment or risk appetite SK ROONGTA, ex-CMD, SAIL, author of Roongta committee report on PSU reforms
If elephants can't dance, India's public sector pachy derms just haven't learnt to polka. They're huge, even powerful, but nimble-footedness hasn't ex actly been the virtue of most of India's state-owned enterprises (SOEs).Also known as public sector undertakings or en terprises (PSUs or PSEs) -the ones controlled by the Centre earn yet another acronym, CPSEs -the leaden-footed movement of many of these giants is reflected in a set of bloated numbers.
According to a CPSE survey of 2012-13, gross rev enue of 229 CPSEs stood at `19,45,777 crore, and they chipped in with `1,62,761 crore to the govern ment kitty by way of taxes, duties and dividends.
Some 79 of them are in the red, and although the remaining 150 do make profits, their margins pale in comparison to their private sector counterparts.
PSUs have a problem of multiple bosses with no accountability. Take for example the national carrier Air India. It administratively reports to the Ministry of Civil Aviation but it also needs to report to the finance ministry when it comes to imperatives like capital expenditure, and its appointments are managed by the department of public enterprises. “We have so many bosses but nobody has ownership in a real sense,“ says Arup Roy Choudhury, chairman and managing director, NTPC. The scenario is bleaker for PSUs at the state level. A recent report by global investment bank CLSA reveals that barring Gujarat, Kerala and Madhya Pradesh, PSUs in all other states are cumulatively loss making.
“PSUs face multiple problems and the new government must address them urgently,“ says SK Roongta, a former CMD of state-owned steelmaker SAIL, who also chaired an expert panel and put out a comprehensive report on PSE reforms in 2011. A Global Phenomenon PSUs exist virtually everywhere. Consider Asia where PSUs or SOEs have played an important role in shaping the economy. According to a slightly dated (2010) but comprehensive OECD report on SOEs in Asia, PSUs pull plenty of economic might -in China they account for 30% of GDP, in Vietnam 38%, and they account for roughly a fourth of GDP in India and Thailand. PSUs are also big employers in many of these countries -15% in China, 5% in Malaysia.
PSUs play an important role in BRIICS econo mies -Brazil, Russia, India, Indone sia, China, South Africa. According to a recent KPMG report, of the 2,000 largest companies globally, 260 are from BRIICS economies.
About 123 or 47% of the largest BRIICS enterprises are SOEs. The market value of SOEs amounts to 32% of GNIs (gross national income) among all BRIICS countries. India isn't the only economy that's trying to get a handle on its PSUs. Over the past two decades, many countries have rolled out a range of initiatives to get their PSUs in shape. Three former planned economies have set up centralized holding entities -SASAC in China in 2003, SCIC in Vietnam in 2007 and Druk Holdings and Investments in Bhutan. In 2006, the Philippines pioneered the development of an SOE governance scorecard which has become an important tool for pushing SOE reforms. Since 2004, Malaysia has rolled out a comprehensive `transformation programme“ to overhaul its PSUs.
But if there is one PSU story that the world is keenly watching, it is China.
The China PSU Story Since the 1950s, China's growth has been largely SOE-led. By the late '80s, they controlled 75% of China's industrial production.
By then, they had also become inefficient with many SOEs becoming insolvent. The '90s saw the first wave of SOE reform in China with financial infusion, huge layoffs, debt reduction and ownership reforms that included public listings and non-government buyouts.
By the early 2000s, when China faced global competition with its entry into the World Trade Organization, SOEs became the core pillar for China to build its global economic prowess. In 2003, it set up holding company SASAC (State-owned Assets Supervision and Administration Commission) to manage SOEs. Today, SASAC is a onestop shop for SOE management -from strategic decisions to appointments to M&As. Between 2001 and 2010, size and power of SOEs in China surged. According to a paper by Calgary University, SOE contribution to GDP rose from 8% to 10% and per-firm assets more than doubled from below 500 million yuan to almost 1.3 billion yuan.
These impressive numbers, however, hide the mess underneath. SOEs in China are often inefficient and a drag on the economy.
They've underperformed the wider industrial sector in nine of the past 13 years in terms of profit growth. According to the National Bureau of Statistics, profits in stateowned industrial firms fell 0.2% in the first two months of 2014 even as China's overall industrial profits grew 9.4%. Under new president Xi Jinping, China is making fresh attempts to overhaul SOEs and make them efficient. The proposals talk about a range of initiatives including privatization and imposing certain performance criteria on SOEs. Oil giant Sinopec recently announced the sale of a minority stake in its downstream marketing operation. In recent months, the government has issued 27 licences to privately owned mobile virtual network operators.
At a macro level, Develop ment Research Centre (DRC), a government think-tank, mentioned that it is looking at Singapore's Temasek for some inspiration to restructure its SOEs.
The Temasek Model Post-independence in 1965, Singapore pursued economic growth by taking stakes in many companies, including start-ups. A decade later, in 1974, it incorporated holding company Temasek to better manage its assets on a commercial basis. This allowed its Ministry of Finance to focus on policymaking. At inception, Temasek's initial portfolio was of S$354 million, spanning 35 companies.
Thereafter began the process of restructuring SOEs. Some were corporatized and privatized, others were allowed to go for big global expansions. For example, companies like SingTel, PSA, Singapore Power and MediaCorp were corporatized and handed over to Temasek for professional management. Even as power generating assets were spun off from Singapore Power and sold, it made investments in Australia. Over the years, Temasek's initial portfolio has been trimmed to just 11 companies. But many of the old SOEs have today scaled up to become big global brands like Singapore Airlines, SingTel, Singapore Zoo, DBS and Keppel.
Temasek's role has evolved. At a macro level, its investments today broadly fall in three buckets: the first includes national champions like Singapore Power and Singapore Airlines where it has controlling stakes.
Then there are pure investments like the one in Bharti Airtel in India or Shin Corp in Thailand. The third bucket -and the smallest -is of pure financial instruments like Greek debt. As of March 2013, 71% of Temasek's exposure was in Asia with Singapore at 30% and China at 23%. Temasek is helping nurture new industries. In 2012-13 it established Pavilion Energy with an initial capital of $1 billion to invest in the region's growing needs for clean energy. Its arm Heliconia Capital provides growth capital for Singapore-based SMEs like Heptagon (developer of microoptics used in smartphones) and Razer Inc (a leader in high-performance video game systems). Clifford Capital, another offshoot that started operations in 2012, finances Singapore-based companies to grow in new markets.
The results so far are impressive. As of March 2013, the portfolio value of Temasek has grown to S$215 billion and has given a compounded annual return of 13% to its shareholder (the Singapore minister for finance) over the past 10 years. It has actively invested S$159 billion and divested S$100 billion over the past decade.
The India Way Will Temasek offer answers to India's PSU woes? What is clear is that while global models will offer some important lessons, India must find its own answers to the PSU problem. The Roongta committee report has sug gested many -from curbing political interference to creating professional boards to overhauling recruitments and compensation, audit and monitoring.
But a few priorities are clear. One, the government must figure out the sectors it needs to have presence in and should exit the remaining, says Roy Choudhury of NTPC. Two, as a pilot, it should start with 20-30 big PSUs -the maharatna and navratnas -and move them to a holding a company, a la Temasek, for better management, suggests CS Verma, CMD, SAIL and also chairman of SCOPE, the apex body for CPSUs.
Last, the government must debate and identify new strategic sectors to set up new PSUs. Some of the sectors that the Roongta report suggests are defence, special capital machinery, equipments sector and green technologies, amongst others. These PSUs, though, may have to be seeded and nurtured in a manner different from their predecessors. The Roongta committee report suggests creation of a single holding structure (SHS) for all future CPSEs that will perform twin functions: of deciding where to invest; and of managing the investments.
That in effect means the SHS will be a kind of sovereign wealth fund and venture capital fund rolled in one. It would need to have an independent board with at least half the members from outside the government. As well as a management team, like a mutual fund, to constantly monitor and optimize returns.
The models pretty much exist and the Modi government may not need to reinvent the wheel in its bid to reimagine India's public sector. If the former Gujarat chief minister's record is any indication, the boring world of PSUs is set for a shakeup sooner than later.
According to a CPSE survey of 2012-13, gross rev enue of 229 CPSEs stood at `19,45,777 crore, and they chipped in with `1,62,761 crore to the govern ment kitty by way of taxes, duties and dividends.
Some 79 of them are in the red, and although the remaining 150 do make profits, their margins pale in comparison to their private sector counterparts.
PSUs have a problem of multiple bosses with no accountability. Take for example the national carrier Air India. It administratively reports to the Ministry of Civil Aviation but it also needs to report to the finance ministry when it comes to imperatives like capital expenditure, and its appointments are managed by the department of public enterprises. “We have so many bosses but nobody has ownership in a real sense,“ says Arup Roy Choudhury, chairman and managing director, NTPC. The scenario is bleaker for PSUs at the state level. A recent report by global investment bank CLSA reveals that barring Gujarat, Kerala and Madhya Pradesh, PSUs in all other states are cumulatively loss making.
“PSUs face multiple problems and the new government must address them urgently,“ says SK Roongta, a former CMD of state-owned steelmaker SAIL, who also chaired an expert panel and put out a comprehensive report on PSE reforms in 2011. A Global Phenomenon PSUs exist virtually everywhere. Consider Asia where PSUs or SOEs have played an important role in shaping the economy. According to a slightly dated (2010) but comprehensive OECD report on SOEs in Asia, PSUs pull plenty of economic might -in China they account for 30% of GDP, in Vietnam 38%, and they account for roughly a fourth of GDP in India and Thailand. PSUs are also big employers in many of these countries -15% in China, 5% in Malaysia.
PSUs play an important role in BRIICS econo mies -Brazil, Russia, India, Indone sia, China, South Africa. According to a recent KPMG report, of the 2,000 largest companies globally, 260 are from BRIICS economies.
About 123 or 47% of the largest BRIICS enterprises are SOEs. The market value of SOEs amounts to 32% of GNIs (gross national income) among all BRIICS countries. India isn't the only economy that's trying to get a handle on its PSUs. Over the past two decades, many countries have rolled out a range of initiatives to get their PSUs in shape. Three former planned economies have set up centralized holding entities -SASAC in China in 2003, SCIC in Vietnam in 2007 and Druk Holdings and Investments in Bhutan. In 2006, the Philippines pioneered the development of an SOE governance scorecard which has become an important tool for pushing SOE reforms. Since 2004, Malaysia has rolled out a comprehensive `transformation programme“ to overhaul its PSUs.
But if there is one PSU story that the world is keenly watching, it is China.
The China PSU Story Since the 1950s, China's growth has been largely SOE-led. By the late '80s, they controlled 75% of China's industrial production.
By then, they had also become inefficient with many SOEs becoming insolvent. The '90s saw the first wave of SOE reform in China with financial infusion, huge layoffs, debt reduction and ownership reforms that included public listings and non-government buyouts.
By the early 2000s, when China faced global competition with its entry into the World Trade Organization, SOEs became the core pillar for China to build its global economic prowess. In 2003, it set up holding company SASAC (State-owned Assets Supervision and Administration Commission) to manage SOEs. Today, SASAC is a onestop shop for SOE management -from strategic decisions to appointments to M&As. Between 2001 and 2010, size and power of SOEs in China surged. According to a paper by Calgary University, SOE contribution to GDP rose from 8% to 10% and per-firm assets more than doubled from below 500 million yuan to almost 1.3 billion yuan.
These impressive numbers, however, hide the mess underneath. SOEs in China are often inefficient and a drag on the economy.
They've underperformed the wider industrial sector in nine of the past 13 years in terms of profit growth. According to the National Bureau of Statistics, profits in stateowned industrial firms fell 0.2% in the first two months of 2014 even as China's overall industrial profits grew 9.4%. Under new president Xi Jinping, China is making fresh attempts to overhaul SOEs and make them efficient. The proposals talk about a range of initiatives including privatization and imposing certain performance criteria on SOEs. Oil giant Sinopec recently announced the sale of a minority stake in its downstream marketing operation. In recent months, the government has issued 27 licences to privately owned mobile virtual network operators.
At a macro level, Develop ment Research Centre (DRC), a government think-tank, mentioned that it is looking at Singapore's Temasek for some inspiration to restructure its SOEs.
The Temasek Model Post-independence in 1965, Singapore pursued economic growth by taking stakes in many companies, including start-ups. A decade later, in 1974, it incorporated holding company Temasek to better manage its assets on a commercial basis. This allowed its Ministry of Finance to focus on policymaking. At inception, Temasek's initial portfolio was of S$354 million, spanning 35 companies.
Thereafter began the process of restructuring SOEs. Some were corporatized and privatized, others were allowed to go for big global expansions. For example, companies like SingTel, PSA, Singapore Power and MediaCorp were corporatized and handed over to Temasek for professional management. Even as power generating assets were spun off from Singapore Power and sold, it made investments in Australia. Over the years, Temasek's initial portfolio has been trimmed to just 11 companies. But many of the old SOEs have today scaled up to become big global brands like Singapore Airlines, SingTel, Singapore Zoo, DBS and Keppel.
Temasek's role has evolved. At a macro level, its investments today broadly fall in three buckets: the first includes national champions like Singapore Power and Singapore Airlines where it has controlling stakes.
Then there are pure investments like the one in Bharti Airtel in India or Shin Corp in Thailand. The third bucket -and the smallest -is of pure financial instruments like Greek debt. As of March 2013, 71% of Temasek's exposure was in Asia with Singapore at 30% and China at 23%. Temasek is helping nurture new industries. In 2012-13 it established Pavilion Energy with an initial capital of $1 billion to invest in the region's growing needs for clean energy. Its arm Heliconia Capital provides growth capital for Singapore-based SMEs like Heptagon (developer of microoptics used in smartphones) and Razer Inc (a leader in high-performance video game systems). Clifford Capital, another offshoot that started operations in 2012, finances Singapore-based companies to grow in new markets.
The results so far are impressive. As of March 2013, the portfolio value of Temasek has grown to S$215 billion and has given a compounded annual return of 13% to its shareholder (the Singapore minister for finance) over the past 10 years. It has actively invested S$159 billion and divested S$100 billion over the past decade.
The India Way Will Temasek offer answers to India's PSU woes? What is clear is that while global models will offer some important lessons, India must find its own answers to the PSU problem. The Roongta committee report has sug gested many -from curbing political interference to creating professional boards to overhauling recruitments and compensation, audit and monitoring.
But a few priorities are clear. One, the government must figure out the sectors it needs to have presence in and should exit the remaining, says Roy Choudhury of NTPC. Two, as a pilot, it should start with 20-30 big PSUs -the maharatna and navratnas -and move them to a holding a company, a la Temasek, for better management, suggests CS Verma, CMD, SAIL and also chairman of SCOPE, the apex body for CPSUs.
Last, the government must debate and identify new strategic sectors to set up new PSUs. Some of the sectors that the Roongta report suggests are defence, special capital machinery, equipments sector and green technologies, amongst others. These PSUs, though, may have to be seeded and nurtured in a manner different from their predecessors. The Roongta committee report suggests creation of a single holding structure (SHS) for all future CPSEs that will perform twin functions: of deciding where to invest; and of managing the investments.
That in effect means the SHS will be a kind of sovereign wealth fund and venture capital fund rolled in one. It would need to have an independent board with at least half the members from outside the government. As well as a management team, like a mutual fund, to constantly monitor and optimize returns.
The models pretty much exist and the Modi government may not need to reinvent the wheel in its bid to reimagine India's public sector. If the former Gujarat chief minister's record is any indication, the boring world of PSUs is set for a shakeup sooner than later.
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