Will CIL's loss of monopoly teach PSUs a lesson? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will CIL's loss of monopoly teach PSUs a lesson? 

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In this issue:
» Goldman Sachs vs. Chinese housewife
» Are the brightest talents in unproductive jobs?
» Fast track reforms to reinstate criminal politicians!
» Japan's dubious distinction
» ...and more!

Most government owned enterprises (PSUs) in India command negotiating power by virtue of their market share. The latter of course is a result of their legacy rather than hard work. Unlike their private sector counterparts, PSUs in India have traditionally been granted scarce natural resources at throw away prices. By virtue of such cheap resources many have also been able to offer stiff competition to private sector in terms of product pricing. However, hardly any PSU treats the resources as 'scarce'. Inefficiency and callous attitude marks the performance of PSUs. In the bargain, the relatively efficient private sector players need to compromise on quality of resources or operating margins. In the worst case they also need to import a raw material that is abundantly available in the country.

That was exactly the case for coal, where Coal India (CIL) has had the undisputed monopoly for decades. Coal, of course, is not the only natural resource that is squandered. In India, the business of mining has had a legacy of corruption. And the government has never bothered to make the details of mineral natural reserves publicly available. This is an attempt to avoid scrutiny of PSU operations. However, ever since listing, CIL has been subject of investor scrutiny both within and outside the country. Investors have questioned the management's lackadaisical attitude despite hoarding vast resources. More so because CIL held crucial power projects in the country at ransom with insufficient supplies. The attempt to import coal from Indonesia too proved unviable. The coal mining major, meanwhile was too busy negotiating wages with labour unions than improving output.

Having made every attempt to mend the relation between CIL and power producers, the government finally bit the bullet. It has now sanctioned the first ever auction policy for coal blocks for the private sector. This move may be the government's desperate attempt to salvage its reputation and attract some investments in Indian energy. However, it comes as a big jolt for CIL, which will have to compete not just in terms of efficiency but also pricing. Whether or not the 'auction' will be transparent, as the government claims, is anybody's guess. But this is certainly a good start. And we see no reason why the other PSUs, Navratnas and Maharatnas should not be subject to such competition. At least it will force them to not take shareholders for granted!

Do you think other PSUs will learn a lesson from CIL's loss of monopoly? Let us know your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
As India continues to worry about capital outflows, the regions that originate most of the FDI coming into the country hold importance. As per RBI, Mauritius continues to corner more than 44% of the FDI coming into the country. And despite the quandary over Mauritius' tax haven status, the government may not be able to take a firm decision on this. One may recall that India was earlier planning to review the double-taxation avoidance agreement (DTAA) with Mauritius. The reason behind the review is to prevent misuse of the treaty and track illicit money allegedly stashed in the African island nation. The country was losing more than US$ 600 m every year in revenue because of the tax treaty, besides incurring the risk of militant groups using it to route money into India. However, all such considerations seem to be in the backburner for the time being. More importantly, besides Mauritius even Netherland and Cyprus seem to be emerging as the new tax havens.

Why Mauritius is important to India...
Source: RBI

Whose investing acumen are you likely to trust more, Goldman Sachs or an average Chinese housewife? Well, at first glance, this looks like no competition at all. The world's largest financial institution, with the best resources and brains at its disposal versus your average Chinese woman. However, there's one area out there where the so called David trumps the mighty Goliath. And it answers to the name of gold investments. As per metals analyst Jeff Clark, the Chinese have continued to gobble up gold in ever increasing quantities despite the warning sign flashed by Goldman Sachs recently. And it is not just China. India's gold appetite has not dimmed either even in the wake of some strong restrictions by the Government on gold imports. Our stance on this has been pretty clear from the word go. We believe that we are in an unprecedented era of central bank money printing where paper money is being devalued every minute. And gold looks like the ultimate safe haven against such a deluge .Therefore, it makes immense sense to have part of one's portfolio invested in the yellow metal.

Should you be buying gold and if so, how much? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

Are the brightest and most talent people employed in productive jobs? We came across an interesting article in Project Syndicate that puts forth this compelling question. As it turns out, the answers are not encouraging. The findings pertain to the US economy. But we believe they are valid for most other economies, including India.

So here are the findings... In 2012, 7.4% of the total compensation of employees went to people working in the finance and insurance industries. As you know, a bulk of the finance industry is about trading, speculation and other unproductive activities. Many of these activities may not only be socio-economically useless but also harmful. The 2008 financial crisis is a testimony to this fact.

Now here is the shocker... The article points out that the share of the most educated and accomplished people is alarming high in unproductive areas of the economy. Consider this... A survey back in 2006 suggested that 25% of graduating seniors at Harvard University, 24% at Yale, and 46% at Princeton were starting their careers in financial services. Of course, the numbers have fallen now because of the crisis. But it says a lot about where the brightest minds are engaged.

This is indeed a worrying sign. If the most talented people in the economy are engaging in areas that may be unproductive or even harmful, the future of the economy may be in danger.

Here's an interesting piece of news. As per PRS legislative research, there are over 100 Bills that are pending approval of the Indian Parliament. Some of these are dated as far back as 1997. We have shared this statistic just to stress on the slow pace at which our government works. Therefore the policy inaction that has gripped our country is not surprising. Nevertheless do not for a minute assume that the government is lethargic.

It now seeks to fast track the passing of a crucial bill. This bill is neither populist nor reformist in nature. It seeks to protect politicians that have criminal charges against them. The Bill is essentially aimed at partially reversing a recent decision by the Supreme Court that politicians with criminal charges had to be expelled from their seats. If the apex court's decision were implemented, then nearly 30% of the politicians, across the centre and states, would have been dismissed. A large part of this group includes the supporters of the ruling government. No wonder then that the government has woken up to the need for passing a bill that would allow such politicians to continue taking part in parliamentary proceedings. However as per the provisions of the bill such people would not be allowed to vote. In essence the bill aims at allowing our country to remain in the hands of criminals. Given the tainted image that the international investor community has of India following the slew of scams, the government should be working hard at improving governance standards. But passing such ridiculous rules and bills only reinforces the tainted image.

If you thought European countries such as Greece were the ones saddled with most debt, you are wrong. That dubious distinction seems to belong to Japan. The country's government obligation is expected to grow to 245% of economic output this year. This is the highest globally. Indeed, as per an article in Bloomberg, the ratio in Greece and the US stands at 179% and 108% respectively. The government has not been able to reduce this debt. But it has instead piled on the pressure by its monetary easing policies. Meanwhile, Japan's population is declining and welfare expenses are rising. This means that it will eventually lose the ability to fund its debt unless it comes out with a solution. One such solution proposed has been the hike in sales tax by as much as 20% by 2020. Whether the country has the capacity to handle such a hike and whether it will be implemented remains to be seen.

Despite selective buying interest in engineering and commodity heavyweights the key indices in Indian equity markets were below the dotted line for most of today's session. The BSE Sensex was trading lower by around 100 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened flat to positive.

04:50  Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."- Benjamin Graham
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8 Responses to "Will CIL's loss of monopoly teach PSUs a lesson?"

surjit kumar chetal

Sep 27, 2013

Since i hv worked in sail for my entire life i do understand what is ailing PSUs.PSU recruits fairly intelligent young professionals today.at middle levels in the plants people r bothered only about their family and plant and do not mind puting in their best there is mostly fair play in their promotion career devlopment except few isolated cases of connection at new delhi beaurocracy or politician.ther in no real autonomy for chairman and members on board.the adm ministries rules the roost.mostly politicians and their babus fleece the organisation and cannot stand any upright boss of psu.Selection of top boss is on conditions other than professional .Aur jo inki sewa nahi karta uska suspend hone ka chance pura rahta hai.aise mein PSU kaise ache se perform kar sakta hai.I think we all understand how it works.In our country industry goes sick never the industrialist.It is not surprising that many of steel plant owners were scrap dealers or traders of sail and flourished due to quota rationing system.Again due to babus and their bosses i.e. POliticians.Whole nation is in their grip other wise u wud not hv found more than 50 IAS in ministry of defence and armed forces with 75% of redundant armaments ,the army,airforce and navy included.No advance jet trainer for 25 yrs destroying more than 400 mig 21 in civil crashes and killing more than 50 young bright pilots


S Nakkeeran

Sep 27, 2013

All PSU negotiate with unions for wage, but definitely not the productivity. All workers and Unions are basically good. If they were explained the important of productivity by the negotiating boss's, definitely they will rise to the need of the Nation. It requires effort b the executives and all the CEO's of the PSU. Unfortunately, very few CEO's has got long tenure. The ones with less tenure do not bother, since they want to enjoy all the benefits and what the can get after superannuation. I hate the statements from the boss's " pl do it, since ED / Director / CMD is interested" This means not the boss's is convinced about the requirement, but he wants to please his boss. As politician wants to retain power, most of the PSU executives wants to get promotion. Though there are good appraisal system, no one do it 50% fairness. Inefficiency is at the top. As said the legacy of the organization culture, and the sincere minority executives contribution make few of the PSU striving still. Take the case of Air India. It is the only airline, does not operate direct flight from Chennai to US. In PSU promotions are given based on the community, batch mate, and what not. Even after retirement few regularly visits the organisatin to influence promotions to the people. This is the major corruption in PSU, and not under the purview of Vigilance.


S Sundaresan

Sep 26, 2013

The PSU's in india are not being managed efficiently. Corruption is also rampant in PSUs. The so called oil sector company Top Bosses are paid heavily. Lavish benefits are passed on to their employees. One of the Major Fertilizer Company functioning in Gujarat is giving free electricity to its employees and many of the employees are having 4/5 air conditioners working in their homes.Only because of all these reasons the cost of petroleum products are costly in India.It is understood that even one of the heavily guarded PSU recently awarded all its directors hefty rewards, after obtaining due approvals from its Board. Private Sector also does not make profits in a straight forward way. Key Functionaries of Private Sector are so chosen, who can manipulate all the laws/law enforcing officials in the Country. We need a total shake-up of the system and stringent Law enforcing officials. Erring officials are to be punished, the way RAVANA was finally punished.


Amit Sengupta

Sep 26, 2013

No. The babu-s will not allow them to take a lesson. They will continue to ensure that the politicians have a hold on them. And their slogun will be "protecting the interest of the masses". For, it helps them protect and in fact swell their kitty. Take Indian Railways- top positions are reportedly sold to protect interest of the masses, their customers. The performance of the PSU-s will certainly improve if they are allowed to be run like board managed companies rather than owner/family managed companies. For, here the nature and character of the owners are subject to frequent changes unlike the family managed companies.



Sep 26, 2013

The general notion about PSU's are that they are inefficient, loss making and a drain on the resources of the country. The popular view about Pvt. Sector is that they are efficient, have professional management etc. One needs to understand that PSU's are not for making profit but to serve the people. for eg. diesel is being subsidised at the cost of growth of the Oil PSU's. These oil PSU's which were making healthy profits one day would sink due to the debts forced on to them for no fault of theirs.Pvt. players in the same sector have coolly shut shop since there were no profits to be made. Would we allow PSU's also to shut shop or increase prices? Therefore it is not correct to brand all PSU's as bad and all pvt sectors as good and efficient. Corporate frauds is prevalent in the pvt. sectors too and specifically in the mining sectors. Therefore to attribute all the wrongs on PSU's alone is not correct.


Umesh Sharma

Sep 25, 2013

The reason why the public sector undertakings do not perform to their potential despite the availability of resources as the cheapest cost and having a monopoly like situation is that the government is not concerned about its efficient management or result oriented operations.The chief officer is required to toe the line taken by the minister who may not have any technical knowledge about the undertaking.The very appointment is political and the CEO is least bothered about the functioning.Every one is concerned to make a fast buck,travels,perquisites etc.from the company.This is why the private sector can always function better than a government undertaking.



Sep 25, 2013

In India I feel that as high as 80% of people are involved in unproductive jobs, like banking, lawyers, courts, revenue,politicians, so called NGo's, MPs, MLAs, and their cronies, terrorists, thives, etc. If we limit this to 20% then the governance could be improved. Management institutes are the main culprit, they produce all above class of societies.



Sep 25, 2013

Government should have broken it and privatised before the IPO. Value of company created with tax payer money go down the drain. Don't know how much longer we will do this experiments.

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