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PSUs: Sell, Sell, Sell - Views on News from Equitymaster
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  • Feb 22, 2001

    PSUs: Sell, Sell, Sell

    There are 235 central public sector units (CPSUs), employing a total capital of Rs 2.7 trillion. Not surprisingly, 106 of these units are loss making. The reasons are not far to seek.

  • More on the financial performance of PSUs

    The purpose of setting up the public sector was to complement the efforts of the private sector in industrializing the nation and to take up strategically sensitive activities (like defence). However somewhere down the line, the public sector became synonymous with monopolies with special privileges. More often than not, the effect was detrimental to the private sector. Take for example, the telecom service provider, the Department of Telecommunications (DoT). The monopoly (atleast till the time it lasted) hurt the society in two major ways. First, cost of the services were very high, be it local, long distance or international telephony services, as users had to bear the cost of its inefficiency. Second, the DoT was not able to service the market and at times customers had to wait for years to get a new connection. Since then, however, the situation has dramatically improved. The benefits of deregulation (which seem to be more apparent by the day) are for all to see.

    One of the key reasons for the dismal state of the public sector is that it is grossly over staffed i.e. 23.5% of all work force is employed by the public sector (including the various governments). Given their monopoly status, PSUs were sheltered from competitive markets. As a result, once deregulation was ushered in and the economy was opened up, these over staffed organizations failed to change. This resulted in a large number of them going in the red. However, it is not that all public sector units failed to change. Amidst this ‘looked down upon’ group there are few gems, if one may say so. Bharat Petroleum Corporation Limited and National Aluminium Company definitely top the list of leading public sector units.

  • Live quotes of key public sector units

    The call the government has to make (and it has been attempting to do so over the last decade) is whether or not the public sector has outlived its purpose. Okay, in defence there may be a case for government control, but surely not in the manufacturing of aluminium (National Aluminium Company*) and steel (SAIL). Or in software and hardware maintenance (CMC). And surely not in hotels, airlines and autos! Indeed, until recently, the government was even engaged in the manufacture of bread! Leaving aside the strategic issue, the government sector even fails on financial parameters.

    Take for example the steel sector. SAIL, a public sector giant, has had to be bailed out by the government for having run up large losses. On the other hand, Tata Steel has grown to become one of the lowest cost producers of steel in the world. And that too by operating in the same environment! Surely, the politicians are wise enough to understand that something was wrong with the government controlled SAIL. To quote another example, Reliance Petroleum has grown to become the second largest refining company in the country, and that too within half a decade of its coming into existence. By the way, Indian Oil Corporation (IOC), the largest refining company, has been in existence for over 40 years! Maruti Udyog is another example of the government having gone wrong.

    The government surely seems to have gone wrong as far as the public sector (or atleast a large part of it) is concerned. However, what is damning is that the government is still dithering on the issue of giving up control of these organisations.

  • More on PSU disinvestment

    There are ample reasons for the government to sell off its stakes in most of the public sector units apart from the fact that these units are basically inefficient and incur losses. Consider this. If the government were to sell off its stake in the PSUs it would be able to raise resources to fund its large deficit (in excess of Rs 1,000 bn in FY01BE). Lower deficits would mean lower borrowings by the government. This would result in a more moderate interest rate environment. In turn lower interest rates will benefit investment activity, which in turn would boost incomes and efficiency in the country. A virtuous circle, indeed.

    Just to take an example, if the government were to go ahead with its plans to sell 25% of VSNL to a strategic partner, it would raise Rs 30 bn (an estimate) for its stake. This would amount to 3% of the fiscal deficit. And this is just one PSU. One can imagine the impact of a successful disinvestment of holdings in several such PSUs. But before you begin counting, factor in the politician. And don’t be surprised if the counter fails to break the zero level.

  • A 51% stake in Bharat Aluminium has recently been sold to the Sterlite Group.



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