Death by a thousand cuts; the wanton destruction of PSUs - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Death by a thousand cuts; the wanton destruction of PSUs A  A  A

2 JUNE 2012

It was in 1997 that the Government declared nine of its companies, called public sector undertakings, or PSUs, as 'navratnas', or nine jewels. The original list was BHEL, BPCL, HPCL, IOCL, IPCL, NTPC, ONGC, SAIL and VSNL. The idea was to give them autonomy to invest up to Rs 1000 crores in a project, without seeking Government's prior permission. If only the Government had, instead, stated that no bureaucrat or politician could make decision on behalf of the PSU's without prior permission of its Board of Directors, the story would have been vastly different.

Fast forward 15 years, and we see that of the nine jewels, two have been sold viz. IPCL and VSNL. Of the remaining, the three oil marketing companies, (OMCs) IOCL, HPCL and BPCL are bleeding, not because of what their managements did, but because the burden for subsidising petro products, which should correctly be entirely of the Budget, has partly fallen on them. This is so that the Finance Minister can, falsely, claim to have a lower budget deficit than is the actual case. Arthos, Porthos and Aramis, the three musketeers, are, in turn, reimbursed partly for the subsidy payouts by the Government, and partly by upstream companies ONGC and GAIL, into whose P&L the Finance Minister dips his hands.

Not satisfied with the cut of subsidy sharing, the Government then goes on to add another. Employees of PSUs are compensated based on 'performance', unmindful of the fact that 'performance' has been orchestrated by the Government. This, but naturally, demoralises them. For them, getting what they consider is due to them, becomes a constant struggle of pleading and grovelling.

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Consider how another navranta, ONGC, is being dealt a thousand cuts. It just declared its results for the year ended March 31, 2012, showing the highest ever turnover, profit and dividend. Something to cheer about, right?

Wrong. Although prices of crude oil (which ONGC discovers), or gross realisation, increased by $ 27.99 per barrel, net realisation after discounts it gives to the OMCs (as above) increased by only $ 0.95/barrel. This is because the Government, the majority owner of ONGC, increased the burden of subsidy borne by ONGC by $ 27.04/barrel. And the pay of ONGC employees is based on 'performance'.

In other words, whilst ONGC employees worked hard to discover oil and gas, and, of course, benefitted by rising crude oil prices, they will be judged on $ 0.95/barrel and not on $ 27.99.

What does this mean for minority shareholders?

The company declared a profit after tax of Rs 25,122 crores. This would have actually been doubled if it did not have to bear the subsidy burden.

So asking the navratna to bear the subsidy is unfair to its employees and to its minority shareholders.

It is also unfair, and completely myopic, for the country! This is because as the Indian economy grows, it will need more energy. There is only so much of India's own requirement that can be domestically procured, and companies like ONGC have to acquire energy assets abroad. For this they need both the cash flow that is eaten away sharing the subsidy burden, as well as the balance sheet size, which is whittled down because of it. ONGC has an ambitious capex plan to invest Rs 11 lac crores up to 2030, to help secure India's energy future.

Of the other original navratnas, BHEL is facing stiff competition from Chinese imports, but is being managed efficiently. NTPC is having problems relating to coal supply and quality and has decided not to sign a fuel supply agreement with Coal India, but to import coal instead. Coal production is a Government monopoly and has little incentive for increasing production or improve quality. SAIL's profits were down because of it.

As per an article in DNA car manufacturers have increasingly started using aluminium in auto parts, in place of steel. This is in order to reduce weight, thus improve fuel efficiency. This would, if it catches on, put more pressure on steel companies.

Amongst its various plans, ONGC also has plans to develop shale gas production. This gas is extracted via a process called fracking, which is thought, but not fully proven, to be environmentally damaging. It may, however, be less damaging than coal. The US has developed its shale gas reserves, which now contribute 29.4% of its energy mix, whereas use of coal has fallen over the decade, and is now 36.7%.

In India, however, we have a Government paralysed into inaction and ever cautious of being pro active. Oil and gas reserves being developed in the KG basin have seen a fall in output. The Ministry of Petroleum is having a dispute with Reliance, one of its operators, about whether or not the claim for capex ought to be allowed. Whilst the dispute drags on, we import oil and gas at far higher rates than those fixed for domestic output.

It is thus welcome news that, FINALLY, the Prime Minister has set up a committee under the head of PM Economic Advisory Board, C Rangarajan, to go into this dispute and to settle the terms of the production sharing contract (PSC) to avoid recurrence of such disputes.

Because of the scare of being hauled up, bureaucrats and politicians do not take decisions. This is a complete rudderless form of governance and an insane lack of leadership. POSCO, one of the world's largest steel producers, which wants to set up a steel plant in Odisha, has been waiting 8 years for environmental clearance, and has recently had to re work the project. However, GVK has got environmental clearance for its $ 10b. coal and rail project in Australia. This would add 4000 jobs, at peak, in Australia. People of Odisha are still waiting.

Politics comes before the nation. Lamentably.

Though not a navratna, Air India is another PSU that has been dealt a thousand cuts. For reasons best known to the then Civil Aviation Ministry, it was arm twisted into buying more aircraft than it could ever need, loading onto its balance sheet more debt than it could ever repay. To belatedly justify the fleet expansion, the other arm was twisted and a shotgun wedding with sickly Indian Airlines was arranged. Attempts to integrate the work culture of the two airlines have failed, resulting in constant strikes, and continuous pleas for extra funds. These are provided, widening the deficit. The only logical reason to keep pouring in money into a lost cause is because of the free rides and upgrades an airline under its control provides to senior Government people. Emirates Airways has now captured a 20% share of outbound flights.

Personal privileges come before the nation. Lamentably.

The same was the story of BSNL, once the largest telecom company in India. Its attempt to expand, in a big way, into cellular telephony, was blocked by legal disputes (being a Government company it was subject to writ petition).

The Government has been turning a Nelson's eye to the problems created for the economy by its own misgovernance. It has been maintaining, thus far, that GDP is rising in India.

Yes it is!! But its Gold, Dollar and Petrol that is rising, not gross domestic product. In fact GDP, the latter, dropped to just 5.3% in the March quarter, not a good sign. Where would strong GDP growth come from?

Manufacturing growth has been affected by various factors including high interest rates, policy flip flops and paralysis. Services growth has been affected by factors like weakness in Europe and USA, added to which are irritants like the disallowance of export benefits on software when teams go to client locations, on the specious plea that it amounts to body shopping and not software exports! This has apparently been reversed under instruction just last week, but it does take away executive time from the task of developing business in difficult environments to pacing the corridors of the tax department.

Agricultural production of food grains is high but there is no storage capacity for a lot of the food grain, which will, ultimately, rot in the open or be eaten by rats. (Question, should it be included in GDP if it is eaten by rats, or rots? Reader comments welcome). This year's kharif crop may be affected. The amount of rain required for planting has not come due to delayed monsoons. This, of course, is the fault of Greece!!

The things ailing our economy are self inflicted. They can thus be solved by good governance. Whether this governance would come from self realisation, or imposed by the electorate, is the question.

Last week the BSE-Sensex slid 252 points, all of it on the last day, to end at 15965. The NSE-Nifty dropped 78 to close at 4841.

The external environment is weak. Greece goes for a second election shortly and is quite likely to leave the Euro. Pressure on Spain is already starting and yields on Government bonds have risen to 7%, the level at which countries like Ireland and Portugal needed bailouts. The ECB has funds only enough for one Spanish rescue so they must get it right the first time.

China is also slowing down and the purchasing manager's index, a measure of confidence, is barely above 50. Brazil's growth is also slowing.

Under such a scenario, if our political leaders had the country's interest in mind, they would have got their acts together and collaborated to usher in sensible policies. If they do, a big if, a rally is possible.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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8 Responses to "Death by a thousand cuts; the wanton destruction of PSUs"
Jun 7, 2012
If one is confused (as our Govt. is) the best thing to do is
"not to do anything" so that one does not end with 'wrong or
right action'. All, (I moderate to say most of them) our Netas
whether political or industry are concerned only to see they
just carry on. The elected members are busy, whether in Gram
Panchyat or at centre, to ensure how much they can make
forgetting that when Tsunami comes nothing will be left with
them. I Prafulla Patel has done damage, why action is not
taken.Let him prove he is clean. He also can face the action
like Raja and others. As u allow time to pass, it becomes more
difficult. Anyway, it appears very hazy and difficult situation.
BJP and Left parties have clearly shown their inability to think
clearly clearly of what is good for the nation - whether it is
Bharatmata, India or Hindustan. Ad(wa)niji.
Jun 7, 2012
India is in the hands of fools mostly elected by uneducated mass, who have no clue who they are voting. We need a massive reform in the Constitution. Even the Constitutional name of India - "Sovereign Socialist Secular Democratic Republic of India" - is really confusing. When we say "Socialist" where is the question of including the word "Democratic"? When we say "Democratic" why do we need to include the word "Secular"? If the word “Republic” is included where is the necessity to include the words “Socialist”, “Secular” and “Democratic”? Why simply 543MPs (mostly criminals and corrupts) to determine the fate of 1.2billion people? . Like 
Nerkuppai Thumbi
Jun 5, 2012
The bureacracy has somehow escaped from detection of its 'contribution' or lack of it, in the PSUs' working. When Navaratna was conceived, it was expected that the technocrats of the PSUs would be allowed to run the companies, and the Government would lay down the long term policies only; but, the bureacrats good at back-seat driving, would not let go of their control easily. they interfere so much that the PSU has become a hybrid of a commercial enterprise and a Government Department, good for nothing Like 
Nerkuppai Thumbi
Jun 5, 2012

There are several angles to the petroproducts pricing and the "bleeding" caused to the OMCs and ONGC.

Firstly, they did not pay the licence fees or rents or royalties that a private sector enterprise would have paid for being in a comparable position. The method of arriving at the "loss" in selling diesel, petrol and LPG seems to be very skewed; otherwise, there would be no explanation for the "profits" they are declaring every year: other products being minor and much less in quantity, any profit should be coming from the major products only. What is urgently required is to (i) review the process of "fixing" cost and return (ii) the efficiency of the operations of the OMCs is to be audited and (iii) whether the salaries and allowances of the employees have been reflecting the efficiency and diligence.
Jun 2, 2012
You seem to indicate that the loss borne by ONGC is unfair to it's employees. Why ? ONGC belong to all Indian Citizens , not just ONGC employees. It is Indian Parliment's decision to subsidize fuel and make ONGC bear the loss. What is wrong with that. The other option for the government would have been to increase taxes. If the ONGC employees dont like it, they can a climb a tree and look for other jobs. Like (1)
R Srinivasan
Jun 2, 2012
As usual you have hit the nail on the head..but what is the use..the nail gets bent in the minds of the bureaucrats and politicians who unfortunately control the levers of power and can cause more harm than good under the present dispensation. I think the real problem is that politically our country has not matured enough to make politicians believe that they can make economics as the main focus for political decisions. But in any democracy when it comes to electoral politics economics takes a back seat when demographics becomes the basis for electoral victory..and good politics and good economics take back seat..... Like (1)
Jun 2, 2012
The bureaucrats in connivance with politicians are bleeding the Navratna PSUs for their short-term interests and due to the general policy paralysis. Like (1)
Jun 2, 2012
The article is absolutely correct that the wounds and economic plunge are self inflicted. This govt does not perform and actually misgoverns. The approach was brazen loot followed by denial and now being caught in scams total inaction. Further, the bureaucracy is taking care of its privileges and the joke of austerity is foisted on the nation. If govt is sincere about austerity why not abolish wasteful expenses like MPLADS( annual outlay of more than Rs.4000 crores),security cover for all and sundry and allowing big diesel cars in subsided diesel prices in narrow Indian roads. the 10% cut in non plan expenditure is a joke where the major expense heads are spared. The bloating babudom was not pruned though based on such a premise 40% salary hike was given to govt servants. This is govt for foreign interests run by bureaucrats and looters. It is a tragedy that we have to live with it for 2 more years. In no other country after so many scams the govt would have survived. We are unfortunate to have an equally bad opposition parties Like (1)
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