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Restructuring of SLPEs in India

Between 1991-92 and 2002-03, state level public enterprises continued to incur net losses and showed the chronic tendency of accumulating losses. The paper provides an overview of SLPEs in India, in terms of various financial parameters, followed by a discussion of the privatisation scenario and the different practices of states in this regard. The differentiating features of the privatisation of SLPEs vis-à-vis central public enterprises are outlined to highlight the challenges states face in retaining their portfolios of SLPEs.

Restructuring of SLPEs in India

A Macroanalysis

Between 1991-92 and 2002-03, state level public enterprises continued to incur net losses and showed the chronic tendency of accumulating losses. The paper provides an overview of SLPEs in India, in terms of various financial parameters, followed by a discussion of the privatisation scenario and the different practices of states in this regard. The differentiating features of the privatisation of SLPEs vis-à-vis central public enterprises are outlined to highlight the challenges states face in retaining their portfolios of SLPEs.

R K MISHRA, J KIRANMAI

I Introduction

S
tate level public enterprises (SLPEs) are an important component of the public enterprise system in India. According to the report submitted by the Study Group on Reforms on State Public Sector Undertakings [Kurian et al 2002:vii-xiii] set up by the Planning Commission in 2002, 747 SLPEs had a total investment of Rs 1,97,105 crore as on March 31, 1999.The investment in these enterprises as per the Institute of Public Enterprise (IPE) database increased to Rs 3,06,493 crore in 2002-03 [Mishra et al 2004]. The contribution of the SLPEs to GDP is about 5 per cent as compared to 10 per cent by the Central Public Enterprises (CPEs). The role of SLPEs can be assessed from the total turnover as a percentage of the gross state domestic product (GSDP). There was no consistent pattern among states and this percentage generally varied from 1 to 17 per cent of GSDP, with most states falling in the range of 6 to 15 per cent. Although SLPEs constitute 90 per cent of the total investment of CPEs, they are more than four times the number of CPEs. The average investment in an SLPE is 20 per cent of a CPE. However, the SLPEs in terms of resource use and control depict a different picture as compared to their counterparts in the central sector, in that they directly impact the functioning of the state economies and have a greater exposure to state political systems. SLPEs are characterised by weak middle management systems as they do not have on their rolls the requisite number of professionally qualified managers. The top management in these enterprises comprises mostly of an IAS chief executive officer and nominees of the state governments drawn from civil services, defeated politicians and the political party in power. The financial performance of the SLPEs bears the brunt of these shortcomings.

Between 1991-92 and 2002-03, SLPEs continued to incur net losses and showed the chronic tendency of accumulating losses. This macro analysis provides in the beginning an overview of the SLPEs in India, in terms of various financial parameters, followed by a discussion of the privatisation scenario and the different practices of states in this regard. The differentiating features of privatisation of SLPEs vis-avis CPEs have been outlined to highlight the challenges that various state governments have to meet in reconsidering the retention of their portfolio of SLPEs. The conclusion provides inputs to formulate an appropriate policy in this regard.

II Financial Performance and Fiscal Impact of SLPEs

Typology

The sectoral distribution of the various SLPEs categorises these enterprises into manufacturing, financial, promotional, trade and service, utility and welfare sectors. Table 1 shows that there were 1,068 SLPEs of which 560 were manufacturing, 176 were promotional, 128 utility, 86 were welfare, 76 were financial and 42 were trade and service enterprises. In terms of the numerical distribution, manufacturing enterprises lead the tally, followed respectively by promotional, utility, welfare, financial and trading and services enterprises. Manufacturing enterprises dominated the scenario because the various state governments emulated the central government in giving a fillip to industrialisation. The trading and service enterprises received encouragement to provide an export thrust and create a suitable infrastructure of services at the state level. The promotional enterprises were set up to cast social activities with an economic tinge at the state level. The welfare enterprises were a new breed of SLPEs set up to provide economic support to the backward classes of society, comprising of scheduled castes, scheduled tribes, minorities, women and the handicapped. On the whole, Andhra Pradesh, Assam, Gujarat, Karnataka, Kerala, Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal showed a preference for manufacturing, promotional and financial enterprises. Maharashtra, Kerala and Uttar Pradesh set up a large number of welfare enterprises. The preference for economic and social infrastructure might have been responsible for the respective choice. Andhra Pradesh, Delhi, Karnataka, Orissa, Tamil Nadu and West Bengal have a major share in the tally of utility sector enterprises. Utility enterprises comprise of state road transport corporations and the unbundled power sector enterprises.

Total Investment

The total investment comprises of the sum total of investments in the form of equity and debt capital by state governments and others, which includes the central government, holding company and financial institutions. The total investment in these enterprises for all the states taken together increased from Rs 77,730 crore in 1991 to Rs 3,06,493 crore in 2002-03. The lion’s share, about 85 per cent, of total investment belongs to utility enterprises. The major portion of total investment was shared by Andhra Pradesh, Delhi, Gujarat, Karnataka, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. The compound average growth rate (CAGR) of total investment for the period 1990-91 to 2002-03 was 12.5 per cent. Investment grew at a slower pace during the period 1990-91 to 1996-97. The growth was much faster during the period 1997-98 to 2002-03. In 1997-98, the rate of growth of investment was high as it was the closing year of the Eighth Plan. In 1998-99, the rate of growth in investment maintained a high tempo as it was the opening year of the Ninth Plan.

Capital Employed

Capital employed comprises of the sum total of investment in the net fixed block and working capital. Net fixed assets indicate the investments in gross fixed assets minus accumulated depreciation. The investment in working capital represents the excess of current assets over current liabilities. Capital employed is also represented by the sum total of investments arising out of equity, long-term debts and internal resources. The investments by way of net fixed assets and working capital are financed by debt, equity and internal funds. The capital employed was Rs 73,300 crore in 1991. It increased to Rs 1,79,630 crore in 2002-03. The CAGR for capital employed was 6.74 per cent during the period under reference. The capital employed figure was about 50 per cent of the total investment, pointing to the fact that the SLPEs system

Table 1: SLPEs Category-wise, All India

Manu-Finan-Promo-Trade Utility Welfare Total facturing cial tional and Service

Andhra Pradesh 14 5 6 3 7 1 36 Arunachal Pradesh 2 1 2 – – – 5 Assam 28 2 62 2 242 Bihar 40 2 42 4 254 Chhattisgarh –– – – – – – Delhi 12 11 9 115 Goa 634 2116 Gujarat 24 6 7 4 4 449 Haryana 10 2 4 2 7 328 Himachal Pradesh 7 2 3 2 3 4 21 Jammu and Kashmir 12 5 2 – 2 2 23 Jharkhand –– –– – –– Karnataka 36 2 21 3 12 5 79 Kerala 77 3 12 4 3 10 109 Madhya Pradesh 13 1 6 2 3 9 34 Maharashtra 30 4 16 1 4 11 66 Manipur 11 1 2 – 1 116 Meghalaya 5 1 6 1 – –13 Mizoram 31 1– 1 –6 Nagaland 31 2– – –6 Orissa 45 5 7 2 6 267 Pondicherry 5 – 3 1 2 11 Punjab 33 2 7 5 5 153 Rajashtan 12 3 4 1 9 –29 Sikkim 42 21 1 111 Tamil Nadu 32 6 14 3 25 5 85 Tripura 32 3– 1 –9 Uttar Pradesh 53 5 21 2 7 16 104 West Bengal 51 7 10 1 9 3 81 Total 560 76 176 42 128 86 1068

was not organic and required artificial respiration from time to time. The states where this phenomenon had a forceful presence included Assam, Delhi, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Maharashtra, Orissa, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal. Rajasthan turned out to be an exception, indicating that viable and self-liquidating project management was the strength of the top management of SLPEs and the policy-makers in the state government.

Net Worth

The net worth is derived by subtracting intangible assets, accumulated losses and fictitious assets from paid-up capital, and reserves and surpluses. The net worth was Rs 11,053 crore in 1991. It increased to Rs 44,631 crore in 2002-03. Net worth showed the trend to increase manifold; it turned out to be a shade lower than 7 per cent of the total equity, which points to a negligible growth in net worth and the erosion of shareholders’ basic capital in terms of real investment prices. The equity erosion occurred in Assam, Delhi, Goa, Kerala, Maharashtra, Mizoram, Meghalaya, Nagaland, Pondicherry, Sikkim, Tripura, Uttar Pradesh and West Bengal. These were precisely the states where the subsidies accounted for the major portion of losses incurred.

Total Revenue

This represents the top line of an enterprise, which provides a cushion against contingencies and the cover to meet expenses. Revenues should grow at least at a CAGR of 10 per cent to set off the loss caused by the real rate of inflation and meet the challenges of productivity arising out of technological advances and reorganisation of business processes. The total revenue was Rs 36,112 crore in 1991. It increased to Rs 86,284 crore in 2002-03. This amount should be at least three times of the investment. The private sector multiple is five times. The multiple in the case of private sector enterprises abroad is eight times. The CAGR for total revenue for the period 1990-91 to 2002-03 was 6.93 per cent. Total revenues turned out to be a discouraging figure of about 40.6 per cent of investment in 199091 and 25 per cent in 2002-03. Total revenue comprises of the income from mainstream operations and other yields. The total revenue scenario speaks of many untold facts concerning the lack of marketing drive, quality consciousness and soft targeting. The states which earned more than average on a rupee of investment were only handful. In 2002-03, such states included Gujarat, Madhya Pradesh, and Tamil Nadu. All states in the country face the challenge of unlocking the vast untapped value in SLPEs.

Net Profits after Tax

Net profit after tax comprises of profits net of all expenses, interest and taxes. They determine the scope for and extent of allocations to reserves, dividends and surpluses. Net profit after tax is the “be all and end all” of business. It is not only the topline that is important for a business but it is also essential to ensure the bottom line is positive. Net profit after tax was Rs -938 crore in 1991. It fell to Rs -6,997 crore in 2002-03. Net profit making helps in updating technology, it contributes to an organic growth and provides a unified direction. It adds to building up reserves and surpluses and higher earnings per share. Net profit making is the core element of corporatisation which takes place through the concept of equity participation, limited liability, setting up strategic business units and practising responsibility accounting. The operationalisation of these concepts creates a harmonious internal environment wherein different units/product groups and services compete with one another to improve their efficiency. Profitability strikes an optimum trade-off between demand side factors (revenues) and supply side factors(costs) in a competitive regime.

Net profits should at least be equivalent to the prime lending rate or 10 per cent of the revenues earned, which is the benchmark prescribed in financial management. Net profits for all the states taken together for the various years of the study, except 1994-95 and 1995-96, were negative. On an average, net losses, for all the states taken together, of the revenues earned were -2.7 per cent in 1990-91, which shot up to -8.0 per cent in 2002-03. Delhi, Gujarat, Haryana, Kerala, Maharashtra, Punjab, Uttar Pradesh and West Bengal have been major net loss makers during 2002-03. The net losses incurred by these states not only wiped out the total profits of profit making states but also were responsible for the phenomenon of loss making.

Accumulated Losses

The story of SLPEs is one of accumulating losses. The accumulated losses of SLPEs almost doubled from Rs 10,099 crore in 1991-92 to Rs 21,570 crore in 2002-03. The loss leaders comprise Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Delhi, Goa, Gujarat, Kerala, Jammu and Kashmir, Karnataka, Orissa, Pondicherry, Sikkim, Tamil Nadu, Uttar Pradesh and West Bengal. One of the reasons for the accumulated losses was an uncongenial debt equity ratio which was 4.27 for all the states taken together in 1990-91, decling gradually to 2.84:1 in 2000-03. This however resulted in no favourable consequence as most of the states had SLPEs incurring either cash losses or losses before interest and taxes.

Fiscal Impact on State Finances

The financial performance of SLPEs has a great bearing on the fiscal health of state governments. This impact could be explained in terms of two measures: Total impact on state finances (TISF) to states’ own tax revenues (TRS) ratio and gross fiscal impact on state finances (GFISF) to states’ own tax revenues (TRS) ratio. TISF could be shown in terms of annual outflows (sum of outflows resulting from change in state equity and debt and state subsidy and grants to SLPEs) plus the opportunity cost of investments in SLPEs. GFISF could be computed by adding the value of guarantees outstanding given by the state to the SLPEs during the year, to the value of TISF. GISF includes total outflows due to the increase in state investments in SLPEs, state subsidies and loan waivers given during the year, imputed opportunity cost of state investments and additional guarantees extended to SLPEs during the year.

It is quite evident that finances of SLPEs substantially impacted state finances. TISF averaged over 31 per cent of states’ own tax revenues, whereas the figure was nearly 120 per cent in the case of GFISF, with outstanding guarantees included. The outstanding guarantees have become a great threat to the financial soundness of the states for they are skyrocketing. They were in the order of Rs 1,01,343 crore in 2000-01. Subsidies and grants to these enterprises were about Rs 16,000 crore during the same year. The Ninth, Tenth and Eleventh Finance Commissions voiced their concern about the adverse impact on state finances due to the working of the SLPEs. However, the state governments have not been able to arrest the trend. Both the managerial and non-managerial factors retarded their financial performance. These varied from sub-optimal project management, deficient capital budgeting and procurement systems to ineffective working capital management, unsuitable debt-equity ratio and absence of enterprise specific costing systems. The governing boards of these enterprises were packed by official nominees. As most of these enterprises are unlisted, they continue to escape from the application of Clause 49 of the Securities and Exchange Board of India Code on Corporate Governance, 2000 [SEBI 2000].

III Privatisation Scenario

This section includes an analysis of the process of privatisation, privatisation policy, privatisation mechanisms, privatisation techniques, social safety nets, privatisation impediments and privatisation successes.

Process of Privatisation

The due diligence process for privatisation of the SLPEs is as follows:

Step 1: The government gives its approval for the privatisation/ sale of an enterprise.

Step 2: The department of public enterprise (DPE) invites expressions of interest (EoI) through open advertisement for the selection of an advisor to assist in implementing the disinvestment decisions. Concurrently, valuation of the SLPE is undertaken in accordance with standard national and international practices.

Step 3: The Advisors are appointed, with the approval of the restructuring committee.

Step 4: Advisors assist the DPE in issue of advertisement for EoI from prospective buyers.

Step 5: The prospective buyers are shortlisted, using the prequalification criteria set out in the EoI advertisement.

Step 6: The information memorandum is prepared by the advisors, in consultation with the concerned SLPE; the memorandum is then given to the shortlisted prospective bidders, after they enter into a confidentiality agreement.

Step 7: The draft sale agreement and other legal agreements are prepared by the advisors and given to the shortlisted bidders to elicit their response.

Table 2: Fiscal Impact, All States

(in Per cent)

Year TISF/TRS GFISF/TRS
1996-97 35.76 115.54
1997-98 37.45 113.50
1998-99 38.19 114.48
1999-00 14.81 107.41
2000-01 30.20 129.97
2001-02 30.91 137.42
Average 31.22 119.72

Source: P K Chaubey and Pranab Banerji, Study of State Public Undertakings and State Road Transport Undertakings (SRTUs), Indian Institute of Public Administration, New Delhi Vol 1, 2004, p 26.

Step 8: The prospective bidders undertake due diligence of the SLPE and hold discussions with the advisors, government, and management of the SLPE for any clarification.

Step 9: Based on the response received from the prospective bidders, the draft sale agreement and other legal agreements are finalised, vetted by the law department, approved by the cabinet committee on disinvestment (CCD) and then sent to the prospective bidders for the invitation of final binding bids (Technical and Financial).

Step 10: After examination, analysis, evaluation and further negotiation, if necessary, the recommendations of the interdepartmental core group are placed before the CCD for the final decision regarding selection of the preferred bidder, signing of necessary legal agreements, and other ancillary issues.

It is clear that the privatisation process is very slow moving and cumbersome. The implementation mechanism is too complex at the central level. Some state governments have modified the mechanism adopted by the centre to their requirements, giving due consideration to factors such as transparency and speed. The cumbersome privatisation process adopted by the central government and various state governments in India has delayed the implementation of the privatisation programme and undermined the revenue potential from privatisation.

Privatisation Policy

As noted earlier, there has been a proliferation in the number of SLPEs and the investments therein have grown phenomenally. This has compelled state governments to have a relook at their SLPEs portfolio to decide which enterprises they wanted

Table 3: Status of Privatisation of SLPEs, March 31, 2003

State Number of Number of SLPEs No of Loss-Making Enterprises Privatised Enterprises

Andhra Pradesh 128 30 25 Arunachal Pradesh 5 – – Assam 42 – 36 Bihar 54 – 0 Delhi 15 – 3 Goa 16 – – Gujarat 49 3 24 Haryana 28 1 16 Himachal Pradesh 2 1 – 1 3 Jammu and Kashmir 2 3 – 1 6 Karnataka 79 – 38 Kerala 109 – 59 Lakshadweep 1 – – Madhya Pradesh 34 – – Maharashtra 66 – 44 Manipur 16 – – Meghalaya 13 – 10 Mizoram 6 – 4 Nagaland 6 – 3 Orissa 67 1 10 Pondicherry 1 1 – 5 Punjab 53 1 25 Rajasthan 29 1 11 Sikkim 11 – – Tamil Nadu 82 – 47 Tripura 9 Uttar Pradesh 104 – 68 West Bengal 81 – 62 Total 1,158 37 519

Note: “ -“ means no privatisation.

Source: Mishra, R K, CH Kumari, Lakshmi and J Kiranmai, Institute of Public Enterprise, Database on SLPEs. Hyderabad, 2004.

to retain and which ones they wanted to privatise, wind-up or restructure. While some states are open to both privatisation and/or restructuring, there are others such as Kerala, West Bengal, Tripura and Bihar which rejected the privatisation option and decided to go in for only restructuring/closure including reference to Board for Industrial and Financial Reconstruction (BIFR). Some states such as Madhya Pradesh, Karnataka and Kerala have announced detailed policies regarding the SLPEs portfolio. The government of Maharashtra in its industrial policy resolution announced the intention to privatise SLPEs.

Privatisation Mechanism

The state governments have preferred to set up expert committees to advise them about retention of the SLPEs portfolio. The government of Kerala appointed the Vijayachandran Committee and brought out a white paper on SLPEs in Kerala. The Institute of Public Enterprise undertook a study on behalf of the Asian Development Bank to recommend the portfolio for retention to the government of Madhya Pradesh. The S V Raghavan committee made specific recommendations for closure, privatisation and restructuring of SLPEs in Tamil Nadu. Besides Kerala, which set up independent machinery to handle the restructuring of SLPEs, Punjab, Andhra Pradesh, Karnataka, Maharashtra, Orissa and UP also set up independent machinery on restructuring/privatisation/disinvestment.

Privatisation Techniques

The state governments adopted different techniques ranging from cold privatisation (i e, non-privatisation reforms to transfer of ownership and closure of SLPEs). Kerala, West Bengal, and Tripura preferred cold privatisation whereas Punjab, Haryana, Karnataka, Orissa and Andhra Pradesh opted for transfer of ownership through trade sale, divestment of majority stake and sale of equity by private placements. Tamil Nadu has preferred mergers and amalgamations.

Social Safety Net

Although the various states realised the significance of having a social safety net in the wake of privatisation, they could not establish an adequate mechanism to deal with this issue chiefly because of the shortage of funds. However, Punjab was the first state to set up a state renewal fund on the pattern of the National Renewal Fund. Tamil Nadu, Maharashtra, Rajasthan, Karnataka, Madhya Pradesh, took their own initiatives in this regard. The National Renewal Fund did not extend any assistance to the states.

Privatisation Impediments

Privatisation and restructuring of SLPEs was fraught with a number of serious problems. Some state governments did not have a comprehensive understanding of the technicalities and accountability which formed an important part of the privatisation process. The adjustment of the labour force through a voluntary retirement scheme (VRS) emerged as a complex issue. There were no arrangements put in place for a pre-investigation audit of all the activities concerning privatisation/restructuring, in the absence of which a lot of witch-hunting took place. Political ideology also acted as an obstacle in the case of certain states. The location of states, in particular the north-eastern states, also obstructed privatisation.

Privatisation Success

The political ideology and support of the chief minister of states such as Andhra Pradesh, Karnataka, Punjab, Maharashtra and Kerala created a conducive climate for privatisation. Public opinion was significantly moulded by the opinion of the state chief ministers and policy-makers. The effectiveness of the machinery created for privatisation lent further support to this phenomenon. The appeal of the enterprise and the readiness of the private sector, coupled with the negotiating skills displayed in the sale talks, also contributed to the success of privatisation. Some states opened a dialogue with the employees of the enterprises that were on the privatisation list and were able to weaken their resistance or draw their support. Another very important factor responsible for privatisation was the preference of the private sector to buy/take over manufacturing enterprises. The size of SLPEs in terms of investment also weighed as an important consideration. These enterprises were mostly in the investment category of Rs 50-Rs 60 crore. Some states did not insist on full payment of privatisation proceeds and allowed the buyers to pay in instalments spread over two to four years. They also made the buyers agree to not effect immediate retrenchment.

Table 3 provides the state-wise details of the privatisation of SLPEs in India. Andhra Pradesh, Kerala and Uttar Pradesh have the largest number of SLPEs. However, Andhra Pradesh clearly emerged as the privatisation leader, followed by Gujarat. Since then, Andhra Pradesh has continued to lead the other states. Uttar Pradesh, Karnataka and West Bengal have also been active in this area.

IV Privatisation Practices

Andhra Pradesh

The Andhra Pradesh government appointed a committee to report on the restructuring of SLPEs. Known as the Subramanyam Committee (1995), it had two non-official members. The commissioner of public enterprises was a member and convenor of the committee. The committee recommended nine SLPEs for closure, two enterprises for 100 per cent disinvestment, 10 enterprises for partial disinvestment and restructuring, two for restructuring and five for cost reduction and re-orientation. The committee’s recommendations are under implementation.

A three-tier machinery consisting of the department of public enterprise, implementation secretariat and cabinet sub-committee on privatisation, was evolved to effect disinvestments. As a part of economic restructuring in the first phase, the government focused on 12 small and medium SLPEs including some cooperative mills, whose restructuring and privatisation did not involve complex institutional and social issues. The Adam Smith Institute (ASI) was appointed as the consultant.

The government also launched a safety net project for the redressal of social grievances. During the implementation of phase I, seven more SLPEs were added. In phase II, covering a period of five years between 2001 to 2005, 68 SLPEs were identified for privatisation. It is, however, interesting to note that Andhra Pradesh emerged as a leader in privatisation in the mid-1980s by the sale of Allwyn Nissan and later Hyderabad Allwyn.

Bihar

The S C Jha Commission (2002) on Bihar’s state finances, suggested privatisation and restructuring of most of its SLPEs. The commission observed that one of the noticeable features of Bihar’s poor financial management is the non-performance of a large number of state-owned corporations and companies. They have continuously added liabilities and financial burdens, on the state; the returns on their borrowings and investments have have turned out to be nil or negative. The total estimated investment in the 50 SLPEs of Bihar was Rs 2,000 crore. Their accumulated losses stand at Rs 586 crore. Most of the SLPEs are entirely defunct. They are surviving on financial life support from the state government. The Jha Commission has suggested liquidating the companies and using the proceeds to settle liabilities. The Bihar government has initiated liquidation proceedings for several SLPEs but only on paper.

Gujarat

Gujarat constituted a High Level Committee (HLC) (1994) to formulate broad guidelines in this regard. On the recommendation of the HLC, the state government formed a standing committee (1995) under the chairmanship of the chief secretary to formulate general principles, broad guidelines and a modus operandi to be followed for the disinvestment, privatisation, winding up and restructuring of SLPEs. The standing committee submitted its recommendations in January 1996 which were approved in principle by the cabinet. The Gujarat government approved a Comprehensive Public Sector Restructuring Programme (PSRP) and it turned out to be one of the most successful state governments in winning the confidence of the workers in working out mutually agreed schemes for closure of non-core enterprises. The government decided to set up a social safety net and a state renewal fund with a substantial budgetary provision. As part of the safety net, Gujarat has made elaborate arrangements for counselling, retraining and redeployment of workers with financial support from the Asian Development Bank (ADB).

Haryana

Haryana set up a High Power Cabinet Sub Committee (2002) for public sector restructuring. Six rice mills and one mill owned by the Haryana State Cooperative Supply and Marketing Federation have been closed. A food and fruit processing plant owned by Haryana Agro Industries Corporation was closed as a measure of reform.

Karnataka

The Karnataka government set up the Linn Committee (1996) to advise on the privatisation, deregulation and merger of SLPEs and later set up a Public Sector Restructuring Commission (2000), headed by P Padmanabha as full time chairman and two part-time expert members. The commission has submitted a report since then on the restructuring of 15 PSUs and a policy on public sector reforms and privatisation has been brought out by the Karnataka State Bureau of Public Enterprises. The policy document also outlines institutional mechanisms for implementation. The Karnataka government has also structured a voluntary retirement scheme which is similar to that being adopted by the government of Kerala.

Kerala

Kerala had 111 SLPEs of which 63 were manufacturing enterprises. The SLPEs employed 53,270 personnel. An Enterprise Reforms Commission (ERC) was set up to have a relook at the portfolio of SLPEs and the recommendations of the Kerala Industrial Revitalisation Fund Board (KIRFB). KIRFB functions through the Restructuring and Internal Audit Board (RIAB). RIAB evolved a seven-fold categorisation of SLPEs for restructuring and disinvestment. Group I enterprises with a negative net worth and obsolete product range were identified for closure. Group II enterprises with a negative net worth and incurring continuous losses due to operational reasons, were to undergo a comprehensive restructuring exercise to attract private investments. Group III enterprises with a positive net worth but incurring losses were proposed to be revived and made attractive for private investments. Group IV enterprises with a positive net worth and good record of profit earning were proposed to be further strengthened by private participation and accessing capital markets. Group V enterprises consisting of social enterprises were proposed to be retained in the state sector with budgetary support. Group VI enterprises comprising public utilities were proposed to be monitored by the ERC and retained in the state sector with the cost burdens to be passed on to the consumers. Group VII enterprises consisting of developmental and infrastructure agencies were to be examined on a case-by-case basis for their continuation in the state sector.

Maharashtra

The Maharashtra government constituted the Maharashtra Board for Restructuring State Enterprises (MBRSE) in August 2001. In January 2002, the state finance department identified 13 of the state government’s 65 public sector units to be referred to the MBRSE. Of these, six have been referred to the board so far. These are Maharashtra Land Development Corporation (MLDC), Ahmednagarbased Chitale Distillery and Mafco, Haffkine Biopharmaceutical Corporation, Maharashtra State Road Transport Corporation (MSRTC), and Maharashtra Fisheries Development Corporation (MFDC). The board has recommended closure of MLDC, privatisation of Chitale Distillery and restructuring of MAFCO, MSRTC and MFDC. It has returned to the government its proposal to restructure HBC because any restructuring was to entail fresh infusion of capital and the Maharashtra’s State Enterprises (Restructuring and Other Special Provision) Act, 2000, does not permit this. The board asked the state government to refer HBC to it once again for privatisation. Other SLPEs identified but not referred to the board included Meltron, nine textile mills of Maharashtra State Textile Corporation (MSTC), Konkan, Vidarbha and Marathwada Development Corporations and Maharashtra Scooters, which falls under the Western Maharashtra Development Corporation (WMDC). In case of Maharashtra Scooters, the government is in talks with Bajaj Auto for the sale of 27 per cent of its stake in the company. Some other enterprises likely to be referred to the board included Maharashtra State Farming Corporation (MSFC), Goregaon Film City, and Kolhapur Film City.

Madhya Pradesh

Madhya Pradesh embarked on an Integrated Public Resource Management Programme (2001) under which integrated public enterprises reform was envisaged, with loan and technical assistance grant from the ADB. As part of the reforms, the government proposes to strengthen SLPEs in which government ownership is required to meet public purposes, close down those which are chronically sick and loss-making, restructure and divest the remaining enterprises to achieve greater efficiency, increase market discipline and have a wider dispersion of ownership. Accordingly, an empowered committee, headed by the chief secretary to the government and supported by a technical secretariat, was set up. It was also decided to transfer the responsibility of restructuring SLPEs from the administrative departments to the department of public enterprises, in order to accelerate the reform process.

Orissa

Orissa set up a cabinet sub-committee (1996) under former deputy chief minister which suggested closure and privatisation of certain units. Orissa availed financial assistance from the Department for International Development (DFID), UK for implementing the reform programme.

Punjab

Punjab set up a Disinvestment Commission in January 2001, which submitted its draft report in June 2002 that is now under consideration. The following principles were followed for recommending the restructuring, disinvestment and closure of SLPEs: a) strategic and viable SLPEs be retained; b) strategic but non-viable SLPEs be retained if their viability can be restored by necessary measures like outsourcing of activities; c) non-strategic SLPEs be disinvested either by direct or strategic sale and SLPEs to be disinvested be freed from the administrative departments by allowing the implementation authority to take over their management; d) the safety net of the employees of SLPEs be rationally chalked out through an adequate compensation package/retraining for deployment; e) non-strategic SLPEs, which cannot be revived and in which no expression of interest by private parties is forthcoming, be liquidated and the management of the SLPEs be transferred to Punjab State Asset Management Authority for speedy disposal of assets. The Punjab State Asset Management Authority should be set up through legislation. The Commission recommended the following process for disinvestment:

  • (i) Each SLPE should be examined on its merits.
  • (ii) Management, labour and the general public should be given an opportunity of being heard.
  • (iii) Privatisation should not be confined only to loss-making units

  • (iv) VRS/retrenchment/compensation, cost of retraining, for redeployment, and retiring of long-term debts of SLPEs should be the first, second and third charge respectively on the sale proceeds from SLPEs to be disinvested.
  • (v) The proceeds from disinvestments should be placed in a disinvestment fund.
  • The government had set up a Directorate of Disinvestment to process the Disinvestment Commission’s recommendations or come up with ‘suo moto’ reports in consultation with the commission. There is a three-tier structure to deal with disinvestments. There is a cabinet committee on disinvestment chaired by the chief minister. There is the core group of officers chaired by the chief secretary. The disinvestment directorate is the implementation agency. Punjab has put five SLPEs on fast track disinvestment. These included Punjab Tractors, Punjab Alkalis, Punjab Communications, Punjab Tourism Development Corporation and Electronics Systems Punjab. The advisors were appointed in case of six of these five SLPEs. A time frame of three to eight months was conceived to complete disinvestments in these enterprises. The Punjab government plans to use both the financial and strategic sale mode to privatise its SLPEs.

    The draft report of the disinvestment commission has covered 29 SLPEs with their 11 subsidiaries and nine apex cooperative institutions. The state has provided total resources of Rs 8,430 crore out of which Rs 3,396 crore was equity investment in these enterprises as on March 31, 2001. The equity investment in 1987-88 was Rs 229 crore. The government received only Rs 8 crore as cumulative dividend till March 31, 2001 from the 29 SLPEs covered by the report. As on March 31, 2001, the total amount of outstanding guarantees was Rs 18,707 crore. The net loss incurred was Rs 185 crore in 2000-01. The accumulated losses were Rs 1,444 crore as on the same date. The SLPEs employed 1,18,624 personnel as on March 31, 2001, including the Punjab State Electricity Board.

    Rajasthan

    Rajasthan set up a committee on “Re-organisation, Strengthening and Disinvestment of SLPEs and Industrial Development”. The government appointed an expert committee i e, the Mathura Das Mathur Committee on the restructuring of SLPEs. The committee suggested privatisation of public enterprises which were low on both public purpose and profitability. A study of 11 SLPEs in Rajasthan suggests winding up of the Rajasthan Land Development Corporation, Rajasthan Cooperative Sheep and Wool Marketing Federation, Rajasthan State Mineral Development Corporation, Rajasthan State Agro Industries Corporation and Rajasthan Jal Vikas Nigam. It has suggested restructuring of Rajasthan State Hotels Corporation, Rajasthan Tourism Development Corporation, Rajasthan State Minerals and Mining Corporation, Rajasthan State Seeds Corporation, Rajasthan State Handloom Development Corporation and Rajasthan State Road Transport Corporation. As per another study, the enterprises recommended for priority closure are Rajasthan Electronics, Rajasthan State Granite and Marbles, Rajasthan Tungsten Development Corporation and Rajasthan State Agro Industries Corporation. The enterprises in the list of closure include Hitech Precision Glass and Rajasthan State Handloom Corporation. This study suggested mergers between Rajasthan Tourism Development Corporation and Rajasthan Hotels Corporation; Rajasthan Mineral Development Corporation and Rajasthan Minerals and Mines. As noted earlier, the departmental enterprises at Deedwana, Rajasthan Electronics and Rajasthan Land Development Corporation were lying closed/defunct for many years. The Rajasthan State Electricity Board is undergoing a reforms exercise as a part of which a State Regulatory Commission has been set up. Two SLPEs namely, Rajasthan State Tanneries, and Rajasthan State Salts prominently figured in the realm of privatisation.

    Tamil Nadu

    Tamil Nadu set up the S V S Raghavan Committee (1997) for streamlining and restructuring SLPEs and to initiate the privatisation process. The committee recommended setting up of a Tamil Nadu Public Sector Disinvestment Commission. A three pronged approach was suggested for restructuring of the public sector: retention, disinvestment and winding up. Tamil Nadu News Print and Papers, was privatised by reducing the government stake to 35.10 per cent.

    West Bengal

    West Bengal is contemplating closing down loss making SLPEs and welcomes private participation in state run enterprises. However, it intends to make the entire process a low key affair. A phased programme is being evolved wherein the long-term viability of all the SLPEs is being ascertained. The profit making SLPEs are to be retained, loss making SLPEs (large units) to be restructured and loss making SLPEs (small units) to be privatised. As of today, out of 89 SLPEs, 53 are manufacturing enterprises. Eight manufacturing SLPEs are profit making whereas 11 nonmanufacturing SLPEs are profit making. The focus of the privatisation process would be on small sized loss making manufacturing SLPEs. The government intends to turn around 14 manufacturing SLPEs through capital infusion, organisational and manpower restructuring and to divest them after turn around, keeping 24 per cent of the equity stake with itself. Prominent among these 18 enterprises are National Iron and Steel Company, Shalimar Works, Greater Calcutta Gas Supply, State Fisheries Development Corporation and West Bengal Mineral Development and Trading Corporation. At present, the state government is trying to build up a consensus to push through a minimum core programme. The restructuring exercise envisages carrying out optimisation studies of the business of these 14 enterprises keeping in mind existing and foreseeable market demand trends. The entire exercise will be carried out in two parts. Part 1 will concern itself with evolving business optimisation plans for four of these enterprises, identifying necessary business, financial and administrative measures for achieving long-term viability under government ownership. Part 2 will be devoted to identifying the earning potential of the remaining 10 enterprises and marketing the investment opportunities to secure investment of up to 74 per cent in their equity, as joint venture entities.

    V Privatisation in SLPEs: Commonalities and Distinguishing Features

    This section discusses the commonalities and distinguishing features of SLPEs privatisation in various states. It provides a comparative view of privatisation of the CPEs and SLPEs. Commonalities: The following are the commonalities in the privatisation practices of the SLPEs in the various states:

  • (i) Most of the states explicitly or implicitly realised the need for the privatisation of the SLPEs. The fiscal crunch pressed them hard to go in for privatisation.
  • (ii) Many states formulated a public enterprise policy to consider afresh the retention of their SLPE portfolio.
  • (iii) Some states set up a mechanism to deal with the privatisation of SLPEs whereas many others were in the process of thinking about this issue.

  • (iv) Manufacturing SLPEs found a greater appeal for privatisation.
  • (v) A social safety net emerged as an important issue in privatisation exercise.
  • (vi) Trade sale was the preferred modality for the transfer of ownership.
  • Distinguishing features: The following were the main distinguishing features of the privatisation of SLPEs:

  • (i) Whereas states such as Andhra Pradesh, Karnataka, Punjab, Maharashtra Orissa, Uttar Pradesh, Manipur and Assam showed a clear preference for privatisation, states like West Bengal, Kerala, Tamil Nadu, Madhya Pradesh and Meghalaya preferred restructuring.
  • (ii) Punjab, Maharashtra, Karnataka and Kerala set up the privatisation mechanism through independent enactments. Rajasthan, Haryana, Madhya Pradesh, Orissa, Andhra Pradesh, Assam and Tamil Nadu have either set up separate departments or used the existing mechanisms to handle issues related to privatisation.
  • (iii) Andhra Pradesh, Orissa, Kerala and Karnataka prepared phase-wise programme for privatisation of their SLPEs.

  • (iv) The privatisation programmes of Andhra Pradesh, Orissa and Uttar Pradesh received the support of DFID and were carried out with the support of foreign consultants. The Madhya Pradesh and Gujarat programmes received the support of ADB and were also carried out with the support of foreign consultants. Centre versus states: The following are the chief comparative features of privatisation relating to CPEs and SLPEs:
  • (i) The disinvestment/privatisation of CPEs began since the launching of the New Economic Policy in July 1991 whereas privatisation of SLPEs was resorted to much earlier in the case of the states e g, Allwyn Nissan, in Andhra Pradesh, UP Auto Tractors in Uttar Pradesh and Charge Chrome Plant in Orissa.
  • (ii) The states preferred trade sale as the modality of privatisation as compared to the partial disinvestment and strategic sale by the central government.
  • (iii) There was a trend in the states to prefer an independent legislation to execute privatisation programmes as compared to the executive action in the case of the central government.

  • (iv) The privatisation exercise in state governments was not target-based whereas the central government laid down targets of the money to be mobilised through disinvestment/privatisation.
  • (v) The central government preferred to use the term “disinvestment” to ward off any ideological/political problem whereas state governments did not refrain from revealing their preference for privatisation. However, some states such as West Bengal, Kerala and Tripura rejected the use of the terms viz, privatisation and disinvestment.
  • (vi) The privatisation of SLPEs, barring the State Electricity Boards (SEBs) turned out to be an easier exercise as compared to the CPEs because of their size and appeal.
  • (vii) The privatisation of both CPEs and SLPEs was confounded by the problem of transparency and valuation. Lessons to be learnt: The privatisation experiences of various state governments reveal the following lessons:

  • (i) It is easier to privatise smaller SLPEs.
  • (ii) Manufacturing SLPEs possess a greater appeal for privatisation.
  • (iii) Effective due diligence expedites privatisation.

  • (iv) The SLPEs organised under the Companies Act could be taken to market with greater ease and comfort as compared to the SLPEs organised as public corporations.
  • (v) Valuation should be considered as an important element of the privatisation process. The entire valuation exercise should be made transparent.
  • (vi) In the case of loss making enterprises with multiple subsidiaries and product groups (strategic business units), restructuring should precede privatisation.
  • (vii) It is always helpful to establish a dialogue with employees before any action is initiated to privatise an enterprise.

    (viii) Sole reliance should not be placed on any particular method of privatisation. Depending on the nature of the SLPE and market conditions, a combination of methods of divesting SLPEs should be employed to achieve the objectives of privatisation.

    Conclusion

    A dissection of the macroeconomic performance of SLPEs clearly reveals that their financial performance continues to cause a great deal of concern. According to the study group report on the reforms in state public sector undertakings for the period 1991 to 1998-99, instead of earning a 10 per cent rate of return, these enterprises registered a compound annual growth of 17.36 per cent in their net losses [Kurian et al 2002]. The fiscal impact of the viable working of SLPEs has become a cause of concern as the ratio of state finances to total revenue of states and that of gross fiscal impact to state finances have been found to be adverse. Policy-makers are left with no choice but to rethink the retention of the SLPEs portfolio in various states and to decide what to divest and what to retain. State governments overtly or covertly acknowledged the need for privatisation of the non-core, continuously loss making and manufacturing SLPEs. The financial performance of SLPEs was such that it did not leave policymakers with much choice other than to redefine SLPE portfolios. Some states took the lead by putting in place a mechanism for privatisation and creating an environment conducive for the acceleration of the tempo of privatisation. However, there is no denying the fact that the states continue to face certain impediments in the successful implementation of their privatisation programmes.

    It is apparent that both the select and the remaining states appreciated the need for disinvestment and privatisation as fiscal pressures mounted up and the need for accelerating social sector spending increased. Most states explicitly or implicitly realised the need for privatisation of the SLPEs. However, whereas states such as Andhra Pradesh, Karnataka, Punjab and Orissa showed a clear preference for privatisation, states like West Bengal, Tripura and Kerala showed their disenchantment with the term “privatisation” and opted to use the terms restructuring. The privatisation pattern of the central and state governments differed in many regards especially in relation to the method of sale. The central government preferred partial disinvestment and strategic sale as compared to the trade sale modality popularly adopted by state governments. The privatisation experiences of state governments point to a number of lessons to be learnt for the future. Instead of depending on a specific modality, it would be beneficial to depend on a mix of methods.

    EPW

    Email: rkmishra_99_1999@yahoo.com

    References

    Kurian, N J, R K Mishra and J D Hajela (2002): ‘Study Group on Reforms

    in State Public Sector Undertakings’, Financial Report, Planning

    Commission, government of India, New Delhi. Mishra, R K, Lakshmi Kumari, J Kiranmai (2004): Database on SLPEs,

    Institute of Public Enterprise, Hyderabad. SEBI (2000): SMDRP/Policy/CIR-10/2000, Clause 49, Securities and

    Exchange Board of India, Mumbai, February 21.

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