India Development Foundation organised a round-table conference on ‘The role of PSUs in a liberalised economy’ at the Indian Social Institute on November 21, 2005. The discussion was spearheaded by two eminent members of parliament from the Rajya Sabha – Dr. Arjun Sengupta and Prof. Saif-ud-Din Soz. The round-table was moderated by Dr. Shubhashis Gangopadhyay.

Prof. Soz kick-started the discussion by raising the question of the role and importance of PSUs in a fast-changing, liberalising and globalising economy. He argued that PSUs should not be looked at as one monolithic structure, but as a heterogeneous mix of companies. There are PSUs which are doing very well, even at par with the private sector. But, at the same time, there are PSUs which are in shambles, which negative contribution to economic growth. It is in this set of PSUs that the tax-payers money gets wasted. He reiterated the need for regular dialogues between the economists and the parliamentarians on how to tackle the twin-issues of stagnation in PSUs and disinvestment.

Dr. Arjun Sengupta said that PSUs are here to stay for a while in the Indian economy. He discussed the stand taken by the current UPA government as promulgated in the common minimum programme. The UPA government has a clear stand on PSUs. First, the government believes that all those PSUs which are making chronic losses should be either restructured (if a turnaround is possible) or shut down completely. Second, the government is also not averse to selling small stakes in profitable PSUs if the sale price of the share is attractive enough. Third, do not privatise the ‘navratnas’ and the ‘mini-ratnas’, but provide them with a greater autonomy. By privatisation the government means bringing-down the total government-equity in a particular PSU to less than 51 per cent. Dr. Sengupta, however, argued that even with equity holding at less than 51 per cent, the government can retain control over the PSU, just as in case of private enterprises where the promoters have less than 51 per cent shares, but they retain full control over the enterprise!

Another issue raised was regarding the proceeds from disinvestment. There was a general agreement that the sale proceeds from disinvestment of PSUs should not be ‘wasted’ – where being wasted was taken as synonymous to using the funds for financing current expenditure of the government. Dr. Sengupta, however argued that one should not read too much into what use the funds from disinvestment are put to. He reiterated that a rupee is a rupee and a dollar is a dollar; and that there is a consolidated account of the government where the proceeds from disinvestment are put. The government can use the funds as per the needs; however, it would be wise to use the funds for financing capital expenditure.

The parliament in India has full decision-making power on whether or not the government stake in PSUs be sold, and how should the proceeds from the sale be used. Dr. Sengupta added that though a commitment from the Prime Minister or the Union Cabinet is enough to decide the ‘fate’ of the PSUs, the parliament can even go to the extent of passing an ‘Act’ which shall lay down the stand of the government on the issue of disinvestment or privatisation of PSUs, and the issue of use of funds from liquidating government stake in PSUs.

One of the most contentious issues in disinvestment is that of ‘valuation’ of the PSUs. The participants in the conference were in favour of laying-down of clear rules and procedures for evaluation of assets of the PSU at the time of disinvestment. However, the group felt that if all procedures and rules are followed for evaluation of assets of the PSU, there should be no ‘ex-post’ criticism if the value of the assets increases upon disinvestment. Valuation of land was also taken-up as a contentious issue where it was felt that there is not a level-playing field for PSUs and private enterprises. For instance, the land-owned by PSU is often valued at less than market-rate at the time of sale, but that owned by private enterprises is valued at the market-rate!

While there has been a lot of public debate on ‘disinvestment’, there has hardly been any public debate on the issue of autonomy for the PSUs. It came out in the discussion that one of the main reasons behind the inefficiencies of a PSU is the heavy government interference in the functioning of PSUs. Thus, in order to give autonomy to PSUs, Dr. Sengupta advocated a complete separation of the ownership from the management of a PSU. He floated the idea of a negative list of activities where the government cannot interfere at all in a PSU – activities such as pricing, distribution, below board-level appointments, transfers and so on. Government should be responsible for making policy at the sectoral-level, and not for any particular PSU.

There was also a talk on the formation of a ‘supervisory boards’ that shall look into the functioning of the PSUs and shall act as a facilitator as well as a regulator. Dr. Sengupta was in favour of having sectoral supervisory boards and not just one supervisory board for all PSUs. The supervisory boards should be directly report to the Prime Minister.

On the issue of autonomy, there was a debate on whether the government stake in a PSU be 51 per cent or more or should it be brought-down to 49 per cent. One advantage of bringing the government-equity to 49 per cent is that this puts the PSU out of the CAG (Central Auditor General). This also puts the PSU out of the control of the parliament. However, the group was divided on the issue of 51 per cent or 49 per cent stake of the government in PSUs and there was no consensus on this issue.

On the role of PSUs, the issue of a ‘level playing field’ was raised. Quite often, PSUs are compared with the private sector, but the two cannot be equated as they do not have a level playing field. For instance, PSUs not only have economic objectives, but also have social obligations to fulfil. Therefore, profits alone cannot be the criterion for judging the performance of a PSU. However, the group agreed that the bottom-line for all PSUs should be profits, and social obligations cannot be taken as a reason for non-performance. It was largely agreed that in a competitive market, unlike in case of state monopolies, cross-subsidisation is neither possible, nor sustainable. In the present-day competitive economy, profitable PSUs cannot be used to cross-subsidise the non-profit ones.

The role of the PSUs in the liberalised economy should be of an integrator and a catalyst. The debate between whether PSUs should be there or not, should they be divested or privatised should become irrelevant as in any economy there is a role to play for both the public and the private sector. The government, especially in case of ‘big-ticket’ purchases from abroad should devise a national ‘off-set’ policy so that both the public and private sectors benefit. The public sector should play the role of increasing the technological threshold of the economy. It was surprising to see that there was not much discussion on the issue of employment-generation through the PSUs. In fact, most PSUs have a ban on further employment and thus, are no longer playing the role of generating employment in the economy. The PSUs need to re-define their objective functions, and re-prioritise their goals. They have a role to play even in a liberalised economy, but the role has to be on the basis of sound economic rationale, robust business fundamentals and strong market-orientation.