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PSUs vs private cos: The reality check PDF Print
Thursday, 15 February 2001 00:00
According to an NCAER report submitted to the Ministry of Industry (So many lost years -- the public sector before and after reforms, Laveesh Bhandari and Omkar Goswami), the profitability of the PSUs (excluding petroleum, power, coal, lignite and minerals) was minus 4.3 per cent in 1996-97 and minus 3.91 per cent in 1997-98. The NCAER Study shows that: A SCOPE-sponsored study conducted by the Centre for Industrial and Economic Research (CIER) on the comparative performance of the ``Public and private sector in India'' concluded that: *While the public sector did not fare well in 1994-95 and 1995-96, it performed better than the private sector in 1996-97 and 1997-98. *In respect of NP/NW, which measures return on investment and real shareholder value, the public sector's coefficient of NP/NW was 5.4 in 1997-98, better than that of the total Indian private sector's at 4.7. *Comparison has been made of the financial performance between top 50 and top 100 and private sector corporates. The turnover of these companies in 1997-98 was of the order of Rs 23,10,000 crore for the top 50 public sector companies and Rs 10,90,500 crore for private companies. Extending the horizon to 100 companies, the relative turnover in 1997-98 was Rs 24,86,600 crore for the public sector and Rs 14,98,100 crore for the private sector. *A comparison of the financial results of the top 50 and top 100 public sector companies in 1997-98 shows that the two segments came close to each other. In a number of cases, the public sector logged better results. Against a RONW (return on net worth) of 11.9 per cent of the top 50 private sector companies, the comparative top public sector enterprises registered 13 per cent return, a full one per cent higher. The divergence gets reduced with the extension of the horizon from top 50 to top 100 corporates, and yet it is the public sector which scores -- 11.9 per cent to 11.33 per cent. *The top ten PSUs contributed Rs 14,254 crore profit out of the total Rs 22,509-crore profits generated by 127 PSUs. In short, about 8 per cent of the total profit-making PSUs contributed 63 per cent of the total profits. If one looks at the profits of all PSUs put together (net of losses), those of 10 PSUs exceed that of the total profits of all PSUs put together. It is apparent that the CIER study has tried to establish that the performance of the public sector companies is better than that of private sector firms. In this connection it is relevant to add that of the top 50 public sector companies taken by CIER for study, 42 are profit making and include units in petroleum, power and telecommunications sectors where the government has full or near monopoly. Again, out of the 100 PSUs taken into account for the purpose of comparison, 73 are profit making, including those in petroleum, power, telecommunications and minerals in which the government had full or near monopoly. The comparison should have been made with PSUs in competitive sectors also to arrive at a competitive analysis of the financial results of public sector companies vis-a-vis the private sector firms. Such a study would reveal that the performance of public sector companies is in no way better than that of private sector firms. Major PSUs which are monopolies in such sectors as coal and lignite, power, petroleum and telecom account for most of the profits made. In 1997-98, out of the total profits of profit-making PSUs, those of five monopoly sectors amounted to Rs 14,051.48 lakh which is 69 per cent share of total profits. Similarly, in 1998-99, out of the total profits of profit-making PSUs, those of five monopoly sectors amounted to Rs 16,497.98 lakh which works out to 73 per cent share of total profits. According to an NCAER report submitted to the Ministry of Industry (So many lost years -- the public sector before and after reforms, Laveesh Bhandari and Omkar Goswami), the profitability of the PSUs (excluding petroleum, power, coal, lignite and minerals) was minus 4.3 per cent in 1996-97 and minus 3.91 per cent in 1997-98. The NCAER Study shows that: *Even if accounting for the monopolistic trends of the petroleum PSUs, large private sector manufacturing companies are more profitable than their PSU counterparts. *The profitability differential substantially widens in favour of the private sector when the petroleum companies are netted out. Even so, these PSUs are profitable though the ratio of post-tax profits to net sales is far more modest. *The 123 pure manufacturing PSUs have been always posting losses. These are in engineering, chemicals, pharmaceuticals, fertilisers, agro-based industries, textiles and consumer goods -- relatively competitive sectors with many private players. Thus, the profitability of the PSUs as a whole seems to rest on monopolistic or oligopolistic rents earned from non-competitive sectors which are bereft of significant private sector presence, such as petroleum, power, minerals and coal mining. *Between 1986-87 and 1997-98, Central PSUs as a whole never earned post-tax profit that exceeded 5 per cent of total sales, and 6 per cent of the capital employed. As on 1997-98, there were 100 loss-making PSUs out of 240 and their annual loss was Rs 6,500 crore. *Exclude the monopoly profit of the PSUs in petroleum, power, coal and lignite, the post-tax profit turns to losses for the manufacturing PSUs for nine out of ten years between 1988-89 and 1997-98. In 1997-98, the losses stood at Rs 1,870 crore. *A large sample of PSUs in manufacturing was compared with another sample of scale-wise similar private sector companies for the period 1988-89 to 1997-98. Unit gross profit and post-tax profit of the PSUs measured as a proportion of sale revenue net of indirect taxes were significantly lower than that of private sector companies throughout the period. Moreover, the differential between non-petroleum PSUs and the private sector is much higher. The former posted losses, the latter profits. *An analysis of 109 manufacturing PSUs (including petroleum companies) for the period 1993-94 to 1997-96 shows that the return on capital for these companies has been far less than the opportunity cost capital. Thus, the shareholders -- mostly the government -- have been steadily losing value. Over the five-year period, at 20 per cent cost of capital, these PSUs have got EVA (Economic Value Added) worth Rs 90700 crore or 8.8 per cent of capital employed. *The cost structure of the PSUs was compared with private sector manufacturing companies. It showed that the PSUs historically carry a much higher burden of unit fixed cost than the private sector. Despite paying wages and salaries that were no higher than large- and medium-scale private sector companies, the PSUs suffered from a significantly higher wage cost burden, which is widening over time. Similarly, despite the benefit of soft budget constraints, the PSUs incurred higher interest cost per rupee of sales compared to private firms. Non-petroleum PSUs suffered from a much larger fixed cost differentials vis-a-vis private sector. *As on 1997-98, there were 56 Central PSUs in manufacturing, with cumulative losses higher than their net worth and registered with the BIFR. Further, 21 manufacturing PSUs had eroded their net worth but were not yet registered with the BIFR. In addition, there were 23 companies in services and trading whose losses had eroded their net worth but which, by virtue of not being ``industrial companies'' were not eligible to register with the BIFR. Together, these 100 PSUs, employed over 6,79,000 people many of whom will face retrenchment when these companies are either downsized or liquidated. The CIER report states that 60 per cent of the private sector companies did not declare any dividend in 1998-99 whereas nearly 62 per cent of the public sector companies declared dividends exceeding 10 per cent. In the case of the private sector companies only 36 had declared dividends of 10 per cent. What the report did not say is that the PSUs which are in the monopoly sector contributed almost 68 per cent of the total dividend declared. The CIER report states that the EVA of the public sector was better than private sector. The performance of the public sector in terms of M-EVA of both top 50 and top 100 corporates shows negative coefficients than those for the private sector. Moreover, the top 50 public sector corporates add relatively more value to the shareholders than do the counterparts in the private sector. The NCAER report, however, clarifies that out of a sample of 109 non-banking and non-financial services PSUs (including petroleum monopolies, power companies, coal and lignite, which make profits and excluding all perennially loss-making PSUs) it was found that as a whole these could not recover their cost of capital. In the aggregate, they lost corporate value for each of the five years, 1993-94 to 1997-98, and the value lost has been substantial. Mind you, this was the dismal picture despite the sample being heavily biased in favour of the public sector. SCOPE'S entire exercise appears, however, to be entirely misplaced. Everybody is aware that the PSUs were established to (1) provide necessary infrastructure, (2) promote redistribution of income and wealth, (3) create employment opportunities,(4) secure balanced economic development, and (5) promote social services. However, since 1991, the objectives of the PSUs have undergone a sea change and they are expected to compete in the market and earn profits. For this purpose, Government has deregulated various sectors with the objective of making these sectors competitive. With the globalisation of the economy, industry, whether in the public sector or private, has to face stiff competition in order to survive. The age of monopolies is now over. It would be difficult for today's public sector monopolies to remain profitable once full deregulation and competition sets in. Disinvestment/privatisation of PSUs should be viewed in the context of emerging competition and as a method of being able to face that competition. Studies such as the one made by SCOPE/CIER will only serve to obfuscate the real issues facing PSUs today. (The author is Member-Secretary, Disinvestment Commission. The views are personal.)