Throw state-owned companies to the lions

By: Sourajit Aiyer

It is fashionable to say that the government has no business to be in business. But this is easier said than done, as governments bearing the liabilities of ailing Public Sector Undertakings (PSUs) – essentially state-owned companies — may vouch.

State-owned companies have played a critical role in initiating their nations’ commercial capabilities post-independence, given the absence of private capital. But government patronage through bailouts, job-secured inefficient management and gaps between strategies and realities on the ground spelt doom.

Divestment of state-owned companies is now a politically-sensitive issue, given the sheer numbers they employ and resources they buy. The issue is not just about the loss of employment to excess, unproductive staff in case of privatization; the dilemma is equally how to choose between loss-making and profitable PSUs.

Unless the industry itself is fundamentally sound, and there is some visibility that inculcating modern strategies might effect a turnaround in the company, finding buyers for a loss-making PSU would always be a struggle. Even if there is a buyer, the price it gives would not add much to the Treasury.

It would naturally be easier to find buyers for profitable state-owned companies, a recourse the government would prefer. But selling a good PSU might make the government poorer in the long run, since the value and wealth it creates could have benefited the government and the citizens.

Some PSUs have performed well, and that shows government ownership need not always spell doom. It depends on the organizational practices, adeptness and initiative of its top management, and inculcating productivity standards. That may pain the inefficient staff, but that is a small price to pay for the wealth created, which benefits the entire nation.

State-Owned Companies in India

Using India’s example, the recent PSU Survey by India Today Group of about 170 federal PSUs showed they can deliver results if managed well. Regardless of whether the government can achieve divesting all its state-owned companies, one might instead look at how their performance can be improved.

Privatizing would undoubtedly make them more efficient, but that assumes buyers would be found for the ailing state-owned companies. What about those that don’t get buyers? They can be made more efficient by being put on a level-playing field at par with private companies and the divested PSUs — i.e., let the state-owned companies also face the lions, just like all the rest of the businesses in the country.

Some practices can be brought in even ahead of retrenchment of excess staff. One is a board of advisors that have the industry-experience, have the competence to give long-term strategic direction, and have the authority to hold management accountable in case of gaps between strategy and performance.

Moreover, this would ensure adherence to corporate governance standards, which every company worth their salt looks at today while partnering with prospective stakeholders. These are practices common to private companies, and the intent is to make the functioning similar for state-owned companies.

Using India’s experience, a stronger Vigilance and Comptroller & Auditor at the federal level also helped raise accountability and transparency.

Incentives and Level-Playing Field

The government has to bring in a culture of incentives as a motivation for the management to perform better, something that raises the performance of private companies. There is less chance of the management becoming complacent and lax, since the variable component in his benefits becomes prominent.

The management becomes more professional and energetic. Under-achievement might have the same repercussion as in a private company. Changes in PSU compensation practices may inevitably require legislation, and hence there is a chance that the issue will be politicized.

However, ESOP schemes (i.e. allotting equity in the company to the management as an option) also work well as a management incentive. Incentive schemes also work in indirect ways, like awarding of free gifts, free trips, loans at subsidized rates, etc to the better performers.

Outsourcing the management of ailing state-owned companies that do not get buyers to private contractors/consultants might be an unconventional idea worth exploring.

If any ailing or profitable PSU was worth buying, then any private enterprise would naturally prefer to buy it outright. That would mean 100% of the profits which the new private owner generates from effecting a turnaround would accrue entirely to him, and that is his main incentive.

But for the state-owned companies that do not get buyers, that means they are in a condition where making a large capital outlay for acquisition is deterring buyers. Outsourcing the management for a fee for services rendered, along with a sharing of returns generated over and above a pre-agreed mark-up, might be a possible way to bring in better management practices without the capital outlay.