For many years in the 1980s, the relevance of public enterprises to India?s economy was debated. It was recognised that in the early years after Independence, the private sector was unable to raise the needed resources to invest in plants to make iron and steel, heavy machinery, machine tools and railway wagons or to build large dams, power plants for generation, transmission and distribution, etc. Only the government could raise such resources in India and overseas. This also extended to airlines, airports, luxury hotels, etc. By 1980-81, the Indian savings rate had gone up to 18.4% as had the capacity to attract foreign investment.
In the first 25 years or so, India did not have a well-developed industrial and management cadre. Civil servants were deputed to state-owned enterprises. Enterprises were also set up by state governments, especially in electricity, which is a concurrent subject in the Constitution. Since all state-owned enterprises were regarded as organs of the state, they also came under legislative review and under the purview of a Minister. This combination of bureaucrats as managers and politicians as masters has emasculated the independence of managers of public enterprises.
Sometimes there were exceptional managers, (usually not from the bureaucracy) like V Krishnamurthy, DV Kapur and SM Patil, who did a wonderful job of strategising, organising technology, building teams and a management culture, which stood their companies (BHEL, SAIL, Maruti, NTPC, HMT) in good stead for decades.
Most others were smothered by bureaucratic rules and procedures. Performance was not as important as following procedures. Capital was easily available and cheap, from the shareholder?government?who did not demand much as dividend. The enterprise had many objectives to meet other than making profit?employment, keeping prices down, ensuring supplies, etc. Major decisions regarding investment, recruitment, salaries, strategic direction, technology and its source were taken by the government department, not the management. All financial decisions were subject to the scrutiny of the three Cs (CAG, CBI, CVC), diminishing the desire to take decisions that were based, as are all management decisions, on inadequate information, and were therefore risky because they could lose money and lead to charges of corruption.
Many attempts were made to distance government bureaucracy from management decisions?MoUs between the Ministry and the enterprise clearly differentiating responsibilities, navaratna status to some, independent directors to moderate the weight of the bureaucrat on the Board. None has worked.
In its anxiety to raise resources, government discovered that it could sell off some of the shares in the public enterprise to private and institutional shareholders, both domestic and foreign. However, the Indian Companies Act gives shareholders some rights, one of which is to expect a reasonable return on his investment. The shareholder can demand explanation for poor decisions that reduce his return. This has happened with Coal India. The problem here is that coal is a nationalised commodity but the government is exploiting it through a company that has private shareholders. This puts government interests (ensuring contracted supplies at reasonable prices to the power sector and other users of coal) in conflict with those of the individual shareholder (earn a good return on investment).
The answer is for the government to own 100% of Coal India (now almost impossible, without complicated procedures), or not to have direct responsibility for coal supplies. It could do so by denationalising coal, and selling leases to private parties as is done with oil and gas fields. However, it cannot stop there. It must also free prices of other products that use coal, especially electricity. A regulatory body could oversee prices of end products like electricity and of the input prices of coal, to ensure that there is no exploitation of shortage situations.
There is another aspect to moving away from government ownership of Coal India and other state-owned enterprises. We will then have the enterprises running for the benefit of the owners, namely promoters and shareholders, who will aim for efficiency and profit maximisation. Misuse of market positions can be controlled though the various regulatory institutions and the Competition Commission.
What we should see is not disinvestment?where government sells a part of the public enterprise but retains its control over the enterprise. Government must hand over control altogether. This will give government a one-time capital gain from the sale proceeds. More importantly, it will result in an overall improvement in the efficiency of the economy, as each former public enterprise aims to maximise profits without the hindrance of bureaucratic procedures and controls.
We do not hear much about privatisation of public enterprises. Government must now sink outdated ideology that has kept these enterprises inefficient. They must be allowed freedom within the laws, to maximise profit and add to the country?s economic efficiency.
The author is the first chairman of CERC and an extensive commentator on infrastructure