New Wave In Public Enterprise Reform

Written by YRK Reddy | Updated: Sep 6 2004, 05:30am hrs
The Prime Ministers recent initiatives signal a fresh approach to reform of the central public sector enterprises, which have been languishing since the early 90s under the single prospect of privatisation, wholesale or by disinvestment. First, the PM sent a missive to check cronyism and ensure that directors selection is strictly as per guidelines. Second, he called on ministries to refrain from assuming public enterprises as fiefdoms.

These are refreshing, coming in the midst of capital market-centric economic thinking that only private ownership will improve shareholder vigil and consequently, elevate efficiency and fiscal conditions for the State. Yet, public enterprises cannot be wished away neither in India nor in countries like Italy and Germany where they dominate the top 100 publicly traded companies. In India, they are massive in market capitalisation, estimated at around 32% of BSEs, as well as in the control public sector banks have over total assets. Privatisation of all these, if at all, will indeed be a long haul.

Against the backdrop of inspired privatisation even in the hot beds of communism, none has been eager to accept that economies will continue to have substantial state ownership of commercial assets for many decades to come. Consequently, international approaches to corporate governance and evaluation of country-level observance of standards and codes underscore the aspiration of private ownership of all assets.

Some countries appear to have recognised the permanence of public enterprise in some form or the other and that privatisation and public enterprise reform are not synonymous that they need parallel processing. These countries recognise the potential benefits accruing to the private sector on adopting the principles of corporate governance and have chosen them as an important method for public enterprise reform. Chief among these is the role of the dominant shareholder in exercising its rights and the equitable rights and treatment of other shareholders.

Countries such as New Zealand, Australia, and Canada have done interesting work in redefining relationships among the responsible ministries, the Board of Directors and the management. The objective is to bring about independence, transparency, accountability and democratic practices expected from companies as different from the sovereign State. These efforts do not ignore the need for public accountability and superintendence over probity of public officials in charge of such assets democracies indeed require that public assets are monitored by the parliament. The new approach to reforms has been to codify, articulate, delineate and ring-fence roles, responsibilities and duties of the board, administrative ministry, Parliament, the government auditor and other agencies in such a nuanced and strategic way as to enable public enterprises to function efficiently and competitively.

PMs recent initiatives signal a fresh approach to reform of PSUs
International experience is useful to configure a new package in this regard
For instance, in New Zealand a separate body has been formed with powers for profiling, selection, appointment, performance review, succession planning and remuneration of directors. The Australian National Audit Office has issued documents titled Corporate Governance in Commonwealth Authorities and Companies and Applying Cor-porate Governance Prin-ciples to Budget Funded Public Service Agencies. Canada also has brought out similar guidelines of corporate governance for public enterprises. In the Mecca of capital markets as well, in the case of Fannie Mae, a public enterprise competing along with the private sector, the US Administration declined to exercise its authority to nominate five directors, preferring the shareholders to elect them at their future meeting.

The objective of these efforts has been to bring about greater independence in the boards, eliminate cronyism in director appointments, curtail undue control over management, improve disclosures and reporting, limit the role of the government auditor to appointing the external auditor and undertaking only periodic studies, limit the role of the parliament to strategic oversight and the like. It would be timely for the Government of India to initiate a comprehensive review and to configure a reform package that draws upon the corporate governance framework and international developments in governance of state-controlled enterprises.