The space for public sector undertakings (PSUs) is shrinking with the sharpening private competition. What has made matter worse for state-owned companies is the government’s short-sighted economic policy-making, which has skewed the playing field against them.
In a free market economy, PSUs are expected to compete with private players on an equal footing, even as they continue to carry the burden of social obligations. Because of the government’s flawed economic policies, PSUs have lost ground to private players in several sectors. Telecom PSUs are the latest casualties of the government?s lop-sided economic policies.
Except for four sectors?oil & gas, power, coal and steel?PSUs do not have any significant presence anywhere. So far, oil PSUs like ONGC and IOC have successfully competed with private players like Reliance Industries and Essar because they have the advantage of size.
However, the way they are bleeding from the government’s petroleum subsidy burden-sharing policy, it is difficult to say how long they will maintain their competitiveness vis-a-vis private players.
GAIL is already feeling considerable pressure on its margins because of increased private competition in the gas transportation business. Its return on networth has declined from 21.33% in 2007-08 to 19.89% in 2009-10. Oil PSUs could soon meet the fate of their counterparts in the telecom sector if the government does not wake up soon.
Power PSUs are already feeling the heat from private players. For example, hydro PSUs are unable to compete with private players for the allocation of projects as they are not allowed to pay upfront premium and extra free power. The result is the private power developers are thriving at the cost of the hydro PSUs.
State-owned thermal generators like NTPC and Damodar Valley Corporation had been getting projects on a nomination basis and were largely insulated from private competition. But the government has recently introduced tariff-based bidding. Thermal power PSUs are now required to compete with private players for the allocation of projects. However, they lack the operational flexibility of private players and could feel the heat when competition intensifies.
Bhel is also likely to face strong competition in the domestic power equipment market once manufacturing facilities being set up by private players like Bharat Forge and JSW come on stream.
If Coal India is doing well, it is primarily because there is no private competition to it as of now. Private players are not allowed to undertake commercial coal mining. However, the government is thinking of making legislative changes to allow private companies enter the sector. If the government goes ahead with the policy changes, CIL could feel margin pressures.
Steel Authority (SAIL) continues to do well despite private competition because of its input cost advantage. It has access to cheaper raw materials like iron ores and coking coal from captive mines. Besides, steel prices are being determined by market forces without any intervention from the government. SAIL is the biggest beneficiary of free market pricing regime for steel.
The economic liberalisation was meant to encourage participation of the private sector in economic activities by leveling the playing field for it vis-a-vis PSUs. While the liberalisation undertaken by the government during the past two decades have gone a long way towards creating a free market economy in the country, parallel moves to empower PSUs to face private competition have been lacking. The result is that PSUs are increasingly losing ground to the private sector. If the government wants to check this trend, it must take further reform measures to improve the competitiveness of the public sector.