1. Column: Instrumentality of state

Column: Instrumentality of state

Until this clause is fixed, PSUs will be transfixed by L1-itis. Make-in-India will soon be hit by this

By: | Updated: November 21, 2014 8:46 AM

While Air India which has a negative net worth of around R20,000 crore battles with myriad problems, from increased competition to trying to get its operations together, it faces a peculiar problem. It has 3 Boeing 777-200 LRs that it does not need to fly, but doesn’t know how to deal with—it floated a tender to lease them out, got a good bid from Etihad Airways, but since the bid is a single one, the company is not sure if it should go that route since this could invite censure from the CAG and worse from the CBI.

Some years ago, when the Railways floated a tender for an electric locomotive factory, the fact that there was just a single bidder—US firm General Electric—was cited as the reason for not going ahead with the tender. This is despite the fact that, in this case, the bid given by the private party was lower than the internal estimate prepared by the Railways—before the bid was invited—of how much it would cost to produce the electric locomotive if it was done in-house.

Across PSUs, the same story is being played out almost every day. So while finance minister Arun Jaitley has done well to say that he is open to privatising sick PSUs—79 of them had accumulated losses of R55,656 crore in FY13—the problem goes far beyond just the sick PSUs. While it would send out a great reforms signal if privatisation picks up and if PSUs like Air India and MTNL are privatised, there is a limit beyond which privatisation can’t proceed—even the Atal Bihari Vajpayee government privatised just 10-15 mid-sized PSUs out of 219 central PSUs, and the Vajpayee government had an aggressive privatisation programme.

To be sure, some part of the slower decision-making in PSUs has got to do with the issue of their bureaucratic culture where there is no special reward for decision-making but a large part of the solution is to fix what is known as L1-itis—tenders have to be called for everything and if they are not given to the lowest bidder, this is seen to be violating the law.

One way to fix this is to do what ONGC has just done. Its board has accepted a proposal from the Boston Consulting Group to revamp its tendering process to give more weight to the technical criterion—in other words, choose the best possible vendor, and then look at the costs.

Whether that works remains to be seen, but how is ONGC to deal with a situation in which there is just one tender, and can the losing parties go to court as they have done, successfully, in the case of other PSUs? And how do you deal with the post-tender negotiations that simply have to take place in a dynamic business environment with both demand and supply conditions changing?

The key issue here is what is called ‘instrumentality of state’, a provision in the Constitution (Article 12) which says PSUs are like an arm of the state—once this is accepted, PSUs are bound to act like the state, in an impartial manner. This is where the tenders and other issues follow. So while no losing bidder can go to court against Vodafone hiring Ericsson to handle its network, they can against MTNL or BSNL—by the way, one of the Pitroda committee recommendations for turning around BSNL is to outsource its network operations in the same manner private firms do.

The L1 and instrumentality-of-state argument, new defence minister Manohar Parrikar would do well to keep in mind, may even hit the newly-minted Make-in-India programme. Under the programme, to begin with, firms are to do joint R&D with the defence forces, with the government picking up 80% of the tab—later, if the R&D is successful, the work is to be operationalised. How are the initial vendors to be selected since bidding is difficult in cases where the work is at the conceptual stage as in, say, the next generation of fighter aircraft? One option is to, as in the US, go in for cost-plus contracts, but since this requires vigorous audits, the defence ministry will have to engage in a long discussion with the CAG on how and what is to be subject to audits—several reports of the CAG tend to get into pointless detail on issues that don’t really concern the CAG. For the record, one is not talking of the Coalgate or 2G reports here, but audit reports on private sector projects would do well to at least do some benchmarking of costs and efficiencies before pronouncing them guilty.

Last year, in order to address this issue, the UPA government proposed a constitutional amendment to get PSUs outside the purview of Article 12 of the Constitution. The proposed amendment, however, got struck down by Solicitor General Mohan Parasaran who said PSUs would still be subject to writs under Articles 32 and 226; besides, he said, removing PSUs from the ambit of Article 12 would run afoul of the judiciary as it violated the basic structure of the Constitution.

But the government would do well to relook the issue. While Parasaran dismissed the proposed amendment, he pointed out that in Pradeep Biswas vs Indian Institute of Chemical Biology (2002), the Supreme Court had said that for an entity to be an instrumentality of state “it should have been entrusted with such functions as are governmental…by being of public importance or being fundamental to the life of people and hence governmental.” Just using the falling market shares of PSUs should make it clear they are no longer fundamental to the life of people, or governmental in nature—BSNL’s market share is 10%, MTNL’s is under 1%and Air India’s is around 17%. Apart from going to the Supreme Court again, if PSUs are to be saved, the government needs to approach Parliament on the matter, if need be through a joint session.


Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Tags: Air India

Go to Top