Which loss making PSUs should be sold and how?

Indian Express, 15 September 2005

There is a total of Rs 28,400 crore of fixed assets trapped in loss making PSUs. They employ over 3.8 lakh workers who received Rs 7,824 crore in salaries and wages last year. The enterprises made a net loss of Rs 7,266 crore in 2004. Their accumulated losses have climbed to more than Rs 65,000 crore.

The Congress appears to have neither the courage nor the conviction to sell loss making public sector enterprises even though the Left will allow it to do so under the NCMP. Its inaction on this issue not only presents a huge drain to the exchequer, it also keeps resources locked up, preventing them from being put to productive uses.

Why should the public sector enterprises be privatised?

The prime reason for privatising public sector enterprises is that the government should be focussing on public goods such as law and order. It must concentrate its resources on improving governance, providing health and education and improving infrastructure rather than dissipating its energies on running liquor shops and making watches. To achieve that it must get out of doing those things which the private sector can do equally efficiently (or better).

The government should, in the first place, have been present only in instances where the market failed. However, since India has a legacy of socialism where the government tried to do everything itself, we have the public sector enterprises in various businesses. Even today half of the output in the organised sector is produced in public sector enterprises.

Which enterprises should be privatised?

In other political circumstances, one could have said almost all. But given that the UPA with its agenda of the NCMP is in power, and the NCMP says that profit making enterprises will not be privatised, at least the UPA should privatise "chronic loss making public sector enterprises".

Not only does the government have to pay out money year after year to cover their losses of more than Rs 7000 crore, there are huge resources such as land, labour and capital tied up in them. If these could be utilised, there would be an increase in total production and income in the economy to the tune of Rs 40,000 crore.

Which are the chronic loss making enterprises?

Of the 239 Central PSUs, 92 are chronically loss making. These PSUs have accumulated losses for many years and continue to do so such that their net worth is now negative. Most of them have seen many unsuccessful efforts at turning them around.

How can a company have negative net worth?

If a company make losses year after year, its accumulated profits can get wiped out. If it continues making losses further, even its paid up capital can get wiped out. When this happens, we get negative net worth. This means that shareholders money is completely wiped out and the accumulated losses exceed the profits earned (if any) in the past and the capital invested in by the shareholders. We identify "chronic loss making PSU" as those central PSUs which have negative net worth.

The list is topped by the Fertilizer Corporation. It has accumulated losses of over Rs 10,000 crore. In 2004 it made a net loss of Rs 1,110 crore. If the problem is that of sacking workers, then it's easy to just pay them - the wage bill is only Rs 3.33 crore - and privatise the rest of the firm.

Similarly, the Hindustan Fertiliser Corporation has accumulated losses of Rs 8,542 crore. In 2004 it make a net loss of Rs 951 crore. It employs 68 workers and pays Rs 4.95 crore as salary.

How will privatising them help the economy?

Privatising these PSUs would lead to an increase in GDP because the resources now lying unused can be productively utilised. There is a total of Rs 28,400 crore of fixed assets trapped in these companies. They employ over 3.8 lakh workers who receive Rs 7,824 crore in salaries and wages. The enterprises made a net loss of Rs 7,266 crore in 2004. Their accumulated losses have climbed to more than Rs 65,000 crore. This does not include the acres of land in prime areas lying wasted.

How can loss making enterprises be sold?

It is unlikely that the disinvestment route, with no change in the management team, would work for these companies because there would be few investors wanting to buy a share in a company that makes losses. For these 98 companies, the government must engage in strategic sales. This would bring in a new management team which believes that it can put the assets of the company to productive use.

However, it may be difficult to privatise these loss making companies even through the strategic sales route. In a privatisation auction, the government should permit negative bids: a bid where government pays someone to take the company off its hands. Negative bids were an important part of the massive privatisation which took place in Germany, after the end of socialism, and helped to rapidly get productive assets into the hands of efficient managers.

Paying a management team to take over a PSU makes sense not merely because the government will not be paying the company year after year to cover its losses, but because this will lead to a better utlisation of resources. For instance the fixed capital locked up in these companies, Rs 28,000 crore can produce value when freed up. In the private sector the ratio of the value of output to gross fixed assets is 1.43. This means that the capital locked up in these PSUs can produce Rs 40,000 crore of output. Companies like IDPL own prime land. This can be utilised for other uses, while currently it is being wasted.

The top 5 Loss Making Central Public Sector Undertaking (2004)

All values in Rs. Crore

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