It?s Time for the White Elephants to Retire!

By Deepthi Mary Mathew

“It would be better if we paint the elephants white” commented veteran leader M V Raghavan on the state emblem during an assembly discussion in 1987. His remarks were on the basis of the report submitted by the Comptroller and Auditor General (CAG) on the state public sector enterprises for the year 1984-85. As per the said report, 85 PSUs in the state had an accumulated loss of Rs. 130 crore.

Since then three decades have passed, yet each successive government has struggled to turn PSUs into profitable units. “Public Sector Units (PSUs) in the state will be revived and they will be turned into profitable units” pledged LDF in their manifesto. Accordingly, an action plan to revive the sick PSUs in the state was put forward by the incumbent LDF government. Furthermore, the government plans to rope in the cooperative sectors and NRI’s for funding PSUs¹. Evidently, the government is finding it difficult to sustain the sick units in the state.

PERFORMANCE OF STATE PSUs (2014-15)

Total investment (as on March, 2015)	Rs. 40,556.65
No: of profit earning enterprises	44
Total amount of profits	Rs. 700.96
No: of loss making enterprises	46
Total amount of loss	Rs. 2,731.01
Contribution to state exchequer (taxes & duties)	Rs. 8,610.05
Total accumulated loss (as on March, 2015)	Rs. 11,757.58

Source: Bureau of Public Enterprises Review for 2014-15                                  * Rs in crore

[su_pullquote align=”right”]The cost of maintaining the large number of loss making units in the state is bringing a heavy burden on the state exchequer.[/su_pullquote]

Thus, the above statistics explain that the cost of maintaining PSUs in the state outweighs the benefits accruing from it. As per the report by Bureau of Public Enterprises (2016), the top five loss making units includes Kerala State Electricity Board (KSEB), Kerala State Road Transportation Corporation (KSRTC), Kerala Water Authority, Kerala State Civil Supplies Corporation, Transformers and Electricals Kerala Limited. Consequently, we can conclude that the cost of maintaining the large number of loss making units in the state is bringing a heavy burden on the state exchequer.

Kerala State Road Transportation Corporation (KSRTC) is suffering heavy losses. Photo Courtesy: Google Images

Take the case of KSRTC, the accumulated loss of KSRTC amounts to Rs 4,217 crore. The contribution of KSRTC to the state exchequer in terms of Sales tax/State VAT stands at Rs 78 lakh, making it only a meagre 0.00015 percent of our GSDP. In 2014-15, total expenditure of KSRTC amounts to Rs 2,650 crore², with salary expenditure claiming around 46 percent of the total expenditure. The heavy spending on KSRTC comes at a time when the share of KSRTC in passenger transport operation comes at 11 % compared to 89 % of private buses.

The below table shows the amount spent by KSRTC on salary account:

NUMBER OF EMPLOYEES- KSRTC (As on 31^st March, 2015)

Employment	No:	Average emolument per person (Rs per month)
Board level employee	1	1,92,500
Managerial Staff	217	55,000
Supervisory Staff	1179	37,465
Workers/Staff	33566	18,131
Other (Casual/Contract)	11732	7,311

Source: Bureau of Public Enterprises Review for 2014-15                                        

Although the government is finding it difficult to maintain its road transport corporation, idea to start an airline company is mooted in Kerala. Consequently, in the budget, an amount of Rs 10 crore was allocated for the same. This is the trend that is discernible in Kerala. Although existing PSUs are bringing heavy loss to the exchequer, more number of PSUs will be started by the political party that comes to power. However, adding more number of PSUs will only augment the pressure on the state exchequer.

If we analyse the arenas in which the PSUs in the state are functioning we get an interesting result. For example, we have Kerala Automobiles Limited (KAL) which is engaged in the production of three-wheelers. In 2014-15, the government has spent around 15 crores on KAL. But when the contribution of KAL to the state exchequer for the year 2014-15 is taken into account, the number stands at a scanty 1.34 lakh. But the accumulated loss of KAL amounts to Rs. 53 core³. In fact, it is very difficult to find a three wheeler under the brand name ‘KAL’ in the streets. Thus we can clearly see that KAL is not having a smooth ride in Kerala.

When there are players already in the market to provide these goods, why should the government expand its operations to these fields? We have the case of Kerala Scooters Limited, Astral Watches Limited, Kerala State Detergents and Chemicals Limited that were closed as they were not able to withstand the competition in the market. From this we can see that the government doesn’t have the merit and expertise to perform these activities. It is high time that the government should ready itself for a withdrawal from such engagements.

Even though Kerala is the state with the largest number of state run PSUs, it is also known for having the highest level of unemployment rate.

Hence, starting more number of PSUs is not the solution for the unemployment problem faced by Kerala. Still, the successive governments in the state are starting more number of PSUs in the state. For instance, during the year 2013-14, the government started 8 new PSUs. When the budgetary allocation to the state run PSUs is taken into account, an increasing trend is visible.

In the latest budget, the government has set apart around Rs. 900 crore for the PSUs. The huge allocation to PSUs comes at a time when the government is finding it difficult to bridge the gap between total revenue and total expenditure. The fiscal deficit of the state stands Rs. 17,715.07 crore for the fiscal year 2015-16, compared to Rs. 3,878 crore in 2001-02. Thus the total accumulated loss of the PSUs makes it 66 percent of the fiscal deficit of the state. In order to cover up its growing fiscal deficit, the successive governments in the state resort to borrowing. Consequently, this leads to an out of control growth in the total debt of the state. As per the recent budget the total debt amounts to Rs. 1,54,058 crore. Furthermore, if this prevails for a longer period, then the fiscal health of the state will be in danger.

[su_pullquote]The poor performance of the PSUs and the huge level of fiscal deficit forced the Union Government to formulate its first disinvestment policy.[/su_pullquote]

The crisis in early 1990s forced the Central Government to find new avenues for raising additional resources. The poor performance of the PSUs and the huge level of fiscal deficit forced the Union Government to formulate its first disinvestment policy. However, the budgetary support to the loss-making PSUs has only enlarged the fiscal deficit of the Union Government.The same is the case in Kerala. The increasing number of loss-making PSUs is bringing pressure to the state exchequer.

Thus, it is important that the state also takes a serious call on disinvestment of the PSUs. But the idea of disinvestment is vehemently opposed in the state. Disinvestment does not mean complete privatization. Disinvestment of PSU can be either through minority stake sale or strategic sale. In the case of the former, government will retain the majority share holding, i.e. at least 51 percent and management control of PSU. Under strategic sale, government will sell a substantial portion of its shareholding-up to 50 percent or more. Also, there will be transfer of management control.

Disinvestment of PSUs is the best move for the Kerala government to lighten its economic burden. Photo Courtesy: Google Images

For the fiscal year 2016-17, Central Government has set a disinvestment target of Rs. 56,500 crore. Of this Rs. 36,000 crore is expected to be raised through minority stake sale. Under minority stake sale, Central Government has disinvested large public sector companies, viz. SAIL, Coal India Ltd, IOCL, BHEL etc. Thus the government was able to mobilise additional resource, helping it minimize the widening gap between total revenue and total expenditure. Thus disinvestment of PSUs was one of the major factors that helped the Central Government to achieve its fiscal deficit target for the fiscal year 2015-16.

Even if we take the case of strategic sale of PSUs, it has only increased the efficiency and productivity of these companies. Consequently, employees find themselves in an atmosphere of increased competition that makes them more productive and accountable. The entities that have undergone strategic disinvestment have shown greater improvement in their performance post disinvestment.

Around 30 entities were strategically disinvested in India, out of which only 12 went to private hands, the rest were either sold for land and assets or were bought by other PSUs.

Furthermore, the weighted average return on assets (ROA) of these 12 PSUs has doubled from 5.8 percent in 1999-2004 to 10.2 percent in 2010-15 after strategic disinvestment. In contrast, average ROA of 243 Central PSUs has only increased from 4 percent to 4.5 percent during the same period⁴. For instance, case of Modern Food Industries Limited (MFIL), a loss making unit prior to disinvestment, post disinvestment wages in MFIL have increased by an average of Rs 1800 per employee. Thus, the turnover of the company has increased, with losses coming down substantially.

Recently, NITI Aayog has submitted a report on PSU reforms to the PMO, which includes strategic sale of government stake in some PSUs. When PSU reforms are taking place at an increasing pace in the national level, Kerala should not lag behind in initiating the reforms. In line with the Central Government, state government should also fix a disinvestment target that needs to be achieved in the coming fiscal year. Dis-investing PSUs will not only reduce the burden on state exchequer, but will also be a helping hand for the ailing state exchequer. Hence, the rising level of fiscal deficit and increasing number of loss-making PSUs in the state clearly shows that disinvestment is the way forward for the government.

REFERENCES

1. Nair, N.J. 2016. Action Plan to put sick PSUs back on track. The Hindu, 10 June.
2. Government of Kerala.2016. Review of Public Sector Enterprises 2014-15. Bureau of Public Sector Enterprises.
3. ibid.
4. Chibber, Ajay.2015. Out of Business. The Indian Express, 23 October.

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Deepthi Mary Mathew is a Research Associate at Center for Public Policy Research (CPPR).

Featured Image Credits – Chris Lawton via Unsplash