Bibek Debroy: PSEs coming of age

OUT OF THE RECORD

The expression "public sector" occurs in various places in the National Common Minimum Programme (NCMP), but there is also a specific section devoted to the public sector.

And this begins with the statement: "The UPA government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning."

This is problematic. There have to be social objectives. But do these have to be addressed through public sector enterprises (PSEs)? And are social objectives compatible with commercial functioning? The NCMP then tells us successful, profit-making companies operating in a competitive environment will be devolved full managerial and commercial autonomy.

The NCMP isn't an economic document and much of it is vague, even if one swears by it. Subject to pricing mechanisms and market structures, one understands what profit-making is.

But what is "successful", as opposed to profit-making, and what is a competitive environment? We also know profit-making companies will "generally" not be privatised, presumably interpreted as sales of majority stake, since they (not just navaratnas) will be allowed to raise resources from the capital market.

If sick PSEs can't be privatised, they will be sold off. And privatisation revenues will be earmarked for social sector schemes. So far so good.

However, as the Bhel episode demonstrates, we need to pin down and agree on what the NCMP means. Flesh it out, for central PSEs.

We have two forums to flesh out the skeleton. First, we have the Board for Reconstruction of Public Sector Enterprises (BRPSE) and, second, we have the Ad Hoc Group of Experts on Empowerment of Central Public Sector Enterprises.

The latter has given itself the acronym AGE. I wish they had thought of something better. What is the difference between the BRPSE and AGE? To my simple way of thinking, the BRPSE is about loss-making PSEs (or more accurately, sick ones), while AGE is about profit-making ones.

And the general NCMP principle is, profit-making ones will not be sold (in the majority sense), while loss-making ones can be. The BRPSE has yet to submit a report, but there is one from AGE.

The subsequent spirit of implementation may be weak, but the flesh of the AGE report is quite strong and it needs to be considered seriously, even though it turns the NCMP principle on its head by advocating majority sales of profit-making PSEs.

The AGE report has five substantive chapters (apart from an introduction) on ownership issues, audit, Article 12, Parliamentary accountability, and vigilance.

Stated differently, the flesh is strong on how the NCMP promise of devolving managerial and commercial autonomy can be delivered. "The Group felt that to increase the autonomy of the CPSEs the Government must accept the difference between ownership and management and ensure that CPSEs are run by the Board of Directors and not by the owner."

So leave decisions on investments, joint ventures, subsidiaries, mergers and acquisitions and assorted other matters to the board. Introduce a performance-linked bonus for the chief executive and functional directors.

After all, the government has a presence on the board through directors and the ministry has a role, following guidelines, in appointing the chief executive and the functional directors.

Since CPSEs will now be commercial entities, change the form of CAG audit. Change the form of parliamentary and vigilance scrutiny.

Stagger devolution by first introducing them for navaratnas, then for mini-ratnas and finally for other profit-making CPSEs. If accepted, this will of course free PSEs from the umbilical cord of administrative ministries.

But AGE probably didn't believe that this umbilical cord can ever be completely severed. Hence, ministry control through appointments and representation on the board of directors isn't enough.

There must be supervisory bodies and twice-a-year ministerial reviews. However, if you accept there will be ministerial interference other than through the board, there must be a negative list to ensure this is not unwarranted.

Even then, if the AGE recommendations are accepted wholesale, as they should be, profit-making PSEs will obtain a considerable amount of managerial and commercial autonomy.

Having said this, the AGE report can be faulted on two counts. First, it doesn't pay enough attention to legal obstacles in granting this autonomy.

For instance, it ducks the Article 12 problem and there are also other issues in the Constitution and outside it, such as in the Prevention of Corruption Act.

Second, it can be faulted on what it says on disinvestment, and this is not because hell will break loose because profit-making PSEs can be privatised, contrary to the perceived NCMP intent.

Up to 51 per cent dilution, the AGE report leaves the decision to the board. Beyond this, for some PSEs (the residual category), it leaves decisions about sales of majority stake to the government and for some others (navaratnas, min-ratnas, those which have profits for three years and have positive net worth), it suggests parliamentary approval, even if the PSE has not been set up by an Act of Parliament.

This doesn't seem logical, other than the point about such parliamentary approval never being obtained. Thus, adhering to the NCMP intent, say goodbye to privatisation. Be satisfied with disinvestment. One now waits for a BRPSE report.