PUBLIC SECTOR ENTERPRISES IN INDIATRANSFORMATION, EMPOWERMENT, SUSTAINABILITY

13 DECEMBER 2013

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in India.

Confederation of Indian Industry (CII) would like to acknowledge the efforts put in by KPMG in India’s team for developing this report.

Knowledge Partner

CONTENTSEvolution and landscape of Public Sector Enterprises (PSEs) in India 01

PSEs — a force to reckon with 07

Challenges indian PSEs face 15

PSEs in other countries 23

Recommendations and conclusion 31

1

Following India’s independence, in 1948, Government of India (GoI) introduced the Industrial Policy Resolution (IPR), which outlined the approach for industrial growth and development in the country1. In this context, the GoI adopted measures to accelerate the pace of industrial development in India by setting up Public Sector Enterprises (PSEs) in core and strategic sectors. The objective was to become self-sufficient and reduce dependence on the import of essential goods or on foreign enterprises for industrial growth, and to also build the foundation that would allow India to break out of the mould of agrarian economy at the time of independence.

The larger purpose was to pave the way for rapid economic development through the creation and expansion of capacity and infrastructure in key sectors such as basic and heavy industries, steel, machinery, mining and others such as railways, post and telegraph, radio and airlines. Over the years, India has adopted a mixed economy framework, which strikes a balance between the respective roles of PSEs and private-sector companies. PSEs strengthened their presence in sectors such as manufacturing, engineering, mines and minerals, power, oil and gas, fertilisers, drugs, pharmaceuticals and telecommunications, as well as in services such as trading, tourism, warehousing and

select consultancy services, with some PSEs being listed on the stock exchanges.

The year 1991 saw considerable emphasis on economic reforms and liberalisation, which opened new opportunities for private and foreign investment, and led to the dismantling of the complex web of controls that hitherto, constrained the entry and thus unleashed a new wave of competition and growth in the Indian industry.

Under the changed economic environment, PSEs have, in recent times, adopted measures to modify their operating strategies and revisit their management of people, process and technology while also complying with evolving regulatory requirements.

PSEs in India play multiple roles in the social and economic development of the country. On the one hand, they contribute significantly to India’s GDP even amid an environment of severe economic crisis and promote industrial and urban infrastructure; on the other hand, they provide large-scale employment and contribute significant portions of their profits towards social development and CSR initiatives.

Some of the important contributions made by PSE include:

• Overall contribution to growth, output and industrial investment

• Employment and creation of jobs in the organised sector

• Taxation revenues

• Overall income of government by way of dividends.

The PSEs are able to converge social and economic objectives together with commercial targets, which is indeed a commendable feat especially by advanced PSEs.

Evolution and landscape of public sector enterprises in India

1 Final report by study group on reforms in state public sector undertakings, planning commission of India , Aug 2002

Structure of PSEs in India

India has a three-tiered administration structure comprising of the central, state and local governments. PSEs take up different forms at different levels, as required2.

Figure 1 : Structure of PSES in India

The table below gives a detailed description of the nature of PSEs:

Table 1: Structure of PSEs in India

Type Description Examples

Government companies This includes companies incorporated under the Indian Companies Act 1956; wherein the central or state government holds no less than 51 percent of the paid-up share capital. As of 2012, there were 260 CPSEs3. There are more than 800 government companies at the State level4.

Central: • Coal India Limited, Delhi• Metro Rail Corporation

State: • Delhi Jal Board• Bihar State Electricity Board

Statutory corporations A statutory or public corporation is a PSE, set up under a specific enactment by the central or state government. As per the Report No 2, 2013 on Financial Performance of CPSEs by Controller General of Accounts, there are six central statutory corporations in India.

• Food Corporation of India

• Airports Authority of India

• Damodar Valley Corporation

• Central Warehousing Corporation

• Inland Waterways Authority of India

• National Highways Authority of India.

Departmental enterprises A departmental enterprise is set up by the central or state government to execute economic activities controlled either by a particular ministry, a ministerial department or by an inter-departmental committee or board.

• Indian Railways

• Indian Post

• Ordnance Factory Board

• All India Radio

• Doordarshan

Public sector banks and public sector financial institutions

Public sector banks, unlike public corporations, are subject to separate legislation — The Banking Companies (Acquisitions Act) and the Banking Companies Act of 1949. Public sector financial institutions are engaged in providing long-term finance or financing institutions that lend to industries.

• Bank of Baroda

• Agricultural Finance Corporation

• Infrastructure Development Finance Company Limited.

Cooperative societies Cooperative societies are established pursuant to a specific policy objective, and hence come under the purview of PSEs. The government uses the cooperative form of business organisation to execute some of its economic activities.

• Gujarat State Fertilizers Cooperative Limited

• Indian Farmer Fertilizers Cooperative Limited

• National Cooperative Housing Federation of India.

Source: KPMG in India analysis

2 OECD - Occasional Paper - State Owned Enterprises in India: Reviewing the evidence, January 2009

3 Public Sector Enterprise Survey 2011-12, Dept of Public Enterprise

4 OECD Paper on State Owned Enterprises in India, 2009

2

Central Government

Government Companies

Cooperative Societies

Statutory Corporations

Autonomous Bodies

Departmental Enterprises

Trusts

Public Sector Banks and Financial Institutions

Deemed Government Companies

State Government Local Governments

3TH

EME 1

Table 2: Structure of PSEs in India

Type Description Examples

Autonomous bodies Autonomous bodies are societies set up under various ministries to promote designated objectives.

• Employees State Insurance Corporation under the Ministry of Labour

• Council of Scientific and Industrial Research− Ministry of Science and Technology.

Trusts Such types of organisations are usually PSEs that hold assets of the central or state government, in the form of trusts.

• Port Trusts of India

Deemed government companies These are PSEs covered under the Indian Companies Act and hold a major stake in the central government’s equity, but are managed by the private sector.

• Allied International Products Limited

• Chennai Ennore Port Road Company Limited.

Source: KPMG in India analysis

Milestones in policy reforms for PSEs

Indian Telephone Industries Limited was the first PSE established in the country in 19485. During the First Five-Year Plan (1951–1956), there was a gradual increase in the number of CPSEs focusing on heavy core industries such as the railways and the post and telegraph entities, as well as radio broadcasting. These industries were of pivotal importance to the public at the time and served as the backbone of communication for the country. They required large-scale investments that only the government could provide.

The agenda of the Industrial Policy Resolution of 1956 was to accelerate economic growth rate and the pace of industrialisation. The main objectives of setting up PSEs, as stated in the resolution were:

• To drive rapid economic growth and industrialisation in the country and create requisite infrastructure for economic development

• To earn returns on investment and, thus, generate resources for development

• To promote the redistribution of income and wealth

• To generate employment opportunities

• To promote balanced regional development

• To assist the development of small-scale and ancillary industries

• To promote import substitutions and save and earn foreign exchange for the economy.

The middle to end of the 1990s saw the gradual adoption of the Memorandum of Understanding (MoU) mechanism to enhance autonomy and improve the flexibility of CPSEs. A MoU is a negotiated document signed between the government, which acts as the owner of the PSE, and the specific PSE. The document contains the intentions, obligations and mutual responsibilities of both concerned entities. Further, a MoU attempts to move the management of PSEs — from management by controls and procedures — to management by results and objectives.

During 1992–2001, around 30 PSEs were divested to develop people’s ownership. The disinvestment led to the significant monetisation of the government’s investment in CPSEs and facilitated the sharing of value, created with the public at large, through the listing of CPSEs on the stock exchanges. The CPSEs’ performance in the recent past bears testimony to the various measures that have been taken to empower and improve the performance of these companies.

In November 2009, government approved the following action plan for disinvestment in profit making government companies.

5 Company profile of ITI Limited ,Website - http://www.itiltd-india.com/upload/ profile.html

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The categorisation of profit making CPSEs and awarding the Ratna status was a significant step by the GOI to grant increased levels of operational and financial autonomy to the PSEs. It also served as a mechanism to encourage more PSEs to review their strategies and perform better to achieve the now coveted Ratna status. The level of autonomy is determined based on the categories of the PSEs .According to the Public Enterprise Survey 2012, conducted by the Department of Public Enterprises, financial investment in CPSEs grew at a CAGR of 12 percent from INR 4,555.5 billion in FY08 to INR 7,292.3 billion in FY12. The enhanced scale of operation, along with up-to-date technology adoption to counter stiff competition, has led to increased financial investments in CPSEs. CPSEs showed robust performance in FY11 and FY12. Their turnover during FY12 grew from INR 14,980.2 billion in FY11 to INR 18,419.2 billion in FY12. In FY12, their turnover witnessed accelerated growth of 23 percent y-o-y (highest during FY08–FY12). The Central Exchequer sources the majority of its revenue from CPSEs through various taxes and duties. On an average, the payment of excise duty and corporate taxes accounted for ~40 percent and ~25 percent of the contribution to

the Central Exchequer, respectively, during FY08–FY12. In FY12, CPSEs employed 1.4 million people (excluding casual and daily rated workers), of which 25 percent belonged to the managerial and supervisory cadre, indicating that CPSEs account for a high percentage of the skilled workforce. As on 31 October 2013 the 50 CPSEs listed on the stock exchanges collectively contributed to about 15 percent of the market capitalisation.

Table 2: Milestones of evolution of PSEs in India

Phase Period Highlights

Developing the framework for the economy

1950 - 1969 • Industrial Policy resolution of 1956 — set the landscape of the industries in India

• Fledgling Indian private sector

• PSEs shouldered responsibility of capital goods sector

• Steps to develop a mixed economy of the country

• Total of 17 Industry sectors considered to be of strategic importance — reserved for PSEs under Schedule A.

Increasing penetration of PSEs 1969 - 1984 • Nationalisation of private sector enterprises such as — coal mining

• Introduction of the Import Substituting Industry Development (ISI) Policy and the policy for the licensing of industries

• Creation of monopolies in the private and public sector

• Imposition of high tariffs on imports to fuel growth of the domestic products

• Industrial Policy Statement of 1973: Identification of high priority industries where investment from large industrial houses and foreign companies was to be permitted.

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Table 2: Milestones of evolution of PSEs in India

Phase Period Highlights

Revival of PSEs 1984 - 1996 • Industrial Policy Statement 1980: Time-bound program of corrective action

• Industrial Policy Statement 1991: Industries reserved for public sector reduced to eight; review of the portfolio of services provided by the public sector and focus developed directed only towards core areas of economic interest

• Competition and de-reservation introduced in PSE monopoly sectors

• Disinvestment introduced involving limited and partial sale of government shares

• A system of MoUs promoted to build a transparent mechanism to evaluate the performance of PSE management

• The Board for Industrial and Financial Reconstruction (BIFR) created to provide second lease to loss making PSEs.

PSE empowerment 1996 - 1998 • Operational autonomy granted to very large PSEs

• Professionalisation of the ’Board of Directors’ in PSEs

• Disinvestment Commission set up with directives such as setting up disinvestment fund, restructuring to enhance intrinsic share value and increase autonomy among PSE Board

• Dramatic reduction in state compliance guidelines and requirements.

Reconciliation of PSEs 1998 - 2009 • Introducing the Navratna and Miniratna concepts to confer greater operational flexibility to PSEs as per the size of the PSEs

• Increasing prevalence of privatisation policies

• Buying back and cross holding of some shares

• Downsizing, restructuring and professionalising PSEs and governing boards

• Shutting down selected loss making PSEs

• In November 2009 , the government approved an action plan for disinvestment in profit making government companies.

Source: KPMG in India analysis on evolution of PSEs in India, December 2013,

Decoding the Ratna Status of PSEs

The Centre has empowered profit making CPSEs by granting operational and financial autonomy in order to equip them to react proactively to market forces. After assessment based on select criteria, CPSEs have been awarded the status of ‘Maharatna’, ‘Navratna’, ‘Miniratna – Category I’ and ‘Miniratna – Category II’ by the DPE, thereby granting enhanced powers. This form of intervention is reflective of the steps that the government is taking to create an

increasingly liberal environment for the PSEs to operate in and at the same time gives the necessary impetus to the PSEs to attain or upgrade the Ratna status. Honorable Prime Minister Shri Manmohan Singh has endorsed his support towards granting more functional autonomy for PSEs, emphasising the need for them to gradually move out of bureaucratic control so that they can compete at level playing fields with their private counterparts6.

6 Quote from Prime Minister Speech at the 3rd BRICS International Competition Conference of India (ICCI) in New Delhi, 22nd November 2013

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• Reported profit for the last three years with positive net-worth

• No default on loans/interest repayment to government guarantees

• No dependence on budgetary support for government guarantees

• Boards restructured with at least three non-official directors.

Miniratna-2

• Reported profit in the last three years with pre-tax profit of INR 30 crores in one of the last three years

• No default on loans/interest repayment to the government

• No dependency on budgetary support for government guarantees

• Boards restructured with presence of at least three non-official directors.

• Should be Miniratna 1 and Schedule A company

• Should have ‘excellent/very good’ rating in 3 of the last 5 MOUs

• Have secured composite score of 60 or more for seven identified parameters or ratios.

• Should have NAVRATNA STATUS

• Listed on Indian Stock Exchange as per SEBI guidelines

• Average annual turnover of > INR 25,000 Crore in the last three years

• Average annual Net-worth of INR 15,000 Cr in the last three years

• Average net annual PAT of over INR 5000 Cr in the last three years

• Notable Global Presence.

Source: Public Sector Enterprises Transformation, Competitiveness & Sustainability, KPMG in India report, 2011

Figure 2: Ratna Status of PSEs

Miniratna-2Miniratna-2Miniratna-2

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Role of PSEs in India’s economy

PSEs are the true engines of economic and social development in India.

From the economic development and industrialisation perspective, PSEs perform the following roles in an economy:

• Help achieve increased GDP growth

• Promote self-reliance in the production of goods and services

• Sustain equilibrium in balance-payments

• Achieve low and stable prices of essential commodities.

The following are some of the highlights quoted in the report on Performance Overview of CPSEs for the year 2011 -2012 issued by the Department of Public Enterprises:

• As against the nominal GDP growth of 15percent the gross value addition by all CPSEs grew by 7.38percent.

• The turnover of operating PSEs stood at INR 18419 Billion as compared to INR 14980 Billion.

• The CPSEs earned foreign exchange of INR 1244 Billion as compared to INR 917 Billion the year before.

• Reserves and surplus of all CPSEs increased by INR 602 Billion showing an increase by 9.59percent over the previous year.

• Contribution to the Central Exchequer by way of excise duty, customs duty, corporate tax, interest on central government loans, dividend and other duties increased to INR 1608 Billion.

PSEs — A force to reckon with

Graph 1: Contribution of CPSEs to India’s GDP

Source: Performance overview of CPSEs, 2011-12, Department of Public Enterprise

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Role of PSEs in social development and upliftment of the country

In addition to economic development, PSEs have been champions of inclusive growth for the economy by fulfilling their responsibilities towards the social development of the nation

• Employment generation

• Provision of basic infrastructure and public utilities

• Protecting consumers from commercial exploitation

• Promoting backward regions of the country and achieving a balanced regional development.

A large number of PSEs have been set up in remote areas of the country thus leveraging the local talent available and providing employment avenues for the population in these regions. PSEs have further successfully introduced changes in existing practices, thus facilitating

the proliferation of appropriate village technologies in agriculture and allied activities, village artisan and handicrafts and local village industry by inducing the use of productivity enhancing equipment and light machinery. A number of PSEs have been taking special interest in developing community development centres to discharge their social responsibility.

The establishment of PSEs paved the way for the development of infrastructure in their vicinities by constructing or improving existing link roads and inside roads within villages to make them increasingly accessible to PSEs. This helped ensure that each village was well equipped with power and utilities for domestic, commercial and industrial use.

The Five Year plans of India have always promoted the role that PSEs play in India’s Economy even setting up CPSEs as Greenfield projects. Below is a snapshot of CPSE contribution to the Indian Economy.

The table below gives a detailed description of the nature of PSEs:

Table 3: PSE contribution to India’s economy

Parameter Contribution

Turnover contribution to GDP During FY08–FY12 the contribution ranged between 20 percent and 24 percent.

Forex earnings A total of 34 CPSEs accounted for net foreign exchange earnings.CPSE Forex earnings accounted for 9 percent of total export earnings during FY08–FY12.

Employment generation CPSEs account for the largest section of employers in the country.

In FY12, CPSEs employed around 1.4 million people.

BSE market capitalisation CPSEs account for 20 percent of BSEs’ market capitalisation.

Performance indicators Around two-thirds of MoU-signing CPSEs have an ‘Excellent’ or ‘Very Good’ rating, indicating a healthy performance.

Growth The turnover of CPSEs during FY12 witnessed accelerated growth of 23 percent y-o-y (highest during FY08–FY12).

Source: DNB Report - India’s top PSUs 2013

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Some of the social upliftment initiatives that the PSEs in the country have spearheaded includes the following:

SAIL7: Focus on health and education: Free medical health centres have been set up for the poorer and weaker sections of society. Special schools have been started exclusively for poor and underprivileged children

Model villages and village adoption: As on 31st March 2012 SAIL adopted villages across eight states and developed 71 model steel villages

Environmental protection and conservation: SAIL has established environment management systems on production facilities. It has further installed anti-pollution equipment and adopted measures for the treatment of waste water , air pollution, solid waste and noise pollution.

Neyveli Lignite Corporation(NLC)8 In 1956, when NLC was established, this area was barren and a waste land. At the time of excavating mine and commencement of operations on 1960s, most of the area was under a thick forest cover. The corporation had embarked on an action plan to acquire the lands there and to transform them into residential spaces. Providing housing accommodation to its employees became an official necessity as the surrounding pockets were underdeveloped. During 1960-65, NLC, apart from generating power for Tamil Nadu and other states, had to take up housing projects. By 1970, about 300 employees, including those at the ranks of executives, were given houses. Thus, around this time, the seeds for a modern township as is seen today had been sown by NLC. Ever since NLC has planned in an organized manner to provide all basic amenities such as electricity and water to the households. The vision that NLC had to transform the region into a self-contained developed town, made the enterprise expand its schemes from a household point of view to society as a whole.

Oil and Natural Gas Corporation Limited9

Some of the CSR projects run by ONGC are as below

• ONGC along with HelpAge India continues its efforts to take healthcare to the doorsteps of the elderly through Mobile Medicare Units. In 2011-12, all the 20 MMUs were launched and almost 1.9 lakh treatments were provided across the eight States and one Union Territory

• ONGC helps operates five computer centres providing employment-related computer training to underprivileged youth across different operational areas of ONGC. In 2011-12, more than 1400 students have received free employability training through these centres.

• Project Utkarsh- Livelihood Project in Sibasagar: Initiated in 2011-12, this project seeks to expand livelihood opportunities for 400 households in one year through training of women in skills like tailoring, soft toy making etc. with linkages for income generation as well as training the elderly in vocations like goatery, piggery, mushroom cultivation etc. while establishing adequate forward and backward linkages.

7 SAIL Corporate presentation , March 2013 , http://www.sail.co.in/presentation

8 The role of public sector enterprises in rural development and social welfare, International Journal of Managing Public Sector Information and Communication Technologies (IJMPICT) Vol. 2, No. 1, September 2011

9 ONGC CSR initiatives from ONGC corporate http://www.ongcindia.com/wps/wcm/connect/ ongcindia/home/csr

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Growth of CPSEs in India

During the First Five-Year Plan, PSEs were involved in industries that were of pivotal importance to the public at the time. They served as the backbone of communication for the country, and essential industries, thus demanding large-scale investment.

Over the years, CPSEs have not only grown in number but also in the range of segments they operate in, such as steel, engineering, heavy machinery, petrochemicals, textiles, manufacturing and pharmaceuticals.

As on 31 March 2012, the number of CPSEs grew to 260 at a financial investment of INR7292.3 billion (including 225 operating and excluding seven insurance companies). This growth in the number of CPSEs indicates a considerable increase in government investments. Financial investment in CPSEs grew at an average rate of 12 percent, from INR4, 555.5 billion in FY08 to INR 7,292.3 billion, in FY12. During the same period, financial investment in CPSEs witnessed 20.7 percent growth10.

PSEs go global

The investment of CPSEs in ‘international trade’ in goods and services has been progressively on the rise. During FY12, 147 of 225 CPSEs were involved in either foreign exchange earnings (FEEs) or foreign exchange expenditure (FEE). A total of 34 CPSEs were net foreign exchange earners of more than INR 1 Billion during FY11–FY12.11

Graph 2: Growth of CPSEs in India

Graph 3: Foreign Exchange break-up of CPSEs

Source: PSE Survey 2011-2012, Department of Public Enterprise

Source: PSE Survey 2011-2012, Department of Public Enterprise

10 Dun and Bradstreet report on Top PSUs 2013

11 PSE Survey 2011-2012, Department of Public Enterprise

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CPSEs’ foreign earnings grew at a CAGR of 16.5 percent during FY08–FY12 and constituted 9 percent of the country’s total export earnings. The share of forex earnings as a percentage of total revenue averaged 6 percent during the same period. The main source of foreign earning is the export of goods and merchandise, which accounts for about 88 percent of total earnings. Foreign investment by CPSEs includes off-shore investment through— the establishment of Indian subsidiaries abroad, as well as joint ventures (JVs), and mergers and acquisitions (M&A). A number of CPSEs have set up subsidiaries abroad to market their products, procure raw material and consolidate their international operations. For instance, ONGC Videsh has acquired oil and gas assets abroad and has invested in 30 exploration and production projects in 14 countries, either directly or through wholly owned subsidiaries/JVs.

CPSEs such as ONGC, GAIL, HPCL, and BPCL are seeking equity stakes in overseas oil exploration and production entities in several countries such as Russia, Nigeria, Sudan, Iran, Angola and Brazil.

Several CPSEs are investing heavily to improve the profile of their teams to help them in overseas acquisition through training programs and strategic hiring at senior levels.

The government has already issued guidelines for PSEs to restructure their boards and has granted financial autonomy to support their foreign expansion strategies. This has helped Indian CPSEs to liberally undertake foreign expansion investment decisions.

According to the government’s directive:

• CPSEs that have restructured their boards should formulate specific vision statements and micro-level strategies and put into practice various measures that facilitate strategy implementation.

• CPSEs should outline their strategy and present their proposals to the Department of Public Enterprises for submission to the Committee of Secretaries for approval.

• CPSEs should periodically, preferably quarterly, monitor the performance of its globalisation efforts. This is also monitored at the apex level by a Committee of Secretaries.

Initiatives taken by PSEs and government to help achieve global competitiveness

Automation of processes and integrated IT setupIn FY12, PSUs spent 2 percent of their total revenues on IT, equivalent to INR454 billion. The investment is expected to help PSUs reduce operational costs through the automation of processes and integrated IT setups. In future, to compete with global competitors, PSUs are expected to invest heavily in Cloud, Big Data and mGovernance

Listing on the stock exchangeThrough its listing on the stock exchange, PSEs can enhance scalability and market reach in the global market.

Delegation of increased powers by the virtue of the title of CPSEsThe Maharatna, Navratna and Miniratna statuses conferred by the Department of Public Enterprises bestow CPSEs with increased autonomy to compete in the global market. The Maharatna status empowers boards of firms to take investment decisions involving up to INR 50 Billion without seeking government approval.

Introducing corporate governance in PSEsEffective corporate governance is essential for any sustainable business aimed at generating long-term value for shareholders and other stakeholders.

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State Level Public Sector Enterprise (SLPE) penetration in India

Most public utilities such as power generation, road transportation, water supply and irrigation fall under the state list. SLPEs often have direct linkages to similar apex enterprises, while a few are resource-based specific to the state /UT related to minerals, forest, produce, tourism, and so on. Some SLPEs manufacture sugar, cement, engineering goods, soap and textiles.

Table 4: Sectors Covered by SLPEs

Sector Industries/Services

Manufacturing Cement,textiles,electronics,paper,minerals,leather,chemicals, engineering, machinery

Term Lending and Promotional Industrial development corporations, state financial corporations

Transport State road transport corporations

Welfare Corporations set up to promote social development

Service and Trading Warehousing and tourism development activities apart from commodity corporations, state trading corporations and various essential commodity corporations, state trading corporations, civil supplies corporations

Agri and Allied Companies involved in plantation, poultry, seeds, sugar and other agro-based projects

Electricity State electricity boards

Source: Study group on reforms in State Public Sector Undertakings, Planning Commission, August 2002

Table 5: Performance of SLPEs

Parameter Highlights

Number of SPSEs 849 operating SPSEs

Total investment Total investment in 579 SPSEs around INR 2988 Billion

SPSE contribution to the exchequer

INR 280 Billion by 579 SPSEs

BSE market capitalisation CPSEs account for 20 percent of the BSEs’ market capitalisation

Employment generation Around 14, 13,646 employees during 2007–08.

Profit INR 8.65 Billion from 579 SPSEs

Source: SLPE Survey 2007-2008 released in 2012

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PSEs success stories

The opening of the economy has changed the market dynamics with the PSEs now being exposed to stiff competition both nationally and globally. Some of the PSEs have reformed their businesses and benchmarked their performance with best practices and are able to perform better than the rest of the PSEs with some of them now even becoming regulars in the Fortune 500 list companies of leading publications. The government is identifying PSEs that have the competitive advantage and potential to grow into global giants. Many PSEs especially the Maharatnas and the Navratnas have performed exceptionally well in the wealth creation of the country. One of the drivers for good performance by PSEs is the empowerment of their board by the government to take decisions in the areas of capital expenditures, organisational restructuring, resource mobilisation, mergers and acquisitions subject to the defined limits depending on the ratna category of the PSEs.

Based on the criterion of significant market share there are a number of CPSEs who could be identified as national champions in sectors such as coal, petroleum, telecommunications, power generation and transmission. The following is a snapshot of CPSEs that are key market players in their respective sectors.

The following are examples of the strides that the PSEs are taking towards achieving global competitiveness

• The Indian Railways which was once considered to be poised for bankruptcy is today regarded as among the best performing PSEs in the country. IRCTC has booked 135 lakh e-tickets at an average of 4.34 lakh each day in August this year against a total of 123 lakh e-tickets at an average of 3.99 lakh daily in the corresponding period last year, registering an increase of about 10 per cent in booking.12

• SAIL a Maharatna PSE has been in operation for over four decades. During this time , the company has not only delivered projects in India but also globally across Egypt, Saudi Arabia, Iran, Qatar, Bangladesh, Oman, the Philippines, Nepal, Taiwan, Thailand, Azerbaijan, Georgia, Nigeria and Sri Lanka. 13

• RITES, a Miniratna Category - I CPSE, were established in 1974 as a multi-disciplinary consultancy company to improve the performance of Indian transport, infrastructure and related technologies. The company has grown to become globally recognized as a leading consulting firm, and has also been engaged in projects across 62 countries in Africa, Southeast Asia, Middle East and Latin America. For foreign assignments, the company mostly engages with either national governments or other apex organisations.13

• Bharat Electronics Limited (BEL) produces electronic communication equipments such as HF/VHF communication transmitters and receivers and is engaged in the manufacture and supply of strategic electronic products primarily to the defence services. In order to expand its product portfolio the company has signed a Technology Collaboration Agreement (TCA) with Opetelian International Corporation and Bharat Electronics Limited of India. Towards the end of 2012 the company signed an agreement with Israel Aerospace Industries for cooperation on future long range surface to air missile ship defence systems.14

• Bharat Heavy Electricals Limited (BHEL) is the largest engineering and manufacturing enterprise in India in the energy related or infrastructure sector. It enjoys a share of 59 percent in India’s total installed generating capacity contributing about 69 percent to the total power generated from utility sets (excluding non-conventional capacity) as of 31 March 2012. We have been exporting our power and industry segment products and services for over 40 years. BHEL’s global references are spread across 75 countries. The cumulative overseas installed capacity of BHEL manufactured power plants exceeds 9,000 MW across 21 countries including Malaysia, Oman, Iraq, the UAE, Bhutan, Egypt and New Zealand. Our physical exports range from turnkey projects to after sales services.15

Table 6: PSE Market Leaders

Name of the CPSEDomestic Market Share

( In Percentage)

Neyveli Lignite Corporation 85

Manganese Ore India Limited 85

Coal India Limited 80

Container Corporation of India 75

Bharat Electronics Limited 64

BEML Limited 62

Indian Oil Corporation 46

Central Warehousing Corporation 33

Bharat Petroleum Corporation 23

Source: Performance overview for CPSEs - 2011 - 12, Department of Public Enterprises

12 ‘5.72 lakh e-tickets booked on IRCTC Website on a single day’, Business Line article, Sep 2013 http:// www.thehindubusinessline.com/industry-and- economy/logistics/572-lakh-etickets-booked-on-irctc- website-on-a-single-day/article5089161.ece

13 Public Sector Enterprises Transformation, Competitiveness & Sustainability, KPMG in India publication 2011

14 ‘Optelian Partners With Bharat Electronics Ltd. of India ‘ Bloomberg article , 2011 website : http://www. bloomberg.com/apps/news?pid=newsarchive&sid=a zGgg3giB9Lk

15 About Bhel released by BHEL , website: www. bhelpssr.co.in/MenuDocuments/About_BHEL.doc

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Challenges Indian PSEs face

Challenges Indian PSEs face Regulations and ownership

The world has witnessed resurgence in state capitalism since the 2007–08 financial crisis. The rise of state capitalism continues to be a major challenge for governments and regulators worldwide. Over the years, the Government of India (GoI) has adopted several measures to improve the efficiency and performance of its Public Sector Enterprises (PSEs), which have played a crucial role in shaping the modern Indian economy. Yet, governance challenges prevail and further reforms are required. There continue to be critical differences between PSEs and the private sector, which distort competition and market dynamics. While on the one hand, PSEs benefit from certain financial and legal privileges, they are constrained by social obligations and human resource challenges on the other.

Governance challenges in PSEs

Ownership and management issuesPSEs or State-owned Enterprises (SOEs) are characterised by interesting stakeholder relationships – those among citizens, politicians and bureaucrats. Of specific interest is the identity of owners, which remains largely ambiguous. Theoretically speaking, these organisations are owned by the public at large. In practice however, de facto control rights rest with bureaucrats, who usually follow goals dictated by political interests. This problem is further accentuated by the conflict between the roles of the government as a policymaker and a promoter. While as a policy maker the government would be inclined towards working in the larger interests of the nation, as a promoter it would be keen on maximising its returns. This conflict gets amplified as PSUs acquire a broader shareholder base by sourcing funds in overseas markets. The government’s intervention is in itself not bad all together as at times it is required and serves larger societal objectives. However these interventions should be more of an exception than a norm.

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Complex institutional frameworkThe GoI’s shareholding in CPSEs is held by the President of India, ex officio, whose powers as a shareholder is delegated to 38 administrative ministries, each with a distinct portfolio of CPSEs. The Department of Public Enterprises (DPE) serves as the nodal agency.

PSEs are governed by a complex legal and institutional framework. They are mainly driven by the Companies Act, Clause 49 of the Listing agreement and DPE guidelines. In addition, PSEs are required to adhere to MCAs Corporate Governance voluntary guidelines and other requirements issued by sector specific regulators such as Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA). According to a World Bank study, Corporate Governance of Central Public Sector Enterprises June 2010 the framework can be depicted as given on the side:

The main challenge in making a complex and control-oriented ownership structure more effective lies in striking a balance between CPSE autonomy and accountability. While boards have come a long way toward becoming increasingly professional over the years, there is enough scope for improvement, particularly in their decision-making ability and in eradicating political interference in day-to-day functioning. While globally there is a focus on boards and their committees, independent directors and management of CEO succession in India boards, are not as empowered and constrained by the will of the majority shareholders.

Recent measures initiated or proposed by the government pose further negative implications.

Share buyback: Case in point is the Department of Disinvestment’s proposal to buy back shares of about 20 cash-rich PSEs with a total cash reserve totalling INR200 billion. In addition, the Prime Minister’s Office (PMO) has now instituted a four-tiered approach of inspection to evaluate investments

of cash-rich PSEs that do not want to participate in the share buyback. It is further proposed that the investment plans of these PSEs be built into the MoU and the PSEs be appraised accordingly. The sector ministry will also be held accountable for the investment plan. The National Manufacturing Competitiveness Council will hold a quarterly review and report to the PMO for appropriate follow-ups.

This proposal weakens the 1997 DPE guidelines intended toward empowering large and important PSEs through special status and functional autonomy in decision making with respect to investments, capital expenditures, joint ventures, mergers and acquisitions, and raising of debt from capital markets.

Tunnelling of funds: To further the disinvestment agenda and utilise the surplus cash of CPSEs, the Ministry of Finance (MoF) has proposed to allow cross-holding among CPSEs. The proposal would allow the government to raise cash by selling its stake in one PSE company to another and vice versa, restricting the cross holding to 10 percent. Cross-holding

among PSEs would result in reduced investible resources. However, allowing CPSEs to acquire stake in other PSEs is akin to the ’tunnelling’ of funds from one company to another within a business group. Although cross-holding would reduce the government’s stake in the respective PSE, it presents the controlling shareholder with the opportunity to exercise indirect ownership rights in exerting control over firms. In a pyramidal ownership, where a firm is controlled by a chain of companies, the controlling shareholder often has the possibility of transferring funds from one firm to another. This practice, called ‘tunnelling’, may be highly profitable to the controlling shareholder (GoI). Share buyback and cross-holding among PSEs are potentially detrimental to the interests of minority shareholders, as the capital invested by these companies to enhance growth and shareholder value could instead be channelled toward the benefit of the controlling shareholder.

Figure 3: Structure of CPSE oversight

Source: World Bank study, 2010 on Coroporate governance of CPSEs

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Board Autonomy and functioningThat PSE boards enjoy limited autonomy is no mystery. However, there are two areas which need further introspection – sufficiency of the autonomy granted and extent to which this autonomy is availed. In case of the former, it is quite clear that PSE boards need greater autonomy. In case of the latter, the autonomy granted is not often practiced. Prevailing culture dictates PSEs to consult with administrative ministries on matters that would generally not require such consultation.

The question of autonomy also faces a threat from a recent government proposal. Under this, the government seeks to establish a process of appointing PSE CEOs as independent directors on the boards of other PSEs and government nominees in board committees. However, by aspiring for board positions in other PSEs, there is a risk of boards becoming unmanageable with various constituents working toward divergent objectives and pursuing different agendas. With predetermined board priorities, there is a heightened risk of ministerial orders taking precedence over strategic and commercial considerations.

Risk aversenessDPE guidelines place special emphasis on enterprise risk management. One of the lessons learnt from the financial crisis has been the widespread failure of risk management.

In 2011, the Planning Commission constituted ‘Panel of Experts on Reforms in Central Public Sector Enterprises’

remarked in its report that CPSEs are suffering from over governance and this has permeated a culture which discourages prudential risk taking. SK Roongta Committee, recently appointed by the government to review PSU performance, has voiced the same opinion stating a cocktail of stringent vigilance norms (CVC, CA&G), excessive regulation and accountability measures has created a culture of risk-aversion and indecision at PSUs.

In their opinion, the following factors have resulted in ‘over governance’:

• Scrutiny from various parties such as the CA&G, CVC, the administrative ministry and various parliamentary committees.

• CPSEs being brought under the ambit of Right to Information Act (RTI)

• Ambiguities in the roles of various stakeholders resulting in often time consuming compliance summons.

Disclosure standardsCPSE disclosure standards are comparable to many Organisation for Economic Co-operation and Development (OECD) countries and the Right to Information (RTI) Act has further pushed the frontier on accountability and transparency. Implementing these disclosure requirements, however, can be a major challenge for many CPSEs, particularly in light of relatively weak internal audit and control functions; lack of guidance on disclosure (especially for non-listed firms); and potential delay in CPSE audits.

Challenges Indian PSEs face Talent management

Despite ever-evolving operational complexities and a dynamic business environment, PSEs have over the years undergone unprecedented change. The challenges they face today in the areas of talent and workforce management are as follows:

War of talent: PSEs are now exposed to a talent war of sorts, with the potential and existing workforce now exposed to multiple opportunities in the private sector, both globally and in India. Thus, PSEs need to upscale their investments in people-related interventions that would be at par with their competitors.

Ageing workforce: The overall trend of an ageing workforce in PSEs is an area of concern, especially as the pipeline to fill in positions of retired employees is not commensurate to fill the future requirements. The limited pipeline can be primarily attributed to the perception among the youth around the avenues of growth which the PSEs have to offer to overall professional development.

Lack of robust appraisal and performance management systems Performance management systems in most PSEs is based on years of experience rather than individual performance against identified goals, which would be relevant to both the individual as well as the organisation. Consequently, the motivation to outperform is low, and competitive spirit among PSEs tends to be amiss.

Reactive succession planning: Currently, most PSEs are reactive while progressing towards succession planning. As most of the top-brass of all PSEs nears retirement, it is imperative that PSEs proactively groom next-level leaders not only for all critical roles, but also for specialised jobs and future strategies that PSEs have envisioned.

Limited focus on training and development in PSEs: The penetration of training and development programs across levels in PSEs is usually limited. It is essential that PSEs adopt an organization-wide approach to ensure that the training needs are met. This can facilitate capacity development for crucial requirements and increase workforce productivity.

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Challenges Indian PSEs face Technology management

To improve productivity and efficiency, PSEs should focus on technology improvements. PSEs operate amid stringent government regulations, considerable technological obsolescence and the unavailability of skilled manpower; thus, by leveraging technology they could effectively monitor their performance indicators and advance towards achieving their goals.

The various technology management challenges that PSEs face are as follows:

Pace of IT adoption slower compared to private sector counterparts: Many PSEs still operate with legacy systems that are more paper-based, and technology is fairly obsolete. While some major PSEs have been identified as leading spenders in IT, they have a long way to go before they can be considered at par with their competitors.

Effectiveness of IT systems in PSEs: PSEs have limited returns on investment in IT. The major causes for this include casual approach towards IT systems selection, lack of management and employee buy in, inertia among employees to change due to perceived job insecurity, and loss of power within teams in the scenario of IT intervention.

Ineffective due diligence before incurring the IT investment: PSEs’ decisions to adopt and invest in technology are not based on thorough due diligence, which involves all stakeholders. Consequently gaps in the existing systems are not mapped accurately to the system that is finally adopted.

Skilled manpower: PSEs have limited manpower with best-in-class, IT-related skill sets, as the majority of the talent pool is absorbed by the private sector and global players; therefore, PSEs have limited resources to execute their vision. Consequently, they are also dependent on outsourced agencies to execute their projects.

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Challenges Indian PSEs face Competition and competitiveness

In recent years, the globalisation of the economy has provided new opportunities in almost all major sectors and brought in many private players, thereby resulting in increased competitiveness in various industries. As competition increases, the responsibility to concentrate efforts on strategising towards dealing with it is also growing.

The integration of the Indian economy with global markets has resulted in several challenges and concerns for PSEs. These challenges act as impediments in the growth of PSEs and also make it difficult to operate in a competitive environment. Since their inception, public enterprises have been bereft of adequate autonomy and authority to make investments and acquisitions whether in India or overseas, unlike their private counterparts. Some major areas of concerns for PSEs, especially CPSEs, are enlisted below:

Archaic methods of projects and operations management: Currently, CPSEs do not extensively benchmark their capabilities and offerings with private players to remain competitive and aligned to the pace of the industry. They operate in silos, thus leaving customers asking for more in terms of a sound value proposition.

Increased bargaining power of the buyer: The bargaining power of the buyer has increased in consumer-driven markets where PSEs face stiff competition from private players. Similarly, on the supplier side, with the increase in the number of players, the bargaining power of the supplier has increased. This is because there are more contenders for materials and products that were earlier only sourced by PSEs.

Lack of financial autonomy: Unlike their private counterparts, CPSEs do not enjoy financial independence. This often leads to delays in decision making. Formulating a business case for raising funds and seeking approvals can be an arduous task for CPSEs.

Inadequate implementation of quantitative performance metrics: The practice of linking financial parameters with operational efficiency to judge the performance is not that prevalent amongst PSEs. Consequently, they find it challenging to compete with private sector companies whose processes are relatively well-aligned. This has constricted the opportunities available to the sector.

Lack of autonomy in decision making: Historically, PSEs have been at a disadvantage due to lack of autonomy. Initially, the delegation of powers was restricted. Consequently, when the Indian economy opened up in the early 1990s, such companies were caught off guard and lost out on several expansion opportunities both within the country and overseas. The need of the hour was to divest more by granting additional financial and operational autonomy to top management. Conceptualising Maharatnas and Navratnas was one such step towards enhancing autonomy.

Corporate governance: The lack of a suitable governance structure for CPSEs often inhibits the transparency and free functioning of these enterprises. Multiple reporting agencies exist with separate agendas, thereby, impeding the growth of CPSEs. Further, there is an urgent need to disengage management autonomy from board composition to achieve a clear and unambiguous growth map.

Political interference: There is often a clash between the agendas of political parties and the objectives of CPSEs, which may impair their growth and autonomy. As public enterprises, political parties are likely to influence the decision making of these CPSEs. Interference tends to be more in areas such as recruitment and transfers. A significant proportion of senior management’s time and effort every month is spent on managing parliamentary questions and other queries under RTI.

Challenges Indian PSEs face Building global presence

Today, the economy is highly globalised, which has enhanced liberalisation and increased the focus of companies to expand operations beyond their shores to enhance their gains from various available opportunities. The Central government is vigorously pursuing the policy of internationalising PSEs by granting them autonomy to invest abroad and form JVs. There is growing emphasis on securing high export earnings from these enterprises, and they have been allowed to mobilise funds from abroad through various channels. Some enterprises have also done exceedingly well to expand their international operations.

Challenges faced by Indian PSEs while trying to globaliseIt is important for PSEs to introspect to what extent they are globalised. Globalisation does not necessarily translate into the number of sales offices in foreign countries. The number of international vendors, the use of updated global technologies and international technical professionals, R&D efforts with global peers, the international exposure of teams may also count as indicators of the degree of a company’s globalisation. However, the inherent problems of autonomy and ownership apart, Indian PSEs face considerable other challenges in building global presence. A few of these are as follows:

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Challenges Indian PSEs face Balancing social development goals with economic goals

Obligation to share the subsidy burden: There is a significant subsidy burden on public sector upstream companies such as ONGC and OIL. The rise in subsidy burden is likely to hit the growth of upstream PSEs such as ONGC, which uses Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) in ageing oil blocks, this has increased production costs. However, since the company has to sell its oil downstream to public sector refining companies such as Indian Oil at a discount, its profits are eroded.

Focus on CSR activities: PSEs face numerous challenges while implementing CSR. These include legal constraints, transparency in CSR funding and spending, the selection of the most appropriate vehicle to execute CSR activities, and taxation and legal implications. According to the Companies Act, profit-making companies (both public and private) have to spend 2 percent of their profits on CSR projects. This implies that CSR, which was hitherto restricted to guidelines, has now become a legally bound obligation for PSEs. PSEs are reluctant to spend on CSR projects as they are now answerable for their expenditure, and if an NGO handling their CSR work undertakes some dubious activity, intentionally or otherwise, PSEs can face allegations and questions in court.

Non-aggressive approach towards exploring new markets: Indian PSEs are competitive in the domestic market, but they are not as aggressive while exploring new viable markets globally.

Need for performance metrics to monitor global growth: PSEs do not monitor their global trajectory periodically to understand existing gaps and areas to leverage and consequently formulate vision statements and micro-level strategies that do not necessarily match their needs or goals.

Restrictive CVC guidelines for PSEs: Private companies often resort to spot sales and purchases and offer discounts even below the manufacturing price to try and capture the market. These practices are particularly prevalent in the international market. Such practices may conflict with CVC guidelines and norms set by the government, which need to be re-examined considering the competitive global environment. PSEs, thus, need preferential support from the government for allotting a portion of the domestic demand to compete globally. Economic support such as tax incentives on exports can also be considered. Purchases and sales guidelines could also be made less stringent owing to the highly dynamic and competitive nature of the market.

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Challenges Indian PSEs face Sick units and privatisation

Sickness in Indian industry is a phenomenon that has, for long, coexisted with healthy industrial enterprises. It took a quantum leap with the onset of the new economic order, ushered in by liberalization and globalization. The GoI set up a committee to examine the matter and suggest potentially suitable remedies to improve industry health. Based on the committee’s recommendations, the GoI enacted a special legislation, the Sick Industrial Companies (Special Provisions) Act, 1985, commonly known as the SICA.

The key objective of SICA is to determine sickness in industry and expedite either the revival of potentially viable units or the closure of unviable units (unit refers to a sick industrial company). It was expected that by revival, idle investments in sick units would become productive and by closure, locked-up investments in unviable units would be released for productive use elsewhere. In 1991, CPSEs were brought under the purview of SICA 1985. The government subsequently set up the Board for Reconstruction of Public Sector Enterprises (BRPSE) in December 2004 to advise it, inter alia, on measures to restructure/revive, both industrial and nonindustrial CPSEs.

Causes of sickness in the public sectorThe adverse effects of resisting the changing times and technology on the fortunes of an enterprise can be witnessed in the comparatively high number of sick CPSEs today. The drivers of losses and sickness in CPSEs vary from enterprise to enterprise. In some cases, the cause is often historical. For example, textile companies, which were taken over from the private sector on socioeconomic considerations, could not be rapidly modernised.

Likewise, various enterprises in the engineering and refractories sectors failed to keep pace with the evolving market landscape. Companies in some other sectors, such as consumer goods, turned sick over the years due to factors such as insufficient job orders, high manpower costs, inadequate funding, technological obsolescence, high input costs and competition from relatively less expensive imports. A poor debt-equity structure, weak marketing strategies and slow decision making constitute some of the other factors associated with sick and loss-making PSEs.

• The turnaround of sick PSEs should not be the ultimate decision-making factor. The feasibility of such an operation needs to be extensively analysed, before any measures are adopted for it. If there is a risk or low probability of turnaround, it is advisable to liquidate the assets of the organisation in question, in favour of other industrial/commercial projects in the area.

• Clauses related to land-use pattern should be taken up and legislated within specified limitations.

Table 7: Loss making CPSEs in India

Year No. of Loss Making CPSEs

2002–03 105

2003–04 89

2004–05 73

2005–06 63

2006–07 61

2007–08 54

2008–09 55

2009–2010 60

2010–11 62

2011–12 63

Source: CPSE Survey 2011–12

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PSEs in other countries

In developing economies such as India, state-owned enterprises (SoEs) play a pivotal role in nation building. Challenges such as undue government intervention, inactive boards and lack of transparency are seen across the board and have compelled these countries to revisit their approach to governing SoEs. In fact, state ownership is a political issue in many countries. For the past two decades, it has been observed that governments of developing economies tend to avoid direct ownership in private enterprises. They are now increasingly evaluating the need to re-nationalise their key financial sectors and other assets of national importance.

As the definition of SoEs varies the world over, it is quite challenging to compare the role of state-owned companies across countries. However, in this chapter, we have tried to objectively evaluate the scenario of SoEs in certain countries across the globe.

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In China, SoEs are wholly or majorly owned by the Chinese central, provincial, county or municipal government.

1949-80

• After 1949: The Government of China created and owned all business entities in the People’s Republic of China (PRC).16

• 1950–1980

– SoEs were managed under a centrally planned system without private enterprise or significant foreign investment. To support industrialisation, the central government undertook large-scale investments in physical and human capital, primarily through the central-government controlled SoEs. Large SoEs supported a large section of the population by providing a lifetime of benefits, including, but not limited to, housing, canteens, parks, on-site schools and playgrounds, as well as hospitals and clinics.

– By 1978, centrally controlled SOEs contributed about three-fourths of industrial production. Since China’s reforms and opening up in the late 1970s, SoEs have undergone a variety of reforms, as the country moved away from a planned economy towards a market-driven economy with private and foreign investment in many sectors.17

– In the late 1980s, the government began reforming SOEs.

1990s and 2000s

• In 1994, it was no longer mandatory for SoEs in China to pay the State dividends. Stock market-listed SoEs, however, had to continue paying dividends to their non-listed and wholly owned parent entities (holding companies). These companies, in turn, retained their profits instead of handing them over to the government. While this suggests that these companies were cash-rich, SoEs at the time were in a difficult position with only a few profitable

companies and many loss-making ones in hand.18

• The year 2003 saw the establishment of State-owned Assets Supervision and Administration Commission (SASAC) which launched a process of redefining the relationship between the central government and the so called ’central enterprises’. The underlying principle of SASAC contains both centralizing and decentralizing features. It clearly separates central, provincial and municipal SoEs and hands over their control to SASAC offices at the respective administrative levels. However, on the other hand, the central government asserted its authority by taking all central enterprises away from the control of various government agencies and putting them under the unitary supervision of an organ that reports directly to the State Council.

The following flowchart illustrates the governance of the SoEs in the PRC set up.17

China

16 ‘Oct. 1949: PRC is established’ article published in China Daily, 2009, website: http://www.chinadaily.com.cn/60th/2009-09/01/content_8642545.htm

17 KPMG Global China practice report : China 360: ‘State owned entities: From centrally-planned origins to hybrid market competitors’ June 2013, http://www.kpmg.com/CN/ en/IssuesAndInsights/ArticlesPublications/Newsletters/China-360/Documents/China-360-Issue9-201306-State-owned-entities.pdf360-Issue9-201306-State-owned-entities.pdf

18 ASIA PAPER: “Chinese Strategic state-owned enterprises and ownership control” by Michel Mattlin, Brussels Institute of Contemporary Chin Studies, http://www.vub.ac.be/biccs/ site/assets/files/apapers/Asia%20papers/Asia%20Paper%204(6).pdf

Figure 5: Governance of SOEs in PRC set up

Source: China 360: ‘State owned entities: From centrally-planned origins to hybrid market competitors’ June 2013, KPMG in China report

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Industrialisation in Singapore gathered momentum late relative to other countries. To accelerate economic growth, SoEs, locally known as government-linked companies (GLCs), as well as statutory boards were established in Singapore to expand the economy by compensating for funding and talent shortages in the private sector.

The majority of GLCs in Singapore were established in the late 1960s and 1970s, often considered the early era of Singapore’s economic development. The establishment of other GLCs, in newly independent states, were either nationalised or motivated by political objectives. It was anticipated that GLCs would provide commercial returns. However, they were privy to the same regulations and market forces that private entrepreneurs were subjected to. Further, they did not receive any preferential treatment or subsidies.

In the late 1960s, despite its economy coming into its own, Singapore’s challenge was to establish presence overseas and institute GLCs such as the International Trading Company (Intraco) to facilitate its trade linkages abroad. .

Incorporated in 1968, Intraco was a joint venture between the Singapore government, the Development Bank of Singapore (DBS) and other private entities. It evolved to become Singapore’s leading state trading enterprise (STE). Civil service officers and private sector employees, working as marketing and product professionals initially constituted Intraco. Product professionals were expected to coordinate with local manufacturers and

offer technical knowledge, facilitate the bulk purchase of raw material and drive product sales to potential buyers overseas. The mid-1980s witnessed the initiation of the privatisation process of Singapore’s GLCs. The objective was to increase economic integration through free-trade agreements and keep Singapore up-to-date with changes in the international economy.27

19 Paper on ‘Divesting State Owned Enterprises’ by Faizal bin Yahya, website - www.wbiconpro.com/319-Faizal. pdf

20 Dissertation on ‘Corporate Governance of State- Owned Enterprises: Investment holding structure of Government-Linked Companies in Singapore and Malaysia and applicability for Indonesian State-Owned Enterprises’ by Agung Wicaksono, Indonesia

Temasek holdings: Holding structure to govern GLCs

• Temasek Holdings is the Singapore government’s private investment arm and the holding company of Singapore’s GLCs. Based on Temasek’s definitions, GLCs are those companies in which the government controls the majority of voting rights and/or has ownership of 20 percent or more. Temasek’s GLCs fit the second category, with about 80 percent being either directly or indirectly government-controlled. Only a relatively small percentage of GLCs in technology, shipping and banking are indirectly managed through inter-corporate equity shares between non-GLCs and GLCs.20

• The Singapore government is a major shareholder in Temasek Holdings, and the company reports to the highest government office — the President. Consequently, the company has a strong government-owned attribute. Yet, in 1974, Temasek was established as an exempt private company with limited liability to hold investments in companies that the Singapore government previously held. Therefore, by definition, Temasek is a private company.20

• According to Temasek, the Singapore government should control and own companies. This perspective is driven largely by key areas where the ownership of a resource is of considerable significance to the country’s security and economic health. This was one of the driving forces behind the creation of Temasek Holdings’ model. Temasek’s focus on sound governance has allowed it to achieve a portfolio value of S$164 billion (about US$108 billion). The company’s value has multiplied more than 400 times since its inception in 1974. Temasek companies are known to adopt and adhere to a “glocal” model for integrated corporate governance. Thus, Temasek not only enhances investment for its shareholder, the Singaporean government, but also generates additional income for it. This income can be used to fund development initiatives for the people —its stakeholders. Thus, the benefits of one concerned party lead to the generation of capabilities that satisfy others, making this approach a win-win situation for both shareholders and stakeholders.20

Singapore

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Public enterprises in South Africa date back to long before the twentieth century. Moreover, the objectives behind conceptualising and establishing public enterprises in this region are varied. Some were incepted in the late twentieth century, while others were formed even further back in history.

The twenty-first century has also witnessed the establishment of many PSEs. However, their restructuring was almost inevitable and necessitated by factors such as South Africa’s democratisation in 1994; the rapid evolution of technology and modernisation; the global economic scenario; and changing socio-economic and political trends.21

Restructuring can either be initiated or driven by the Executive Authority or be internally driven, either by the board or management. The restructuring initiatives of PEs in recent times have yielded mixed reactions and, in some cases, even undesirable consequences.

Represented below is the landscape of the SOEs in South Africa

Following are some SoE restructuring case studies in South Africa:

1. Restructuring by the Apartheid government on the eve of democratisation: This drove the selling of several strategic state entities and the creation of a specific unit for privatisation.

2. The second large-scale restructuring initiative took place in the late 1990s. This led to either many entities being sold or equity partners being inducted to boards. The majority of these transactions subsequently failed, prompting the State to re-acquire the sold equities at much higher values.

3. Other recent initiatives include those by public enterprises such as Transnet; the sale of V&A Waterfront’s equity stake; and efforts to sell equity in Eskom. However, many of these initiatives do not exhibit evidence of central coordination or fitment with the country’s larger vision and policy directives.

South Africa

Figure 5: Landscape of SOEs in South Africa

21 Report on ‘Restructuring of State owned enterprises in South Africa’ by Presidential review committee headed by Thabo Mokwena

Source: An evaluation of regulatory framework governing SOEs in the republic of South Africa by Victoria Bronstein and Morne Oliver

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Figure 5: SOE Governance structure in South Africa

Source: Adapted from Du Toit , H.2005 “Governance Oversight role over SOEs in South Africa , National Treasury

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The SoEs are not dominant in Indonesia as they are in China ; however, the number of SoEs in Indonesia is high, given that the Indonesia government founded them approximately 50 years ago to fulfil its economic and social goals.

The Indonesian government has been struggling to find ways to manage its SoEs. The SOEs are characterised as being inefficient, mismanaged, governed by heavy political interference . While the governments realise that there should be a concentrated strategy to leverage the potential of the SOEs, democratisation has also made the reform process difficult due to entry of more stakeholder groups which now have a say in the restructuring process. Thus, the privatisation of SoEs not only holds the key to generating revenue for the State budget but also steering SoEs into market discipline by functioning as a driver for efficiency.

Foreign parties have played a significant role in acquiring SoE shares divested by the Indonesian government as only a few major Indonesian businesses had the capital necessary to acquire the divested shares after the crisis. However, economic nationalism seems dominant in Indonesia’s response to globalisation. Currently, there are 141 State-owned enterprises and 18 companies in which the government has minority stake.22

The case of corporate governance of GLCs under Singapore’s Temasek Holdings has drawn interest, as it is a possible model for Indonesia to govern its SoEs. However, the Singapore model can work properly only in a system that has good and clean governance not only at the level of enterprise management, but also at the level of government and public sector management.

Table 8: Number of SOEs in Indonesia

2006 2007 2008 2009 2010*

Listed 12 14 14 15 16

Corporations (non-listed)

114 111 113 112 111

Special purpose entities

13 14 14 14 14

Total SoEs 139 139 141 141 141

Corporations in which the ministry has a minority stake

21 21 21 19 18

Source: Presentation by Dr. Ir. Mustafa Abubakar M.Si. Minister of State-Owned Enterprises Republic of Indonesia

Indonesia

22 Dissertation on ‘Corporate Governance of State- Owned Enterprises: Investment holding structure of Government-Linked Companies in Singapore and Malaysia and applicability for Indonesian State-Owned Enterprises’ by Agung Wicaksono, Indonesia

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Like India the Irish economy was agriculture based and relatively undeveloped at the time of its independence in 1922 and there was a lack of basic industries. The State immediately assumed a leadership role in promoting economic development. The first commercial public enterprises were established in 1927. Subsequently the formation of public enterprises was often on ad hoc basis initially reflecting the imminent need of the government at the time .

The establishment of SoEs started with initiating activities strategically important economic activities which the private enterprises failed to take up on a sufficiently extensive scale. The Irish government introduced the Harbours Act which changed the legislation for governing Irish ports and harbours and provided the basis of port companies. More recently, State ownership in the financial sector has increased as it has taken large equity positions in distressed banks. In 1980, the National Economic and Social Council (NESC) published a report on ‘Enterprise in the Public Sector’ that sought to facilitate SoEs to maximise their contribution to economic growth while conforming with the need for public information and accountability in relation to their activities and the requirement for central policy-making in relation to the allocation of public funds.

There were concerns initially that SoEs in Ireland were getting increasingly associated with unjustified monopoly, high costs, consumer indifference, regulatory capture and seeking subsidy rather than development corporations that acted in national interest. The board and management teams were also perceived

as weak and dominated by public sector trade unions. While many industrialised countries were embarking on programmes of liberalisation and privatisation in the early-1980s, the thrust of the Irish SoE policy was on commercialisation and exerting pressure on the management to improve financial performance. However, the fiscal crises of the 1980s and political developments initiated liberalisation and privatisation in the country.23

The creation of a single European market offered enormous opportunities to Irish firms and facilitated a reassessment of policies to switch from protecting State enterprises to improve competitiveness.23

The global importance of SOEs can be estimated by highlights which are as follows:

• Out of the 2,000 largest companies globally, 260 are from Brazil, Russia, India, Indonesia, China, South Africa (BRIICS) countries, with China and India accounting for the majority of them. About 123, or 47 percent, of these largest BRIICS enterprises have been classified as SoEs according to our definition, with China and India accounting for 70 percent and 30 percent of them, respectively. The market value of SoEs amounts to 32 percent of GNI(Gross National Income) among all BRIICS countries. Further, with the exception of South Africa, SoEs control relatively large amount of assets in BRIICS, with China, India and Russia leading the list. The total value of assets of all BRIICS SoEs listed on Forbes Global 2000 is equivalent to the value of their GNI.24

The extent of State ownership and the success of the SOEs are subject to the country’s history, its level of economic and institutional development, the political system, macroeconomic situation, structural characteristics, comparative advantages, access to various resources, as well as its integration with international trade and investment markets.

Leveraging the role of SOEs in nation building, modifying the approach in the SOE Governance, increasing transparency and accountability is a consensus which can be drawn from the above illustrations.

Ireland

23 ‘The Role of State Owned Enterprise: Providing infrastructure and supporting economic Recovery’ report published by Forfás , Ireland’s policy advisory board for enterprise, trade, science, technology and innovation, July 2010

24 OECD report on state-owned enterprises: Trade effects and policy implications- March 2013

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Recommendations and conclusion

For India to scale the ranks and achieve global competitiveness, it is imperative to empower the country’s PSEs, which constitute the backbone of its economy. This will likely give PSEs the thrust required to transform and sustain in a very competitive marketplace. Over the years, governments have taken into account the challenges that PSEs face and have accordingly constituted committees to gauge, estimate and devise recommendations that have been instituted to adapt to the environment in which they operate.

The following are among the key recommendations from some of these committees:

Arjun Sengupta Committee’s recommendations

In November 2004, the GoI established the Ad-Hoc Group of Experts (AGE) to consider CPSE-related issues. In April 2005, this committee put forward its report and recommendations on issues related to the power of CPSEs, ownership, audits of government companies, Article 12 of the Indian Constitution, parliamentary accountability, and vigilance management in PSEs.25

The AGE’s recommendations, which were regarded as extreme at the time of their release, pertained to strengthening the powers that Navratna, Miniratna and other profit-making CPSEs held. Initially, these recommendations were taken into consideration, and the Cabinet even approved proposals to enhance the authority delegated to Navratna, Miniratna

and other profit-making-CPSEs. Orders to this effect were also released in August 2005. Based on the recommendations of the Group of Ministers (GoM), a Cabinet note was formulated. It was considered and approved by the Cabinet in its meeting on 26 April 2007 and the orders in this regard were issued in May 200725.

The government accepted the following recommendations made by the AGE:

• The holding companies should be empowered to transfer assets, float fresh equity and divest shareholding in subsidiaries subject to certain conditions.

• Budgetary support to implement government-sponsored projects of national interest and government-sponsored research and development projects should not disqualify CPSEs from retaining the Navratna/Miniratna status, subject to conditions.

• The Chief Executive of the CPSE should be a member of the search committee responsible for selecting independent directors for the concerned CPSE board of directors.

• Guidelines related to foreign travel by board-level executives in CPSEs should be the responsibility of the respective boards.

• Internal committees in CPSEs should be instituted to assess disciplinary cases before they decide to initiate departmental proceedings — for example, setting up an advisory board to consider CPSE-related cases in the banking sector.

• The powers delegated to Navratna, Miniratna and other profit-making CPSEs should be augmented25.

The GoI discounted the AGE’s recommendations on the following aspects:

1. Board of directors raising equity from the market without government approval

2. Establishment of six supervisory bodies and related recommendations

3. Role of the government director

4. Issue of presidential directives

5. Review of the company’s functioning for not more than twice a year

6. Negative listing of areas

7. Powers to approve capital expenditure without the approvals of the Public Investment Board/Cabinet Committee on Economic Affairs

8. Appraisal of independent and government directors

9. Revisit of Article 12 of the Indian Constitution

10. Appointment of chief executives and functional directors to the board of CPSEs till the age of superannuation

11. Appointment to board-level posts in JVs/subsidiaries.25

25 Recommendations of Arjun Sengupta Committee Report, Press Information Bureau , GOI , August 2012, Website : http://pib.nic.in/newsite/erelease. aspx?relid=87029

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Roongta Committee report, 2010–1125

Although they have exhibited a marked improvement in performance, Indian CPSEs continue to operate under multiple constraints. To help Indian CPSEs strengthen their performance, the Planning Commission constituted a ’Panel of Experts on Reforms in Central Public Sector Enterprises (CPSEs)’, chaired by Shri S.K. Roongta, in 2010. The panel examined a range of issues — related to HR and corporate governance, the MoU mechanism, effective partnerships with the private sector, diversification, mergers and consolidation and technology mapping in CPSEs — and suggested a road map for their development. Some of the committee’s recommendations are as follows:26

Focus on growth and sustainability: The committee has stated that the development of a strategy and business development committee — in addition to the audit, human resources and remuneration committee — would help strategise and evaluate business development proposals and guide a company’s diversification, acquisition, JVs, new business entry, the review of organisational structure, etc. This would help pre-empt strategies and facilitate CPSEs to inculcate a proactive culture in governance. The committee also recommended that the Comptroller and Auditor General of India (C&AG) should publish an annual report on best practices for diverse fields in different CPSEs, as observed in the process of performing the ‘Oversight Functions,’ to be shared with other CPSEs. This was expected to not only help CPSEs learn from each other and improve their performance, but also create a positive mindset around the role of C&AG among them. The committee recommended that at least 30 additional CPSEs be listed in the next three years, which should increase to 50 in the next five years. Additionally, where there is a specific need to enter a partnership in line with the board’s approved strategy, an ‘in principle’ clearance should be taken from the administrative ministry. 26

Focus on empowerment: To reduce government intervention, the committee has suggested segregation in the role of the government nominee on the board from its position in the GoI. This would empower the government nominee to suggest perspectives in line with other independent directors without prejudice. Any official views of the government could be officially conveyed to the board during board meetings. This would help ensure that government views are taken in to consideration along with the other stakeholders.

The panel has recommended increased autonomy for CPSE boards with regard to the selection of consultants, vendors with proprietary technologies, technology partners, JV partners and companies for acquisition. It is necessary to give CPSEs increasingly flexible selection/search processes and the provision to negotiate settlements. However, it is not likely that CPSE managements will see notable success in these areas if they are not provided with clear guidelines.26

Build a suitable team: The committee has further observed that the CPSEs have little say in board composition, boards often lack domain knowledge, and there are delays in appointments. Thus, the report suggested that the Department of Public Enterprise/ Public Enterprise Selection Board (PESB) should formulate a panel of approved names from where independent directors can be selected. This panel should be updated every six months. In addition, apart from administrative ministries, CPSE boards should be allowed to suggest independent directors. The nomination committee should identify knowledge gaps in the board and recommend suitable candidates from the approved panel. The CVC should examine its database of directors/personnel and make the vigilance clearances it has accorded available online. Once the PESB completes the selection process, there should be no delay due to vigilance clearances. A separate body should be constituted within the PSEB, specifically for the careful selection of CMDs/CEOs of Maharatna and Navratna CPSEs.26

In addition, a vigilant framework should be developed in discussion with the CVC. Meanwhile, internal vigilance clearance should not be the responsibility of the Central Vigilance Officers (CVOs) of CPSEs. Instead of assigning CVOs to short-term deputation, the CVC should maintain a panel of CPSE executives at the level of executive directors/directors, who could be evaluated for the positions of CVOs in CPSEs.26

The power to create positions below board level in CPSEs and not depend on the government’s budgetary support should be delegated to the respective CPSE boards. The CPSE boards may also be authorised to allow the engagement of such professionals on a contractual basis, at the market’s prevailing levels of compensation. 26

Some CPSEs lack experienced personnel in important functions due to gaps in compensation as compared to the private sector as well as demographic profile. One possible solution to this could be the extension of service up to two years for the DGM and above levels, albeit only for executives with outstanding service records. 26

26 Report of Panel of Experts on Reforms in Central Public Sector Enterprises (CPSEs), Nov 2011

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Restructure and realign resources: The panel has also recommended that the government identify loss-making CPSEs for disinvestment. If the privatisation of such CPSEs is not intended, the government could consider selling them through auction, limited to other CPSEs, so that profit-making CPSEs could bid for them, especially to create new businesses and leverage the robust infrastructure at the disposal of many loss-making CPSEs. Since many loss-making CPSEs have surplus land, a Public Sector Land Development Authority (PSLDA) (on the lines of the Rail Land Development Authority), may also be created to develop such tracts and unlock their real value.

Towards a new paradigm: TThe panel has proposed a vision for the future of CPSEs. The need of the hour is to initiate the fourth phase of CPSE reforms. An innovative method of public intervention may be considered to incubate companies and take risks. The model proposed is a mix of a sovereign wealth fund, a single holding structure, and the government playing the role of a venture capitalist. It’s also essential to formulate a single holding structure (SHS) for all future CPSEs, which would be managed by a small management team such as a mutual fund. The board of the SHS could discharge the responsibility of selecting sectors for investment and managing investments. Instead, it would appoint the board of companies it invested in depending on its holding. The appointed board would select the chairpersons and directors on the incubated companies/CPSEs and the entities, which would be board-run companies/CPSEs, and not included in any ministry’s purview. This implies that these entities would not be mandated to report to the CEO of the SHS entity, as the CEO would be responsible only for managing the government’s stake in various companies and providing annual reports on the financial performance of invested entities for their respective boards. There could be instances where the chairperson of the SHS could demand the replacement of the CEO of an invested company. An Empowered Group of Ministers (EGoM) may be assigned the responsibility of monitoring the performance of the SHS entity.

Benchmarking with global practices The OECD’s guidelines on the corporate governance of SoEs constitute the first global benchmark for various governments. They can use these guidelines to monitor and enhance the corporate governance of SoEs by providing standards, good practices and guidance on implementation. The guidelines are aimed at facilitating the creation of a level playing field among private and publically owned incorporated enterprises operating commercially.

Striving for an effective legal and regulatory framework for SoEs:

a. There should be a clear distinction between the state’s ownership role and other state functions that could influence the conditions in which SoEs operate.

b. Governments should strive to simplify and streamline operational practices and the legal conditions in under which SoEs function.

c. Laws or regulations should clearly mandate public service-related obligations and responsibilities an SoE is expected to assume beyond the norm.

d. The legal and regulatory framework should allow for adequate flexibility for adjustments in the capital structure of SoEs.

The State as an owner

a. The government should develop and enforce an ownership policy that defines the overall objectives of State ownership, the State’s role in the corporate governance of SoEs, and how it expects it to implement its ownership policy.

b. The government should not be involved in the day-to-day management of SoEs; rather, they should grant them complete operational autonomy to achieve their defined objectives. The exercise of ownership rights should be clearly identified within the state administration.

c. The coordinating or ownership entity should be accountable for representative bodies such as Parliament.

d. SoE boards should be formed such that they can make judgements objectively and independently.

Transparency and disclosure

a. The coordinating or ownership entity should develop consistent and aggregate reporting on SoEs and publish an aggregate annual report on SoEs.

b. SoEs should develop efficient internal audit procedures and establish an internal audit function.

c. SoEs, particularly large ones, should be subject to an annual independent external audit based on global standards.

The responsibilities of SoE boards

a. The boards of SoEs should be assigned a clear mandate as well as overall responsibility for the company’s performance.

b. SoE boards should execute their functions of strategic guidance and monitoring management, subject to the government’s and ownership entity’s objectives.

c. Mechanisms should be introduced to guarantee that this board representation is effectively implemented and contributes to the enhancement of the board’s skills and autonomy.

d. SoE boards should institute focused committees to support the board in the execution of its functions, especially with respect to audit, risk management and remuneration.

e. SoE boards should also conduct annual evaluations to appraise their performance.

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Conclusion

PSEs, as drivers of the Indian economy, are facilitated by government allegiance — in the form favourable completion policies, sustainable development guidelines and the restructuring of sick PSEs — as well as constraints such as overbearing government control. Several success stories in developing economies have their origins in the SoE format, such as Singapore Airlines and Pohang Iron, as well as steel companies in Indonesia. Even in mature economies such as France, companies such as Renault, Alcatel and EDF were SoEs for a long time, similar to Rolls Royce and British Aerospace in the UK. As compared to India, these countries had a different ownership structure and level of empowerment, focused on the development of contemporary strategies that were as effective as those adopted by their private sector counterparts.

While we have witnessed major growth in PSEs over the years, they remain shrouded in red tape, limited risk appetite, doctored pricing systems, overbearing governance structures with multiple lines of reporting, depleting manpower, and corruption. It is imperative that the government adopts administrative measures to strengthen the performance of PSEs, which should act as role models for the economy.

Overall, the Roongta and Arjun Sengupta Committees have examined issues, such as corporate governance and effective partnerships with the private sector. The Roongta Committee has proposed that the government formulate a five-year schedule for the listing of PSEs on a rolling basis. The Cabinet has processed the Roongta Committee’s recommendations and demonstrated its support through measures such as fixing a three-year time frame for chief executives of companies to improve accountability, transparency and efficiency. This has been one of the strongest recommendations from this committee.

Indian PSEs could also draw lessons from the OECD guidelines on corporate governance, where it has been advocated that the government simplifies operational practices and promotes competition through a universal applicability of law, as compared to the current situation where PSEs enjoy exemption in some areas as against their private sector counterparts. The State should allow PSEs to exercise their responsibilities as well as respect their independence. Such measures could significantly help strike a harmonious balance between the private and public sectors27.

27 KPMG in India Analysis

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