by Vivek Kaul
Let’s look at the list of the top 10 profit-making public sector enterprises. Almost all the companies on the list operate in areas where there is almost no or perhaps very little competition from the private sector.
This is in line with what Dwijendra Tripathi writes in The Oxford History of Indian Business:
The profit before interest and taxes as the percentage of capital employed in the public sector remained on an average very low—between 10 and 15 per cent—during all these years…. Few of the profit-making units were operating in a competitive framework [emphasis added]; the bulk of the profits came from companies operating in sectors in which the public sector enjoyed a near monopoly [emphasis added] position.
Take a look at Table 2.2, which is a sector-wise profit/loss list of the public sector enterprises.
One look at the table makes it clear that the public sector enterprises do well in sectors where they have a monopoly, more or less. Over the years, the public sector enterprises have made most of their profits in the coal and oil sectors, where they have a monopoly (actually a complete monopoly in the coal sector and very little competition in the oil sector).
Table 2.2: Sector-wise profits/losses of CPSEs between 2012-2013 and 2014-2015.
Source: Public Sector Enterprises Survey, 2014-2015.
In 2014-2015, the public sector enterprises operating in coal and oil made around 47.4 per cent of the total profit made by public sector enterprises. It is interesting to see that in those sectors where there is a reasonable amount of competition from private sector companies, the public sector enterprises tend to do very badly.
Take a look at the telecommunication services. The public sector enterprises operating in this sector have lost more than Rs. 23,000 crore between 2012-2013 and 2014-2015.
One sector where the public sector enterprises have faced a lot of private competition but have still managed to continue to make money is the banking sector, which is a part of financial services.
Nevertheless, as is clear from Table 2.2, profits had risen at a much slower pace between 2013-2014 and 2014-2015, than they had risen between 2012-2013 and 2013-2014. Also, as we shall see in Chapter 11, PSBs have a huge bad loans problem to deal with currently, which isn’t going to go away in a hurry.
To cut a long story short, when public sector enterprises face competition from private companies, their performance tends to go for a toss. Also, Tripathi talks about the low returns on the capital employed for the public sector companies, which should be the right way of judging any company. Capital employed refers to the total amount of money put into a business in pursuit of profits. This is important because the same capital can be put to an alternative use, and hence, it is important to check whether it is generating sufficient returns.
Tripathi’s book was published in 2004. Let’s see how things have been since then. As can be seen from Figure 2.1, the return on the capital employed for the public sector enterprises has been falling over the years.
Figure 2.1: Return on capital employed for the CPSEs between 2005-2006 and 2014-2015.
PBIEET = Profit Before Interest, Exceptional, Extra-Ordinary Items and Taxes.
Source: Public Sector Enterprises Survey, 2014-2015.
The net profit to capital employed (the lower curve) has more or less halved during the decade between 2005 and 2015. This is primarily because of competition from the private sector companies. What this clearly shows is that the returns which the government earned on its investment in the public sector companies in 2014-2015 were less than what you and I earned on our fixed deposit investments. Hence, the government is not being adequately compensated for the risk that it is taking on.
In fact, this is not a new insight, and has been known in political circles for nearly a quarter of a century. This is something that the then Prime Minister, PV Narasimha Rao, said at the 79th Congress Plenary at Tirupati in 1992.
As Rao said: “We have invested over one lakh crore of rupees in the public sector so far. The returns therefrom, on the whole, have been very meagre. All this is the people’s money, no one else’s. The present situation is that the Government can no longer collect any more money from the people for further fresh investment in the public sector.”
Rao’s point was that the public sector was ultimately owned by the people. As he said: “What exactly is the public sector? It is, in fact, a sector owned by the State and run with the money belonging to the people. The profits and losses of the public sector, therefore, are the profits and losses of the people.”
The point being that the moment the state funds the losses of the public sector, it takes away money from other important sectors, like education, health, infrastructure, etc. Furthermore, the government ends up stretching its meagre resources as well. As Rao said: “At the moment, the State has over-stretched its meagre resources and is seeking to do many things at the same time. As a result, it is unable to do anything adequately.”
This explains, to a large extent, why even 70 years after Independence, India still has the world’s largest illiterate population. And this has happened while the governments over the years have been busy running Air India, manufacturing condoms and scooters, and even selling soft-drinks (Double Seven).
Should the government really be doing these things? As Rao said in Tirupati in 1992: “The fact of the matter is that the overall resources at our disposal were themselves inadequate: we had to spread them too wide and too thin. In order, therefore, to shoulder the vital responsibility of human resource development adequately, the State must conserve its resources by withdrawing from various areas where private enterprise can replace it. Besides, the State has certain functions which belong to it by its very nature, such as defence, law and order, and governance.”
The lessons of what Rao said nearly 24 years back have still not been learnt.
More importantly, as mentioned earlier in the chapter, every extra public sector enterprise that the government chooses to run takes attention away from something more important. And that remains Big Government’s biggest problem.
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Like any monopolist, the government is reluctant to relinquish the monopoly of operation it enjoys in certain sectors. Take the case of the coal sector. Private sector companies are not allowed to mine coal and sell it to those who need it. They can only mine coal for their own consumption. For example, a power company can own a coal mine and mine coal to use it to produce power in its thermal power plant.
The government-owned Coal India has a virtual monopoly and produces close to four-fifths of the coal mined in the country. Given the monopoly that it enjoys, the company is extremely profitable. In fact, as on March 31, 2015, the company had Rs. 47,269 crore of cash on its books. This cash is essentially the profit that the company has managed to accumulate over the years.
Some of the Coal India subsidiaries, like Northern Coalfields and Mahanadi Coalfields, operate on extremely high margins. For the year ending on March 31, 2015, Northern Coalfields operated with an operating margin (operating profit divided by total revenue) of 34.3 per cent. On the other hand, Mahanadi Coalfields operated at an even higher margin of 40.7 per cent.
That these are very good margins there is clearly no doubt. But, despite this, the lack of competition in the coal sector has hurt the nation. In April 2016, Coal India had to hold back despatching coal because of the lack of demand caused by an industrial slowdown in India.
Of the targeted 51.5 million tonnes of off-take, only 42.5 million tonnes were picked up. But this is not how the situation has always been. In the past, the demand for coal had been significantly more than its supply. This happened for the simple reason that Coal India couldn’t ramp up the production of coal fast enough to match the country’s demand for coal.
Coal India produced 323.6 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.4 million tonnes of coal. The rate of production increased at an average annual rate of 4.1 per cent. The production of coal did not keep pa
ce with the demand. During the same period, the total amount of coal imports increased from 29 million tonnes to 171 million tonnes, at an average annual rate of 21.8 per cent.
Furthermore, the price paid for the imported coal was higher than the price paid for the domestic coal. Every time coal was imported, precious foreign exchange was used. Also, in the process of importing coal, we ended up creating jobs in countries other than India.
It needs to be pointed out here that India has enough coal. As of April 1, 2014, the country had 301.6 billion tonnes of geological reserves of coal.ii Typically, not all of this is extractable. Around 80-95 per cent of the geological reserves can be extracted in open-cast mines. In the case of underground mines, because of the methodology followed, around 30-40 per cent of geological reserves can be extracted. So, the point is that India has enough coal going around. It just needs to be extracted.
A major reason for the slow increase in the total production carried out by Coal India lies in the low per-employee productivity. Coal India produces around 1,100 tonnes of coal per employee in a year. Now compare this with the 36,700 tonnes per employee produced by Peabody Energy, based out of the United States. The Chinese Shenhua Energy produces 12,700 tonnes per employee.54
Partha Bhattacharya, a former Chairman of Coal India, pointed out the need to create competition in the sector: “Multiple players that have both bandwidth and competence… [will turn] the current situation of acute coal shortage into one of abundance.”55
The irony is that an average Coal India employee is extremely well paid. In a calculation I did in January 2015, I found that an average Coal India employee makes much more than an average employee of ICICI Bank.56
Take a look at Tables 2.3 and 2.4. In 2013-2014, an average Coal India employee made 34.9 per cent more than an average ICICI Bank employee.
This is surprising, given that Coal India largely has a semi-skilled workforce. As on December 1, 2014, out of a total workforce of around 3.38 lakh, the total number of workmen was at 2.86 lakh. And these Coal India employees get paid significantly more than they should be, given that they are largely semi-skilled.
Table 2.3: The average Coal India employee’s salary between 2010-2011 and 2013-2014.
Source: Coal India, Annual Report, 2013-2014.
Table 2.4: The average ICICI Bank employee’s salary between 2010-2011 and 2013-2014.
Source: ICICI Bank annual reports.
Hence, despite being well paid, the Coal India employees are not productive enough when it comes to mining coal. Of course, there are several reasons for this, but money clearly isn’t one of them. The lack of mechanisation of the mines is definitely one reason for this low productivity. The lack of competition is another.
To summarise, government monopoly, which is an excellent example of Big Government, in a certain sector does end up hurting the country as a whole, even though the companies operating in that sector might individually be immensely profitable.
One thing that the government can do in order to create some competition in the sector is to dismantle Coal India. The company currently has eight subsidiaries, of which seven mine coal. One subsidiary, Central Mine Planning and Design Institute (CMPDI), as its clearly name suggests, doesn’t produce coal.
These companies are allowed to operate in a certain geographical area, and they cannot mine coal in the area allotted to other companies. This artificial distinction should be done away with, and the companies should be allowed to mine coal all across the country. This would be a good starting point to create some competition within the sector if the government does not want the private sector to mine coal for commercial purposes.
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Now let’s get back to the loss-incurring companies. One argument that is often made is that the government cannot be looking to make a profit all the time. As a senior editor of a digital publication put it to me once, the government makes Nirodh condoms so that it can distribute it to those who need it. Hence, it needs a company like HLL Lifecare to make condoms.
This, I think, is a silly argument. Why can’t the government just buy condoms over the counter from private companies that make condoms? I am sure, given the huge size of the order, the government would get a very competitive price. Condoms aren’t exactly missiles that the government needs to make them on its own. It doesn’t have to run a separate company to do so. Just because the government has to deliver something to the citizens of the country doesn’t mean that it needs to produce it as well.
Furthermore, the company that makes condoms for the government, HLL Lifecare, comes under the Ministry of Health and Family Welfare. India is facing a huge number of issues when it comes to health. As Jean Drèze and Amartya Sen write in An Uncertain Glory—India and Its Contradictions:57
A particularly telling illustration relates to child immunisation. There is very little public awareness of the fact that India’s immunisation rates are among the lowest in the world.... Except for the BCG vaccine, India’s immunisation rates are uniformly lower than the corresponding estimates for every other South Asian country, including Nepal…. In contrast, Bangladesh has achieved immunisation rates of around 95 per cent for each vaccine.
Shouldn’t the Ministry of Health and Family Welfare be tackling these kinds of issues rather than making condoms?
Let’s take another look at the top ten loss-incurring public sector enterprises (as shown in Table 1.1 in the previous chapter). The top four loss-incurring companies, which are responsible for the bulk of the losses, operate in sectors in which they have competition from the private sector.
The fourth largest loss-incurring firm happens to be Hindustan Photo Films and Manufacturing Company. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more. During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013.
The third largest loss-incurring company was MTNL. It provides telecom services in Delhi and Mumbai. In both cities, there are many other telecom service providers which provide these services. So why should the government continue to be in such a business and lose close to Rs. 3,000 crore in just a single year?
As far as Bharat Sanchar Nigam Ltd. (BSNL) is concerned, an argument is often made that the company provides telecom services in many areas where private players don’t. I personally don’t know how valid this argument is. Nevertheless, it still doesn’t justify the company losing more than Rs. 8,200 crore in a single year.iii
Imagine what this extra Rs. 8,200 crore could do to the budget of the Department of Health and Family Welfare (under the Ministry of Health and Family Welfare), which currently stands at around Rs. 37,062 crore.
Every rupee that goes towards sustaining these companies is taken away from some other area. Take the case of agriculture. After the budget for 2016-2017 was presented in late February 2016, the government made a big song and dance about the budget being a farmer’s budget.
But what it really did was essentially change the way it accounts for things. The economist Ashok Gulati explained this in a column in The Financial Express in March 2016. The Department of Agriculture, Co-operation and Farmers’ Welfare spent Rs. 15,809 crore in 2015-2016.58 The allocation for 2016-2017 has been increased to Rs. 35,983 crore. This is a jump of a whopping 127 per cent. Or so it seems.
But there was an accounting trick that the government used here. A jump of Rs. 15,000 crore in allocation is primarily because of the different allocation of subsidies on the short-term credit to farmers, which needs to be paid to banks. This allocation came under the Department of Financial Services earlier, and has been moved into the budget of the Department
of Agriculture only in the 2016-2017 budget.
After we adjust for this new allocation, the actual jump in money being spent on agriculture and farmers is around 33 per cent more. The point being that even more ‘real’ money could have been allocated to agriculture and farmers if the government wasn’t continuing to finance the losses of its public sector enterprises.
Getting back to BSNL and MTNL, given that the government wants to continue owning these companies, it should appoint outsiders with extensive experience in telecommunications as the Chief Executives of these companies and give them a free hand in cutting their losses. The nation cannot continue to lose such a massive amount of money, which could be better utilised somewhere else.
Also, it needs to be pointed out here that the loss-incurring public sector enterprises could be used to generate revenue for the government in another way. As the Economic Survey for 2015-2016 points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the ‘Make in India’ and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups, and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.”
In fact, the government first needs to get the public sector enterprises to do a proper inventory of the total area of land that they own. This land then needs to be gradually sold and the money thus generated can go into an infrastructure fund, which could be used to build physical infrastructure like roads, bridges, railways, ports, etc.
While the Modi government has talked about this (given that it is a part of the Economic Survey), no concrete steps have been taken until now. One reason for this is perhaps the fact that Modi had revived a few state-level public sector enterprises when he was the Chief Minister of Gujarat. And he perhaps believes that he can repeat the same at the national level as well.
