PSEs need a sovereign holding company

public sector enterprises, HPCL, ONGC, SBI, National Insurance Company, SASAC The acquisition of HPCL has increased ONGC’s market share in the domestic space for downstream petroleum products, thus providing a firm foothold in the sector.

There has been a radical shift in the government’s policy towards public sector enterprises (PSEs). A lot of reforms have been brought, and the government has adopted a policy of consolidation, merger and acquisitions of PSEs, hoping it would lead to economies of scale, capacity to take risks, taking higher investment decisions, greater negotiating power and optimising returns.

On disinvestment, approaches have been introduced including dilution of stake sale, strategic and outright sale of PSEs, and merging sector-specific PSEs into a single entity and listing on stock exchanges. The FM, during Union Budget of 2018-19, announced merging of three non-life insurance companies—National Insurance Company, United India Insurance and Oriental Insurance—into a single entity for listing on stock exchanges by FY19. It is hoped it will reduce overheads, and improve their operational efficiencies and financial position, thus making it an attractive proportion for disinvestment.

Following the policy announcement of creation of sector-specific majors, the government announced outright sale of 51.1% central government stake in HPCL to ONGC to create an integrated public sector “oil major” that could compete with foreign and domestic companies. The acquisition of HPCL has increased ONGC’s market share in the domestic space for downstream petroleum products, thus providing a firm foothold in the sector. Similarly, SBI announced the merger of its five subsidiaries within itself effective April 1, 2017. There have been reports the government is considering expanding the scope of consolidation of PSEs in sectors including defence, construction and consultancy.

While these moves are welcome, more is needed to reach the model of a sovereign holding company as has been adopted by many countries and suggested by OECD. The key principle of OECD guidelines is that the State or the government should be an active and informed owner, ensuring professional and effective governance of state-owned enterprises (SOEs) in a transparent and accountable manner. A way to achieve this is by developing an ownership policy wherein the role and responsibility of the owner, i.e. the government, is defined clearly and objectively.

Globally, a sovereign holding structure has proved successful for SOE performance. Singapore formed Temasek to undertake management of government stake on a commercial basis, thus facilitating the Ministry of Finance, Singapore, to focus on policy-making and governance rather than management of government stake in different SOEs. Malaysia incorporated Khazanah in 1993. Initially, it assumed a custodial role in managing the government of Malaysia’s commercial assets as well as investing in strategic and high-technology sectors. A decade later, in 2004, Khazanah was given a mandate to undertake a more active investment approach including enhancing the performance of existing SOEs and seek opportunities across geographies for SOEs.

China underwent restructuring in 2003 with the formation of State-owned Assets Supervision and Administration Commission (SASAC) and it undertakes all SOE-related management. The role of the SASAC extends from strategic decision-making to also leadership and implementation decisions.

Kazakhstan operates an agency model wherein the government exerts its ownership role through a centralised fund, namely Samruk-Kazyna JSC. Indonesia has a different system of centralised ownership—the government exercises ownership through the Ministry of State Owned Enterprises. South Korea works on a modified form of agency model, wherein the Ministry of Strategy and Finance is responsible for a wide range of work including designation of companies as public institutions, oversight of their information disclosure practices, review of mid- to long-term management plans, performance evaluation, etc.

In India, the government has entrusted administrative ministries to coordinate and operationally oversee their sector’s PSEs. Over time, reforms have been undertaken to provide greater autonomy in decision-making to PSEs. These include an MoU system, categorisation of PSEs in Maharatna, Navratna, etc, and delegation of enhanced financial and operational powers to the Boards of these PSEs. However, these appear inadequate. There is a multi-control system by more than one ministry. PSEs are also subjected to a heterogeneous matrix of accountability checks and balances by various committees/agencies, regulatory bodies, etc, which have brought a state of over-governance.

In spite of this, the public sector has been performing impressively. For the last five years, PSEs have been earning a net profit of over Rs 1 lakh crore every year. Their contribution to central exchequer during 2016-17 was an all-time high of Rs 3.85 lakh crore, and for the last four years CPSEs have been contributing over Rs 2 lakh crore to central exchequer every year. This contribution (during the last five years) is almost equal to the total investment of Rs 12.5 lakh crore as on March 31, 2017, in all 331 CPSEs, of which 257 are operative. CPSEs’ gross revenue (turnover) from operations is Rs 19.55 lakh crore—about 13% of the total GDP of Rs 151.85 lakh crore in 2016-17. Above all, since inception, CPSEs have been an effective instrument for the growth of the country with social justice as CSR in their DNA. CPSE shares are dear to investors as 50 listed CPSEs contribute 14.61% of total market capitalisation of BSE. It aggregates to Rs 17.76 lakh crore as on March 31, 2017.

An effective and simplified governance model, aligned to global standards, can be the formation of an apex sovereign holding company by the government as the body for all PSEs. This company, under the PM or at least the FM, should function through a Board comprising of experts, professionals, academicians, researchers, top officials, SCOPE, etc. This body will focus on policy-making and governance rather than management. The sovereign wealth fund under the apex committee could be used for meeting investment needs of PSEs, enhancing their performance, investment in strategic and high-technology areas, and for strategic cross-border investment. There could be 5-6 sector-specific sub-holding companies that would entail responsibility for vision, mission and strategy of related PSEs. Disclosure and transparency norms should be defined at each level so as to fix accountability and ensure sustainability through a converged system of checks and balances. The company might also coordinate between the government and sub-holding companies of various sectors to ensure overall satisfactory performance of PSEs under the sector.

The step towards consolidation, merger and acquisitions and listing of PSEs on stock exchanges will prove to be a boon if the government also implements the model of centralising ownership through an apex sovereign holding company, gives operational autonomy to PSEs and facilitates running them on professional principles.

The Author is Director General, Standing Conference of Public Enterprises (SCOPE)

Source: Financial Express