killing fields of psus

Governance in the Public Sector Undertakings (PSUs)

Maximum Government Minimum Governance

Brijendra K Syngal

1. What is Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding remarks

Agenda

1. What is Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding remarks

Agenda

• How any organization, including a nation, is run? • Includes processes, systems, and controls - to

safeguard and grow assets.• Concept of governance has 6 different meanings:

minimal State good governance new public management corporate governance social-cybernetic systems self-organized networks

What is Governance ??

Good Governance

• Catalyst to delivering value to all the constituents

• A holistic, integrated approach

• ‘Conformance and performance’

• Governance is derived from the Latin word “gubernare” – the action of steering a ship

Titanic

Corporate Governance

• Set of processes, customs, policies, laws, institutions

• Way a corporation is directed, administered or controlled

• Goals for which corporation is governed

• Manage relationship with stakeholders:- Shareholders - Board of Directors- Executives - Employees- Customers - Creditors- Suppliers - Community

Public vs Private

• The Political View

“In situations where commercial and political objectives conflict, there is the potential for the company to react more slowly than its competitors, or even to take a decision that is against its own commercial interests” – Tim Fischer – formal federal leader of the National Party in Australia.

Seven Tenets

• The Managerial View

Public vs Private

• Public Sector– Too much policing– Too much audit– (External and Internal)– No authority to take

decisions– No Real autonomy

White Elephants

• Private Sector– Autonomy, Authority and

Freedom to take decisions

– External Audit

Efficient Organizations, MNCs

as well as

Satyams and Enrons

Ironically PSUs are more transparent!!

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

The Indian PSUs

• Amongst the largest and most profitable of India Inc• Management control lies with Government• Government holds minimum 51% equity in PSUs• BSE listing

– Central Public Sector Enterprises # 169

– Public Sector Banks # 35

– State Level Public Enterprises # 6

CPSUs account for over 13% of BSE capitalisation !!

‘Temples of modern India’

– J. L. Nehru

Genesis of Indian PSUs

• Capital intensive industries:– Oil & Gas - Iron & Steel -Telecom– Coal - Power -Transportation– Banking & Financial Services– Insurance - Heavy Engg

• Objective post independence era:– Low regional imbalances - Income inequalities– Employment generation - Industrial growth

• Post liberalisation performance measurement as per: – Profitability - Productivity– Return to shareholders.

Governance of Indian PSUs

• Changing measurement tools required: – Government to only define broad goals, strategy and

objectives;

– Leave the rest to the professionals to manage, execute and deliver

‘Government must not be in the business of running businesses’ – Margaret Thatcher

But is this the case in reality?

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUS

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

Predicament

Appointments & Compensation

• The PSU board itself has no powers around succession planning, compensation and board appointments!

• Government virtually controls PSUs

Are independent directors really independent?

Serious Flaws in Governance

PSU Show Stoppers

• Independence, leadership and enhancement of shareholder value are big question marks in this environment let alone governance

Multiple Influencers

• Various influence groups are at work all the times

• Money, power, position, (de)fame are the various detractors that constantly dog PSU management

• Walking a fine line – its all about governance

“Self Governance”

Is this Justified?

• PSU funding is based on taxpayer’s money to a significant extent

• Would it not be better if government set objectives and then let professionals manage the show

World over the infrastructure as well as service sectors are funded by taxpayers’ money.

Nonetheless, the governments get out of them the moment they reach maturity or commodity status

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

Good Governance Essentials

• Authority

• Accountability

• Transparency/Glasnost

• Audit

• Reward for good work

• Reprimand for bad

• Hire & Fire

Seven Tenets

This may also be termed as the Managerial view leading to maximisation of stakeholder value

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

The Air India Story

• Merger of Air India with Indian Airlines ill-timed and made without adequate financial consideration.

• Bulk order for aircrafts based on flawed and invalidated market share growth estimates.

• High aviation oil prices, rise in wages and competition from other airlines.

The airline is in the need of an immediate lifeline for it to chart a turnaround in its fortunes

Air India

The BSNL Story

• Policy and paralysis of decision. Similar parallels as Air India.

• Capacity constraints leading to no major growth in subscriber base.

• Both, BSNL and Air India are not listed. This leads to their performance being subject to public scrutiny only occasionally.

The enterprise is in a sordid state of affairs due to the dysfunctional nature of the Board and continuous interference by the Govt.

BSNL

The VSNL Experience

• Entry into cellular services

• Undersea cable project skirting India in a JV with British Telecomm

• Entry into NLD and other domestic services

Today VSNL, as Tata Telecomm, has been able to do all if not more of the above

VSNL Denied

The Kingfisher Saga

• Started operations in 2005. But didn’t see a single year of profit since it got listed in 2006.

• Flawed business plans of Founder (Dr. Mallya) and impropriety in style of functioning of the organization.

• Questionable merger with Air Deccan. Fleet maintenance issue on its Airbus & Fuel cost variations.

Kingfisher Airlines

Thus, pvt sector entities are equally prone to mismanagement and corrupt practices.

Sahara Scandal

• SEBI bars two Sahara Group entities from raising money from the public as it raised several thousand crores through debentures, deemed illegal by the regulator.

• Through court proceedings and decision taken by the regulator, it is deemed that the money raised by the 2 companies was without due compliance of SEBI norms.

• Total dues were to the tune of over Rs. 24,000 crores. The group founder Subrata Roy is arrested in Feb 2014 and a claim for defreezing of company assets made.

Sahara Group Investor Fraud

How to deal with….

• Politicians

• Bureaucrats

• Lobbyists

• Press

Personal Perspective

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

Philosophical Question

• Why PSUs are not MNCs?

• Why are they not in the global league of fortune 500, with all the talent, expertise?

• Or why have they not become global, if they are indeed Board Managed?

Perceptions Seven Tenets

Answer

• An emphatic yes provided the conditions are right – PSUs have been through 50 yrs of destruction– Bloated with unnecessary manpower– Forced into non core business areas– Jagirs or personal fiefdoms

- No objectives

- Excessive interference - Political & Bureaucratic

Where is the question of good governance?

Seven Tenets

But…

• Too much Oversight, only Controls

• No real autonomy, authority

• Only audit

• No rewards

• No punishment

• Political vs Managerial conflict

Seven Tenets

Trusteeship vs. Stewardship

• Is government striking effective balance between trusteeship and stewardship?

• Government’s involvement should be minimal, except for policy matters

“Clearly there is a gap between autonomy granted & autonomy availed. Complete separation of government interference from day to day management of PSUs is an immediate requirement. PSUs should not be considered as an extended arm of the administrative ministries.”

- Dr. U.D. Choubhey, - Former CMD – GAIL

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The State of India Today

8. Concluding Remarks

Making Sense of India Today

– One Year of Modi Government- Emphasis on private sector benefits. But, no sound policy and regulation coming with it

– Neglect of PSUs (Need for Overhaul at BSNL & MTNL)

– Growing NPAs at banks

– Misconstruing “Maximum Government, Minimum Governance” by the “leaving it to market forces” approach

– Air India in a state of continuous decay

While world witnessed worst recession ….

“Coal India IPO fetches mind-boggling Rs 2.36L crore”

“OIL IPO subscribed 91% in an hour ”

“PowerGrid

subscribed 15

times,

employees

make full use of

quota”

PSUs accounted over 72% of 2010's mobilisation - Coal India (Rs 15,199 cr) - NMDC (Rs 9,930 cr) - NTPC (Rs 8,480 cr) - Power Grid (Rs 7,442 cr) - REC (Rs 3,530 cr)PSUs collectively realized Rs 49,007 cr in 2010

“NTPC FPO subscribed 0.77 times, gets maximum bids at Rs 209”

“NHPC IPO fully subscribe

in an hour time

“Cochin Shipyard mulls Rs 800-crore IPO”

“ONGC to be India's biggest IPO ever”

Agenda

1. Introduction to Governance

2. The Indian PSU Environment

3. Growth dampeners for PSUs

4. Tenets of Good Governance

5. Case Studies

6. Philosophical Questions

7. The World Today

8. Concluding Remarks

Getting it Right = Paradigm Shift

• Right sizing

• Focus on Core Competencies

• Access to capital markets

• Adoption of appropriate reward structures

• Seven Tenets

• Privatisation

Follow the VSNL/Maruti models for success of PSUs

Getting it Right = Paradigm Shift

• Doing away with the bugbears of:– Bureaucrats and Politicians– Industry polity nexus– CVC– CAG

– Administrative Ministries

Or doing away with the Rahu, Ketu and Shanis

For getting things right for PSUs

And

Putting them on the path to becoming MNCs

PSU Management = Good Governance

• Allow governance to prevail and PSUs can outwit their private sector competitors by even bigger margins

• VSNL/Maruti are examples at hand

• Because VSNL/Maruti has had the autonomy to flourish

• So can other PSUs like ONGC, IOC, BHEL etc

Seven Tenets hold the key

OECD View

Corporate Governance in State Owned Enterprises– Ensure level-playing field with the private sector

– Reinforce ownership function within state administration

– Improve transparency of objectives and performance

– Strengthen and empower boards

– Provide equitable treatment of non-controlling / minority shareholders

Back to Basics….

• Return to basic value systems– India’s century old principles of ‘Dharma’

• Make ethics part of your and company’s DNA

• Make ‘high moral character’ key hiring criteria

• Make integrity, ethics and compliance part of promotion, compensation and evaluation processes

“Ethics in business is extremely important; your reputation is all you have in life.”

- Sir Freddie Laker

Focus on strengthening the moral fibre of the corporation

“Good government is no substitute for self-government”

&

“You must be the change you wish to see in the world . . .”

- Mahatma Gandhi