7 PM | State PSUs: | 21 January, 2019

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After independence major thrust was given to economic development with social perspective. With the adoption of the method of central planning by the government, the setting up of government owned commercial establishments (PSUs) was initiated, both by Centre and state governments in their respective fields. Today the role of PSUs has changed from being producer of services and goods to acting as facilitator of economic growth.

The biggest growth in the number of PSUs occurred in late 1960s and early 1970s, when most of the large commercial banks were nationalized followed by a similar move in coal mining, crude oil refining & marketing and textile among others. Today the Central Government has 444 PSUsand the States have 1,136 functional and 319 dysfunctional State PSUs (SPSUs).

State PSUs comprise state government companies as well as statutory corporations. The former includes state road transport corporations, state financial corporations, state electricity generation and distribution companies and numerous others in sectors from water to warehousing. The latter, i.e. statutory corporations usually comprise Electricity Regulatory Commissions.

Relative performance of Central and State PSUs:

• Investment: Total investment in Central PSUs has been around ₹15 lakh crore whereas in State PSUs it has been around ₹14.6 lakh crore.
• Profits:
• Central PSUs: In 2016-17, Central PSUs had earned net profit of ₹1.3 lakh crore while providing employment to 11.31 lakh people.
• State owned PSUs:
  • 1,136 working SPSUs collectively incurred net loss of ₹84,000 crore during 2016-17 while they employ 17.3 lakh people.
  • Only 531 earned total profit of ₹18,000 crore. As many as 292 SPSUs have negative net worth, and many of the 319 dysfunctional SPSUs had ceased operations for more than 25 years.
  • The accumulated losses of SPSUs are ₹4.65 lakh crore.

Thus, State PSUs have not been able to keep pace with the rising demands and their fiscal performance is a drag on state finances. There are many reasons behind their subdued performance:

• Over presence:
• Large number of SPSUs have been established in the finance and welfare sectors but states lack expertise or resources to manage such a sweeping range of activities.
• Development corporations have been set up for almost everything – from fishery, poultry and seed to police housing and small industries, backward classes, scheduled castes, women, ex-servicemen. UP has 103, Bihar 74 and Kerala has 130 such redundant PSUs.
• Used as political tool:PSUs provide parking places for senior bureaucrats or powerful politicians, to extend state resources like cars, perks and privileges to them. They lack a business plan and there are no production or marketing policies, which are must for a commercial entity(CAG)
• Politicisation: SPSUs are manned by politicians who influence the commercial decisions of PSUs. Politicians usually lack the technical expertise and knowledge to man the organization.
• Lack of autonomy: PSUs are established under specific ministries and departments of state government but they suffer from day-to-day interference in their operational functions by ministries.
• Lack of accountability: PSUs don’t have fixed and objective targets and even in case of under-performance the Board is not held accountable, whose member’s remunerations are fixed according to the government pay scales.
• Arrears in finalization of annual accounts:The accounts of companies must be finalised within six months from the end of the financial year under the Companies Act, 1956.But the delay in finalizing accounts ranges between 1 to 7 years, which hampers the audit process making to remain outside the scrutiny of the State Legislature.
• Lack of internal audit systems: Statutory auditors usually find absence of internal audit system commensurate with the nature and size of business of SPSUs and lack of internal control during the audit process. 

Solutions:

• Holding company model for PSUs: Governments may institute a holding company for managing PSUs, which would reduce the political interference in PSU management.

Singapore Model:
Temasek is a holding company of the Singapore government, which was set up to manage the government’s holdings in its public sector firms. This allowed the government of Singapore to focus on policy making. Temasek went about its task by bringing in a corporate structure to these companies. The boards were made independent and accountable. Long term business plans were drawn up and professional managements were asked to implement the same.

• Improved financial management: As per CAG, states may set up a cell to oversee the financial management of PSUs like clearance of arrears, setting financial plans and set targets for individual companies which would be monitored by the cell.
• Redefining aims of PSUs: The idea is to make them viable first and then focus on welfareaspect, hence PSUs must focus on generating profits. The social welfare purpose should be met by a separate department under CSR activities of the organization.
• Autonomy to PSUs:The PSU Board must work independently without political control. There was an 11.7% increase in profit growth of central PSUs in FY17, the bulk of profits came from sectors in which PSUs were independent and monopolists.
• Rationalisation of SPSUs:
  • States must withdraw from all unviable sectors, while revamping the structure and management of the remaining ones.
  • The welfare SPSUs only provide loans to members of various communities which can easily be done through the banking networks or devising suitable government schemes.
• Support from Central PSUs: Wherever feasible and where synergies exist, efficient Central PSUs may be persuaded to manage State PSUs.
• Infusing professionalism:PSUs must be managed professionally by depoliticizing them and appointing experienced and qualified managers.Many countries, such as Sweden and Thailand, have insulated their ailing PSUs from politicians and bureaucrats. They have created a Directors’ Pool from where all Board members including CMDs are appointed.
• Listing of PSUs:State governments should promote listing of PSUs as public investment in PSUs would bring more transparency and discipline in their functioning. Currently there are

Source: https://www.thehindubusinessline.com/opinion/time-to-rationalise-state-psus/article26043388.ece