Well-performing PSU-an oxymoron?

Well-performing PSU –is it an oxymoron?

Roopen Roy

(The author is the Managing Director of Deloitte & Touche Consulting (P) Ltd. The views expressed in this article are his own)

In India, we call them PSUs. In China, they are called State-Owned Enterprises (SOEs). In Singapore they are Government-Linked Companies (GLCs). One data point to assess their importance: the average contribution of PSUs to the GDP of 40 developing countries surveyed was about 11% according to a World Bank report.

To many, a well-performing PSU is an oxymoron. The root cause, it is argued, lies in their ownership structure. The argument goes like this: a private sector owner treats the business as his own. Thus, the private sector is efficient and performs well. Therefore, the panacea to all the troubles the public sector is privatization.

The issues are far more complex. First, if the “ownership structure” is the root cause of all inefficiencies, then how do we explain away the performance of Singapore Airlines and SingTel whuch are GLCs. The second issue : most successful global corporations have dispersed ownership with no dominant owner. Thirdly, there are numerous poor-performing private sector units. Indeed, some of the PSUs of today were ailing private sector units of yesterday. And lastly,the recent financial prairie fire in the US was sparked by the private sector. Ironically the massive rescue package is coming from the US Federal Government. The simplistic notion that the private sector is innately efficient and the public sector is inherently inefficient needs a second look.

Singapore Airlines is a GLC. It is profitable, efficient and well performing across several parameters . The largest shareholder in Volkswagen is the state of Lower Saxony in Germany. The case of Pohang Iron and Steel Company (POSCO) is even more startling. The World Bank rejected the loan application of the Korean government for setting up a steel plant in Pohang—then a fishing village. No wonder - Korea neither had deposits of iron ore nor coking coal. The Korean government took the help of a consortium of Japanese bankers and set up POSCO as a SOE. POSCO is now the third largest producer of steel and doubtlessly one of the most efficient. It was only in 2000 that the company was fully privatized.

Many of today’s success stories in the developing world began life as SOEs. Even in the developed world – France,for instance, Renault, Alcatel, EdF, Thomson and Elf were SOEs for a long time, as were Rolls Royce and British Aerospace in the UK.

There is little difference between Singapore Airlines and Air India in their ownership structures. The difference lies in the governance, style of management, empowerment, attitude to customer service and results produced by its leadership teams. Many family owned businesses perform poorly compared with professionally managed companies. IBM, Unilever, Coca-Cola, Pepsi , BP, Shell have widely dispersed shareholdings but are all well performing enterprises. They have a strong set of core values and a culture that engenders innovation and success. They all have a strong brand and have been tempered by the fire of market competition for years.

Poor performance of PSU s is a result from other causes –not ownership. Red tapes, bureaucracy, risk aversion, administered pricing systems, ineffective governance structures, inability to hire the best talent because of poor compensation, meddling by politicians, rampant nepotism in appointments of managers and corruption are among the many reasons that cause PSUs to under-perform. Privatization may well be a near-term strategy to uncage the PSUs and protect them from the bad behavior of the owners. But in the long-run, the root causes that afflict the PSUs must be tackled head-on.

Is it possible to preserve the ownership structure and at the same time carry out a comprehensive reform? Is it feasible under our current political system to change the rules of the game and have a governance structure that is transparent and independent? Is it pragmatic to believe that we can create a culture of innovation and high performance and make PSUs autonomous, merit-based and insulated from meddling by bureaucrats and politicians? If ever the answers are “yes”, then it will be possible for the PSUs to deliver.

China has been able to bring about sweeping reforms. In 1949 , 100% of China’s businesses were state-owned. Then as the joke goes, Deng was being driven in his Red Flag limousine when the chauffer came to the cross-roads. When asked whether he should turn left or right, Deng famously said, ”Signal left but turn right.”

Under Deng and subsequent administrations, efficiency and performance have become the watchwords. SOEs have flourished in China. Foreign investors have been permitted to take stakes in SOEs. Rewarding cats that can catch mice –no matter what their colour is - has been the mantra. Today only 40% of the industrial output of China is contributed by the SOEs. Performance, not, ideology drives modern China’s success.

In India , we have the Navaratnas and a clutch of moderately successful PSUs. But there is a huge number of non-performing PSUs. To reform the political and bureaucratic systems will be as gigantic and difficult a task as the Samudra Manthan in our Puranas. We cannot shy away from that task. But in the short run, an effective reform program must include privatization to provide a shock to the system. While we privatize, we must work on reform measures to unfetter PSUs from the many shackles that make them uncompetitive. Unless we unleash a comprehensive reform program (including stake sales and privatization) and hold the feet of our PSUs to fire, we will continue to bear the burden of their inefficiencies, diverting huge funds away from crucial sectors like infrastructure, health and education.