Air India’s (AI) ongoing and shameful financial distress is a clarion call for a dramatic shift in the way the government manages its commercial ventures. AI is not an exception. It is just a case where difficult circumstances have fully exposed the weaknesses of governance. It is not the first time that the state is being accused of inept governance or of meddling with management.
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Finance minister Pranab Mukherjee referred to public sector enterprises (PSEs) as the wealth of the nation in his budget speech. If his budget speech is a hint of things to come, the public sector is here to stay. Let’s allow Mukherjee his conclusion. After all, the ongoing international financial crisis has brought the state onto the centre stage of the economic arena globally. How then can we protect this wealth of the nation from meeting AI’s fate? Or more positively speaking, how can we enhance this wealth?
Remember that the total market capitalization of state-owned enterprises across different industry segments is about $400 billion at current valuations (and this does not include many commercial entities such as railways). Around 10% divestment could fund this year’s entire fiscal stimulus. And 10% does not bring us anywhere close to Mukherjee’s laxman rekha of 51%. So it’s a lot of money. And we need to, as the ultimate owners, demand more professional custody and management of our money.
We need to galvanize the public sector. But first, we need to professionalize its oversight. One potent way to do this is to create an Indian sovereign fund to professionally manage the government’s commercial assets at arm’s length from ministries. Sovereign wealth funds have been discussed a lot lately. But the discussion has occurred mostly in the international context and they have often been looked at with suspicion. How about a domestic wealth fund to professionally and transparently manage and build the wealth of the nation? Khazanah in Malaysia, for example, plays that role.
Let’s call this sovereign fund the National Development Fund (NDF) of India. The government’s stake in all commercial entities would be transferred to NDF. NDF would be mandated to professionally and transparently enhance the value of the assets it controls. Table 1 shows that NDF would be among the top funds globally in terms of size, with almost $350 billion in assets under management (AUM) as of July.
The foremost benefit would come in the way we measure performance and wealth creation. While Mukherjee may call it the wealth of the nation, no one in the ministries seems to bother about value creation by PSEs. Has anyone heard any ministry talk about the price-to-earnings (PE) multiple of a public sector enterprise? Public sector banks (PSBs) have always had PE multiples that are often less than half of their private sector peers. Even a modest adjustment halfway up would mean Rs1 trillion value creation. That is a significant amount of money. Not so in the case of NDF. NDF would be measured on value creation. And that can be measured very transparently.
A second area of consideration is corporate governance. NDF would not be an intrusive investor. It would have a long-term strategic development mandate. A recent Boston Consulting Group (BCG) survey of at least 800 companies globally highlighted that the once-feared sovereign wealth funds are welcome investors for most companies now. Companies find them stable, patient, and with composite and long-term objectives. Political pressures on companies will not be possible due a degree of separation provided by NDF. More importantly, NDF will have professionals with expertise in specific sectors to guide the portfolio companies.
A third area is human resources (HR). Currently, as PSEs and PSBs are managed by their respective ministries, their HR management gets linked invariably to the scales and hierarchies of the administrative ministries. Different industries have different ground realities in terms of market practices. Compensation models, especially for senior executives, have to reflect the realities of their sectors. NDF management would have the professional expertise to oversee where this required.
Indirect and opaque funding of social mandates would not be possible. Social mandates would be transparently funded by the government if an NDF-owned enterprise has to incur uneconomical business towards a government mandate.
There are several steps towards this goal. The structures, processes, and organization of NDF have to be conceptualized. In certain industries, such as banking, legislation has to be changed. Perhaps there could be more than one fund depending on the strategic nature of the industry. Perhaps one has to start with a few sectors and gradually add more.
The big question is why all of this cannot be done by the ministries in their current set-up. In right earnest they could. But institutional structures help manage the conflict of interest. It is like wondering why the finance ministry cannot manage monetary policy and government finances instead of the Reserve Bank of India (RBI). No one doubts the value that an independent RBI adds.
It is time to take the lead in creating a winning model of public sector in the new economic paradigm. There are, thankfully, no holy cows to study and emulate any more. We have to define ours in India. Mukherjee might otherwise be presiding over the destruction of public’s wealth rather than enhancing it.
Saurabh Tripathi is partner and director, Boston Consulting Group. Views here are personal. Comment at email@example.com
Graphics by Ahmed Raza Khan / Mint