A few days ago, the government decided to end the year-long probation of the chief executive of a large public sector undertaking (PSU) and confirm him in his position. In doing so, the signals it sent out were singularly graceless. The minister said they were unable to find a suitable private sector contender for the job. Ostensibly, this was because the compensation offered was too low, in relation to job requirements and not because they used the wrong search firm, assuming they used one. If that is indeed the case, it is an insult both to the incumbent, questioning his quality and more to the government for persisting with rules that it acknowledges to be unwise. Why should professionals take a pay cut to work in a PSU?
On occasion, a more professional “work culture” and wider learning opportunities are cited as offsetting benefits in the PSU. Once, this may have been true, when private firms were largely family-run and their management more capricious, but it is now rarely the case. Moreover, learning opportunities are a double-edged sword. If anything, PSUs often constrain a professional’s ability to use what she/he learns, and a move to a private sector position may lead to greater functional freedom and satisfaction.
Neither is it the case that PSUs cannot pay, for many of them have the financial strength to afford a market-based compensation structure. Some of them have also put one in place. It was not so long ago that salaries at ICICI were similar to that of the PSU banks and Maruti’s wages was comparable with other PSUs. Over time, both these institutions have moved to compensation structures comparable with their private competitors. So, what prevents our other PSU personnel from being paid appropriately? One does not have an answer, but a clue.
It appears that distance from the government matters. Within government, there seems to be a need to compensate comparable positions similarly. The Public Enterprises Selection Board (PESB) is an institution that reinforces this notion of equity across different PSUs. It prevents the compensation at one PSU differing too much from another, since all their appointees are, in some sense, products of the same selection process. This refuses to recognize the fact that variation in compensation across firms promotes better matching of jobs to people. Beyond PESB, when the appointment becomes one that concerns the Prime Minister’s office, the chance of treating it as just another commercial job becomes even more unlikely.
Conversely, where the hiring decision is made by the board of the company rather than the government, even though it may exert its influence through its nominees on the board, it is easier to treat the position as a commercial appointment that does not need a certain parity to be ensured with other similar jobs, e.g., government servants, to minimize envy and unseemly jostling for the position.
The story in China is markedly different. Chinese PSUs and joint ventures span the entire gamut of economic activity, from advanced electronics and power plants to hotel chains and financial institutions. Compensation at most of these firms is market-related, though they may not be the best paymasters. If China seems too far removed, just look across the border. While regulatory agencies in Pakistan do not pay market salaries, they do pay significantly more than standard government scales. Coupled with the challenges of the job, they are able to attract and retain many well-trained professionals, who would otherwise have significant market opportunities. Recently, CEOs of water and sanitation agencies in Lahore were also hired with similar compensation packages. If they can do it, why can’t we?
It is important to recognize that the market failures that led to the establishment of many PSUs have long since disappeared. With Mittal and Tata in the fray, SAIL no longer commands the heights. Many can be allowed to function almost entirely on commercial lines. This would involve distancing them from government and giving them full operational freedom. Compensation is one area, and investment is another, where the Public Investment Board second-guesses all major decisions even if no fiscal support is involved.
Maybe the fear is that given investment freedom, PSUs will undertake more self-serving projects than they do now. China provides many such instances. However, we do have a better corporate governance system, which is designed precisely for such situations. Here, the signals from the government so far have not been particularly encouraging. Once it became clear that government nominees would not be considered as independent directors on PSU boards, it has tried to get around the spirit of the law, rather than utilize the opportunity to make the PSUs more independent, while ensuring appropriate oversight.
This twilight zone existence, where the PSUs have to compete nationally and internationally, with large private sector firms, but with radically limited decision-making powers, needs to go. Is this possible without divestiture? I, for one, think not, but am willing to be proved wrong.
(Partha Mukhopadhyay is senior fellow at the Centre for Policy Research, New Delhi. Comment at email@example.com)