India can’t make up its mind on PSUs, 30 years after liberalisation

This dividend directive is the latest in a series of moves by the central government to monetize something from its PSUs that is essentially in the nature of a tradeoff: today’s outgo in favour of the Centre will leave the PSUs relatively weaker for the future. Besides the dividend request, the Centre has been nudging PSUs to channel corporate social responsibility funds (CSR) to central government schemes. It has been asking them to do share buybacks. It has been asking one PSU to buy the government’s stake in another PSU, as was the case with ONGC acquiring HPCL.

As the majority owner, the Centre is within its rights to do all this. Except, most of these moves have the net effect of weakening PSUs financially, eroding their autonomy, and sending the message that the government’s funding needs are an additional consideration in the business choices of PSUs.

The stock market has not taken the performance or predicament of PSUs kindly. In the last six-and-a-half years, while the bellwether BSE Sensex has increased 76%, the BSE PSU index has fallen 40% (see Chart 1). As it is, the market tends to value PSUs at a discount to their private peers. For example, in the capital goods sector, it values each revenue rupee of BHEL, a PSU, at 50 paise, against ₹1.83 of L&T, a private player.

The divergence in performance on the market is especially pronounced since December 2016. It is a reflection of how little things have changed nearly 30 years after economic liberalization.

Performance pressure

The operational performance of PSUs has been under serious stress even before covid-19. According to the Public Enterprises Survey 2018-19, which maps the financial performance of all central PSUs, there were 249 non-banking PSUs in operation. Another 86 were being set up, and a mere 13 were either under closure or liquidation.

The non-banking PSUs in operation cover a wide swath of economic sectors, including aviation (Air India), minerals (Coal India), petroleum (ONGC, IOC, BPCL), steel (SAIL), capital goods (BHEL), fertilisers (National Fertilisers), trading (MMTC), power (NTPC, Power Grid) and logistics (Concor).

Many were formed in the 1950s and 1960s, when the government was the prime driver of economic activity. Private players have since built a significant presence in many of these sectors, negating the argument for the government to be in business.

As a set, the operational PSUs are on a downward trajectory in profitability. At 5.9% of revenues, the net profit margin of all operating PSUs in 2018-19 was the lowest in the last four years. Among the four sector categories, manufacturing, processing and generation saw the biggest drop in net margin, from 21.3% in 2015-16 to 4.1% in 2018-19 (see Chart 2).

Over the last five years, the turnover of operating PSUs has increased at a compounded annual growth rate (CAGR) of 7%. Meanwhile, during the same period, their borrowings have increased at a CAGR of 15.3%. This comes in the backdrop of their margins coming under pressure and the government asking them to distribute higher dividends.

For the Centre, dividends and profits from the various entities it owns are important for its own revenues. In 2018-19, the Centre received ₹1.13 trillion from such dividends and profits. This amounted to about 6% of its total revenues, according to Union budget documents. Of this, about ₹48,000 crore were dividends from PSUs. In this challenging fiscal, this is projected at about ₹66,000 crore (see Chart 3).

As per current norms, PSUs have to pay an annual dividend of 30% of their net profit or 5% of their net worth, whichever is higher. This effectively means that even if PSUs are recording losses, they can pay dividends if their net worth is positive.

In recent years, the richer, better-performing PSUs have consistently maintained or increased their dividend payout despite a dip in profitability and mounting levels of debt. In 2018-19, of the 102 PSUs that paid a dividend, 61 paid more than 30% of the net profit they earned that year.

It’s a tradeoff. The government, their ultimate owner, benefits from higher dividends. But the PSUs end up retaining a smaller surplus, which effectively reduces the internal funds at their disposal to expand. The price of this inability to expand, or relying more on debt than own funds to expand, is paid in later years. It’s paid both by the PSU (in the form of lower profits) and the Centre (by way of receiving lower dividends).

CSR donation drive

At present, the Centre is pulling many levers to get PSUs to provide funds for its priorities. It’s even found a way in the corporate social responsibility (CSR) spending of PSUs. PSUs are among the largest contributors to CSR spending of India Inc.

In 2018-19, the total CSR funding of PSUs was ₹3,513 crore, shows data from the CSR database managed by the ministry of corporate affairs. Within this, there was a spike in the flow of CSR funds into central government schemes and funds, from ₹190 crore in 2017-18 to ₹541 crore in 2018-19. In other words, as a share of the overall CSR spend of PSUs, the Centre’s share increased from 7% to 15%.

This is likely to increase further in 2019-20 and 2020-21 because of the pandemic. In August, The Indian Express reported that RTI responses received by it from 38 PSUs showed that they contributed ₹2,105 crore—60% of their total 2018-19 CSR spend—to the newly launched PM Cares Fund.

If it’s not funds, it’s assets. One of the avenues the government has long identified to raise additional funds is selling or leasing excess/unutilized land held by PSUs, and by the Indian Railways and key ministries. Staggering as the land holdings of these government entities are, monetizing them poses many questions of intention, procedure and process.

Consider the very first step: identifying parcels of land. Several committees and taskforces have been formed for this objective. However, there is still no thorough audit of how much land each PSU holds, how much is unutilized, how much is not essential to operations and can be considered for sale, and what it is potentially valued at. In 2017, the government set up a GIS portal to create an inventory of the land held by ministries and their PSUs. Of the 51 ministries, 41 responded. Of the 300-plus PSUs, only 22 responded.

Two ministries that hold significant chunks of land spread across India are the ministry of railways and the ministry of defence.

According to its 2017-18 annual report, the ministry of defence owns about 17.57 lakh acres of land, managed by the three main defence services and periphery organizations. Of this, about 1.57 lakh acres is inside cantonments and the remaining outside.

Similarly, the ministry of railways owns about 4.77 lakh hectares of land, according to a response to a Right to Information (RTI) query filed in 2018. While data on total unutilized land is unavailable, the railways has plans to monetize it. It identified 12,000 acres of surplus land that states could buy from it at market value.

The Rail Land Development Authority (RLDA) is tasked with the commercial utilization of land under the railways. In 2018-19, it oversaw the commercial development (including sale/lease) of 59 vacant railway land parcels, totalling just 538 acres. Through the year, it realized a mere ₹83 crore, while transferring ₹74 crore back to the ministry.

Similarly, the status of the 123 sites earmarked to develop multifunctional complexes underscores the slow pace at which these projects are moving and the challenges inherent to them. These challenges would exist even for PSUs or other ministries. Thus, while there might be an opportunity to sell land parcels, not everything is saleable and it takes time.

The fallback

Even the outright sale of chosen PSUs by the government is proving to be quite a task. The government is struggling to sell the laggards. A case in point is Air India, which it has been trying to sell since 2018. Two efforts so far have come a cropper.

Its first effort to sell stronger, more valuable PSUs also did not receive the response it would have liked. This was for fuel retailer Bharat Petroleum Corporation Limited (BPCL), for which, the expression of interest closed last month. BPCL controls about 25% of India’s fuel retailing and 15% of refining capacity. It was also profitable. Despite four deadline extensions, it failed to attract major players like Reliance Industries, Aramco, British Petroleum and Total.

The sale of BPCL is essential for the government to meet its 2020-21 disinvestment target of ₹2.1 trillion. This is twice as much as the most it has ever raised: ₹1 trillion in 2017-18. Of this, ₹36,915 crore came from the directed sale of its 51% stake in HPCL, a fuel refiner like BPCL, to another government-owned company ONGC.

For ONGC, whose principal business was oil exploration, HPCL gave it an extension into fuel retailing. The government received funds, while ensuring it still effectively owned HPCL. It was a deal of the government, by the government, for the government. And that seems to be happening with many things in the PSU space.

Vaidik Dalal is with www.howindialives.com, a database and search engine for public data.