Drabu’s antidote for PSUs

A committee on PSU reforms lead by Dr Haseeb Drabu has undone the recommendations of Godbole committee set up in 1998. While Godbole  recommended closures, mergers, re-engineering and operational halt of various Public Sector Undertakings, Drabu calls for the state to be the principal development agent operating through owned enterprises and intervening in labour, capital and product markets. R S Gull

Haseeb DrabuJK Minerals was probably the first commercial initiative that J&K government took in 1960. Later in 1963, JK Industries was established by converting its earlier operations into the existing formal structure. Over the decades, J&K has established 20 working companies and three statutory corporations. Barring J&K Bank, where the government holds 53 percent share, there are quite a few PSUs that sustain themselves. Others largely depend on government aid. By the end of last fiscal, according to Comptroller and Auditor General, J&K government had invested a whopping 5412.52 crores rupees and most of it has gone “waste”.

For most of their history, state run PSUs were small rackets. These were fiefdoms of the ruling class where they could accommodate their workers flouting recruitment rules. In turn, they would milk the resources of these corporations by getting their blue-eyed boys to lead them. Professionals were never permitted to head any such organisation. Despite some PSUs working overtime to sustain their existence, an unprofessional management would fail all their efforts.

Drabu’s 10-Point PSU Revival Plan
Set up Ministry for Public Enterprises for all PSUs with the minister as non-executive chairman of all the corporations. Let all budgetary support be given as a plan allocation to this ministry.

Restrict government nominees to the Board of Directors of the Corporations to one third of the total strength (10-12 excluding non-executive Chairman) of the Board.

Transfer the aggregate stake of the state government in the individual corporations to a holding company, which will be wholly owned by the state government and will in turn own all the PSUs individually and collectively. Follow it up by initiating a process of “internal privatization” at the level of the holding company or the individual corporations or both. Ideally, a financial investor should be inducted into the Holding company and a strategic investor at the level of individual corporations.

Paid up capital must be made equal to authorized capital through a fresh and unconditional infusion of capital. Increase the authorized capital to xx level. The idea is to keep the number of authorized shares higher than those actually issued. This allows the company to sell more shares if it needs to raise additional funds.

Exempt all PSUs from paying dividend for five years so that their re-investible surplus increases besides the equity base at the existing level of paid up capital.

Covert all government debt to PSUs into equity so that equity bases goes up. Let this be donated capital.

All Corporations should immediately revalue all the assets at current market prices. The increase in value of fixed assets because of revaluation of fixed assets must be credited to “Revaluation Reserve”.

Variable Pay be made applicable to all pay bands and be related to the Grade Pay. Grade Pay can be divided into two components and one component will be linked to performance while as the other component will be allowed to all.

Convert all arrears into “sweat equity” earmarked for employees, based on the number of years in service, in a trust. This total “sweat equity” in any individual corporation should not exceed 15 per cent of the capital of the company. On the basis of the ownership in the Corporation, the employees in the company, must been given a board level representation.

All statutory liabilities of the corporations must be converted into sweat equity with a three year lock in and buy back at a predetermined rate after 5 years.

Rise of militancy proved the most crucial blow as situation prevented employees from going to offices. A government, pre-occupied with “proxy war”, had no time to see where the PSUs were heading. State Road Transport Corporation (SRTC) that was already suffering massive losses, suffered further as 117 of their buses and trucks were set afire in a single calendar year. JK Cements is perhaps the only PSUs that fought a pitched battle with the management for productive survival though some of its trade unionists were imprisoned for confronting the management.

The entire sector was in a mess in governor’s rule during which the government would manage funds by debit to plan and manage their salaries. Crisis started unfolding only after the National Conference (NC) government replaced the prolonged spell of gubernatorial regime. As the new government started introspecting the pitfalls of a unitary rule, lack of funds almost triggered a denial of wages to thousands of PSU employees. There were scores of instances in which the employees of erstwhile PSUs attempted suicide, were divorced and in countless cases their wards were kicked out of the schools for want of tuition fees. In absence of a policy, the system was encouraging a bloodless massacre.

Since then a series of measures were taken by successive regimes to ensure that commercial activities of PSUs come out of the strain. So far it has not yielded any positive results, barring JK Cements and Cable Car Corporation which besides earning enough to sustain offer some dividends as well.

Appointing Godbole committee was the first major exercise for PSU revival by the then NC government. It made a detailed analysis of state’s commercial activities and bracketed them in three categories – closure, clubbing, privatization and re-engineering. It recommended closure of nine PSUs besides eight units of JK Industries. It suggested clubbing of nine PSUs into four with diversification of production besides re-engineering in case of four other enterprises. For the units making massive losses, it wanted immediate halt in operation suggesting employees be paid at home without any work till superannuation.

Though some of its recommendations were not popular, it had arrived at the decisions on pure scientific basis. For the 13 unit J&K Industries Ltd, the committee said it is losing Rs 6,317.54 for every Kg of silk it produced, Rs 2,117.04 per Kg produce at its Jammu Filatures unit and Rs 293.60 for every metric ton at its Rajbagh Silk factory unit. In case of JK Minerals which then had only five of its 10 units functional, the committee said it is investing Rs 1.82 in its coal mine operations at Kalakote to earn one rupee.

For the follow up of Godbole committee recommendations, the government appointed senior IAS officer Khursheed A Ganai (currently principal secretary to Chief Minister). He submitted a voluminous report suggesting Voluntary Retirement Scheme and certain mergers in the light of Godbole’s suggestion.

The PDP government exhibited its desperation in reviving the loss making units but failed almost on all counts. Initially it created Rs 34 crores PSU Reserves & Restructuring Fund to manage the golden handshake of employees. It could not take off as the 3000 employees willing to go home required Rs 98 crores. Later the government came with the idea of setting up Rs 200 crores Asset Reconstruction Company (ARC) that would take over the “infected assets” of state’s ailing financial institutions and offer them a clean balance sheet. It also did not take off for lack of follow up even though central government was willing to offer Rs 150 crores.

Congress government asked senior IAS Officer B R Kundal (now a MLC) to chalk out the details of the VRS and golden handshake. In a brief report he identified the surplus staff and suggested the assets of the PSUs be sold out to create the corpus fund required for implementation of the VRS scheme. The scheme is under implementation and so far 740 employees have availed the scheme.

But now, Dr Drabu’s report seems to have undone all earlier reports. Then the youngest member of Godbole committee, Drabu says he was dissatisfied with the committee’s recommendations. He sees a possibility of reviving most of the PSUs that are in the red right now (see box). Submitted during governor’s rule and accepted by the incumbent government as well, Drabu says the approach (of earlier committees) lacked recognising the basic feature of the state’s economic system and situation.

Failure of a vibrant private sector is a major problem that Drabu has identified. “If the explicit and implicit subsidies (including government revenue foregone) given to the private enterprises in the state are estimated, it will become evident that the corresponding welfare gains for the local economy both in terms of output and employment are far lesser than in case of public sector,” the report says. “Hence, the route to privatization and sale are bound to be non-starters”. Legal impediments in permitting national level players add to the crisis.

While Drabu’s dissatisfaction with what his colleagues suggested during the Godbole committee meetings were not taken into consideration, his report is likely to emerge as a bible for PSU revival and 20,000 employees associated with them – most of them working in lowest wage grade.

While the PSUs are in a very poor state of affairs, both financially and organizationally, Drabu’s report says that the magnitude of the problem can be managed – total capital base of Rs 500 crores and output of a few hundred crores.

“While the intensity of the problem is severe, the size of the problem is very manageable,” he says. His report suggests the government to replicate the development strategy of the Southeast Asian tigers in 1970s where the state was the principal development agent operating through owned enterprises and intervening in labour, capital and product markets.

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