Karnataka must divest from state PSUs

IN PERSPECTIVE

The Report of the Comptroller and Auditor General of India on State Public Sector Undertakings (PSUs) presented to the legislature in February 2021 tells you that Karnataka has 114 PSUs. Of these, 13 PSUs have not been working for the last 16 years, six are statutory corporations like the Karnataka State Road Transport Corporation. The other 95 PSUs together register a turnover of over Rs 70,000 crore, predictably incurring a net aggregate loss of over Rs 2,300 crore as per their latest finalised accounts.

Undoubtedly, the precarious condition of Karnataka’s finances requires a critical analysis of all PSU investments that do not contribute to the economic growth of the state. The March 2021 budget for Karnataka, already impacted by Covid-19, showed a revenue deficit of over Rs 15,000 crore, while the fiscal deficit, having exceeded the prescribed limit, is about Rs 60,000 crore. Further, devolution receipts from the state’s share in central taxes have decreased by 11 per cent, the state’s own tax revenue is 15 per cent lower than the budget estimate and the total revenue receipts have decreased 1 per cent.

In this tough situation, why drain precious resources into loss-making and sick PSUs? Instead, the state should take a leaf out of the Centre’s strategic disinvestment policy.

The Centre is pretty clear that the government has no business to be in business as it is difficult to take bold commercial decisions necessary to run enterprises. All underutilised and unutilised assets should be monetised, not used for fiscally supporting sick PSUs, thereby burdening the economy. The Centre has said it is committed to privatising all PSUs barring a bare minimum in the strategic sectors of banking, insurance, steel, fertilizer, petroleum and defence equipment, where it would retain a limited presence, thereby easing the burden on the taxpayer.

Now, what is true at the central level should be true at the state level. The state government’s Department of Public Enterprises (DPE) has to transform the portfolio of state PSUs, their customers and suppliers to unlock growth, drive industrialisation, create jobs and develop skills.

Adopting the Centre’s logic of classifying sectors deemed strategic, Karnataka’s strategic sector PSUs would probably be in the power sector, social sector and other companies known as statutory corporations.

Karnataka’s power sector PSUs covering generation, transmission and distribution of electricity in the state, unfortunately, incur a net aggregate loss of over Rs 1,800 crore, although some of the PSUs in this sector are profitable. Nevertheless, their privatisation should be tied to the National Electricity Policy. Karnataka’s power sector privatisation can wait for the national power sector disinvestment targets to crystallise before the state takes its own plunge in this area.

Ninety-seven non-power sector PSUs and statutory corporations are likely prospects for disinvestment. Since eventually the state government would be exiting all non-strategic sectors, there is no particular order in which PSU disinvestment needs to be planned. Non-functional PSUs like Mysore Lamp Works Limited and profit-making PSUs like Karnataka Soaps and Detergents Limited are all drifting alike amidst severe private-sector competition, making them prime candidates for immediate privatisation.

Disinvestment would unlock state PSUs’ value, make them independent of government contracts, force them to seek out new markets, stop local politicians from interfering, prevent needless discounts and rogue sales, rationalise staffing and manpower, making the new organisations robust and confident and capable of standing on their own feet.

The stakeholders in the process of disinvestment of state PSUs are evidently the organisation’s employees. From the security of the public sector work environment, they would find themselves in a new atmosphere of increased competition, demand for higher productivity and accountability, and would be loathe to let go of their privileges. A trade-off between protecting employees and the degree of freedom the private sector strategic partner should have in running the company must be worked out in mutual interest.

The state government should take particular care to ensure that the strategic disinvestment partner does not indulge in asset-stripping. All PSUs have valuable assets in the shape of land, buildings, plant and machinery, which a strategic partner may dispose of, make money, and quit, making the sick industry even sicker. Serious partners keen to run the company and help it grow should be chosen with great care.

When the central government, too, has demonstrated a keenness to disinvest, instead of pouring money into and running businesses and needlessly spending on administrative and maintenance costs of sick non-working PSUs, given the state’s precarious finances, the state should realise that it makes good sense to privatise its PSUs, too. The earlier it gets its act together the better for Karnataka’s taxpayers.

(The writer is former Executive Director and Member, Board of Directors, BEML)