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Public Sector for Public Interest

May 2, 2012

PSUs can once again be the beacon that will show the way to development, growth and social benefit

LPG is widely seen as the magic potion that gave India’s economy a phenomenal boost. Liberalisationprivatisation-globalisation, or LPG, was welcomed by many as the recipe that not only injected new energy into the slowgrowing Indian economic plant, but one that would also be the death knell of the public sector parasites that were inhibiting its development. Some did die, some are on oxygen, and a few have seen rebirth in a privatised avatar. Many, though, are yet alive. It is in this context — as the new, LPG India turns 21 — that the role of the PSU merits discussion.

Born out of a planned-economy model, underpinned by a Nehruvian-Fabian socialist philosophy, PSUs were conceived as torchbearers of a resurgent India. The economic rationale was that the private sector was unlikely to invest in large, capital-intensive, longgestation projects with slow returns or high risks. PSUs were, therefore, set up for steel plants, oil refineries, aircraft manufacture, heavy machinery and such-like; over time, they got into a range of other fields too. PSUs were also intended to secure the ‘commanding heights’ of the economy, so as to guard against any monopoly, cartelisation or market manipulation by the private sector.

Now that the private sector is able to raise substantial funds, aided by the fact that foreign investment is permitted in most sectors, what — if any — is the raison d’être for the public sector? The surprising efficiency of PSUs, given the constraints and interference that they have to live with, is generally not recognised, even as the whole government sector has been vilified as being inefficient, slothful and corrupt.

With this background and in new economic scenario, the role of PSUs has obviously to be very different from the days of monopoly. Today, they must act — where they can — as market shapers and influencers. PSUs in hi-tech areas must be leaders in R&D, and invest in long-gestation developmental programmes. Some of the country’s best talent — especially in the engineering domain — is in the PSUs; also, with the exception of the pharmaceuticals sector, the quantity and quality of their R&D is far ahead of that in the private sector. PSUs must leverage this.

Unlike private sector companies, they do not have to worry as much about the day-to-day reactions of the stock market, nor be driven by the QSQT, or quarter sequarter tak, mentality of their private-sector peers. The relative independence from these pressures means that they can afford to focus on the long term. PSUs should be leaders in environmental issues: conserving energy, water and resources in their processes; recycling waste and water; minimising their carbon footprint and promoting environmental consciousness amongst employees, suppliers and the community.

PSUs should set benchmarks for customer service, transparency, corporate governance and ethics. In sectors where they have a substantial presence, PSUs can ensure that no cartelisation or exploitation of customers takes place, especially when there are demandsupply mismatches. The airline industry is an example of such trends, and it is disturbing that some time back, there were market rumours of Air India too colluding with private operators to capitalise on temporary seat shortages. PSUs are commercial undertakings, but the very fact of their being ‘public’ implies a larger social responsibility. As many instances around the world have shown, public good and commercial viability are not always in conflict. As a matter of fact, the flavour of the day is doing well by doing good.

The roles and responsibilities of PSUs require appropriate managerial frameworks, and these will be impossible without a major revamp of the overall governance paradigm of PSUs. Reform at the board level is the first requirement. PSUs must become truly board-managed organisations, with the government stepping back and giving full power to boards. At most, the government could retain a say in very large investments entailing debt or raising of new capital, and any fundamental changes in the stated objectives of the PSU. Like any promoter in a private company, the government can nominate board members, but — like listed companies — it must have independent directors and these must be selected by the board, through its nominations committee, rather than nominated by government. Also, it must be the board — and not the government — that selects and appoints the CEO. The board and professional managers must run the PSU, not the owner or promoter.

One vital lesson of the last half-century is that interference by politicians and bureaucrats is the touch of death for a PSU; this must end. Apart from this, a few simple reforms at the level of the board are all that are required to begin a transformation of PSUs. This, though, is possible only if there is a change in the mindset of the government. It must recognise that building and strengthening autonomous institutions is a necessary element for a smoothly-functioning society, and a vital part of the economic infrastructure.

It is on this premise that institutions were built in the early years of the Republic. Those that were given — and guarded — autonomy, continue to do well (a few educational institutions, sci-tech organisations, the Election Commission); others that began well have been destroyed through interference. Sadly, many PSUs, such as Air India and BSNL, are in the latter category. In the new, competitive context with dominant private players threatening to dictate terms in many areas, PSUs are needed more than ever. It is time to reinvigorate them and use them as guardians of public interest and engines of development and economic growth.

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