In this article we will discuss about the restructuring of public enterprises in India. Learn about:- 1. Introduction to Restructuring of Public Enterprises 2. Need of Restructuring Process 3. Major Issues for Restructuring Programme 4. Objectives 5. Formulation of Restructuring Strategy 6. Government Initiatives 7. Sickness 8. Revival Strategies.
Restructuring Public Enterprises in India (PSU): Introduction, Need, Issues, Objectives, Initiatives, Sickness and Strategies
Restructuring of Public Enterprises – Introduction:
The Public Enterprises (PEs) have made tremendous contributions to the development of the country at a time when the private sector was almost in infancy. In the last two decades, private sector enterprises have tried to march forward and they are getting success in their operations Introduction of Liberalisation, Privatisation and Globalisation (LPG) has given private sector enterprises a broader framework for their operations.
However, in the changed scenario public enterprises are facing severe constraints. In terms of quality or competence, the PEs are no wax inferior to private sector companies. Efficiency is not dependent on ownership. There are efficient PEs as well as not so efficient ones. Just on there are successful private sector companies and not so successful ones.
Today, the image of public sector is poor not because of lack of concerted efforts in communicating the achievements and activities of the public sector. There has been a campaign from the private sector organizations for privatization of PEs which has not been confronted effectively. There is need to improve communication system and to acquire latest skills in order to convey right image of PEs and of the public see or as a whole.
“The general image of the public sector is that it is white elephant, loss making, but this has arisen because of a few organisations and most of them are taken over from the private sector.” These PEs are inefficient due to continuous government intervention, overstaffing, poor labour productivity, and social obligations.
In the changed scenario, they have to compete with private sector enterprises and they need level playing field with them. They need immediate attention from the government, covering organizational, financial, personnel and marketing issues Liberalization, Privatization and Globalisation have changed the whole scenario of PEs working environment. The government of India has taken several initiatives to restructure the PEs and result forth coming are quite positive. But these efforts need continuity to remove the constraints being faced by the PEs. They now need restructuring process.
Restructuring of Public Enterprises – Need:
“Restructuring is required in both profit making and loss making public enterprises because of changing competitive environment and changes in government policies.” Restructuring is coming lo PSEs as a compulsion and in next five years there will be no option but to undergo organizational changes. It should originate from within the organisation so that the employees could join hands to make it more effective.
Disinvestment and privatization, another dimensions of restructuring, are coming up very fast and in a large way. “Restructuring is essential for enterprises manufacturing goods – capital equipment or capital goods – as it is for those engaged in services.” Restructuring is as a relevant intervention for public enterprises, as it is for private ones.
In the past – before the launch of the economic reforms programme both public and private enterprises were relatively inflexible. Both considered no doubt for different reasons, that there were no real compulsions for change. Today, restructuring more rampant in the private sector than it is in the public sector. Both need it urgently and continuously. The business environment, metamorphosed by globalisation, IT and telecom, has made restructuring necessary for the survival.
In the context of overall problem of restructuring and cases of sick enterprises in the public enterprises, the major issues which emerge are:
(i) How do we distinguish between revivable and non-revivable enterprises?
(ii) What are the options available for non-revivable enterprises?
(iii) Is it possible to merge the non-revivable enterprises with other units?
(iv) If yes, what will be the fast track mechanism?
(v) If the non-revivable enterprises are closed down, what about the manpower engaged?
(vi) Are there safety nets available or could these be created?
(vii) How can PEs, to be turnaround (or to be closed), attract worker support and cooperation?
(viii) Can some non-revivable PEs be handed over to workers?
(ix) What are the priorities for revivable units?
(x) What strategy can be adopted for PEs which cannot stand alone or are vulnerable units to be left alone to be forced to terminal sickness?
(xi) What can be the best mechanism to expedite the operation?
(xii) What about incipient sickness?
(xiii) If revivable PEs and PEs with incipient sickness are to be revived where will the funding come from?
(xiv) What impact will the closure of BIFR have on the PEs which are referred to it and others which may be referred?
(xv) What strategies should be followed to deal with- (a) non-revivable PEs, (b) revivable (PEs which call for immediate ICU (intensive care treatment), (c) loss making enterprises which have the potential for gaining competitive strengths, and (d) PEs which are performing but run the risk of becoming sick in the global environment.
(xvi) How does privatization programme affect the future and future course of action of non-performing PEs?
Restructuring Process of Public Enterprises – Objectives:
“The goals for restructuring process inter alia would include: technological upgradation, improvement in productivity and quality, profit maximization, cost reduction, shedding of nonproductive areas etc. Each organisation has its own individual entity and characteristics and, therefore, non-common prescription can be given to all public enterprises.” It is imperative, therefore to take restructuring exercises on case to case basis to improve their performances.
The broad objectives of restructuring would include:
(i) Clear business goals;
(ii) Improved work ethos and culture;
(iii) Cost reduction;
(iv) Improved profitability;
(v) Motivated and trained manpower;
(vi) Market oriented approach;
(vii) Technological upgradation.
Each of the public enterprise must carry out an introspection and draw up strategic plans to meet the challenges of the market. This would call for adopting a holistic approach to productivity encompassing areas e.g. finance, marketing, technology, HRD, together with optimization of resources – physical and financial. It is generally recognised that modernization of industries is essential to improve productivity and reduce costs.
Development of human resources is – key factor in modernization. The level of technology sophistication has an overwhelming influence on productivity. The speed of technological changes is forcing the organisations to continuously redesign, modify, and innovate the products/services in order to be competitive in the global market.
Restructuring Strategy Adopted by Public Enterprises – Formulation:
The strategy to be adopted for restructuring of public enterprises will be enterprise-specific. Restructuring process in general is depicted in figure 16.1. SWOT analysis consisting of identification of strength, weaknesses, opportunities and threats of the enterprise is the first step in restructuring process.
Necessary action plan will bring out the financial and physical resources required to achieve the goals spelt out in strategic plan. Strategic alliances will be spelt out that could be considered in the related areas.
Time frame, modalities of implementation, organizational requirements and mechanism for monitoring the progress will be detailed out. It is expected that such restructuring process will chart out course for individual public enterprise which may emerge as market oriented, lean and flexible organisation to respond effectively to the competitive environment.
Thus, the public enterprises in the sector have to be competitive in the emerging environment of globalisation and economic liberalization. Quality and productivity should be improved through technological upgradation, human resource development and organizational improvements. These call for restructuring of public enterprises.
Restructuring process has to be enterprise specific and should be done with a view to:
(i) Search globally for opportunities and resources possibly through strategic alliances;
(ii) Maximize returns on all assets;
(iii) Perform only those functions that can be performed quicker, more effectively and at lower costs;
(iv) Outsource those areas which can be more economically and effectively done by others;
(v) Close down those areas which are non-productive.
Strategically, this would necessitate redesign of work places, recognise the work practice and restructure the physical and financial assets to cater to the changing market needs. This is the task by itself and can be accomplished internally by managers, deployed exclusively for the purpose with assistance from an external management consultant.
Restructuring of Public Enterprises in India – Government Initiatives:
“Government is committed to reform and restructure the Public Sector Enterprises so that they stand poised with the best of their kind in the world. Government’s strategy towards public enterprises will continue to encompass a judicious mix of strengthening strategic units, privatizing non-strategic ones through gradual disinvestment or strategic sale and devising viable rehabilitation strategies for weak units.”
Efforts in this direction would include:
(i) Revival through the process of BIFR,
(ii) Mergers, contractions, diversifications as circumstances dictate,
(iii) Financial restructuring wherever to appropriate,
(iv) Joint venture formation by induction of partner(s) capable of providing technical, financial and marketing inputs,
(v) Manpower rationalization, including introduction of voluntary separation scheme in nonviable PEs.
Some of the Central Public Sector Enterprises (PEs) have been incurring losses continuously for the last several years. The accumulated losses in many of these cases have exceeded their net worth. Sickness in PEs has been the continuing concern of the Government. There has, nonetheless, been significant improvement in the overall condition of these enterprises over the years. In comparison to 105 loss making PEs in March 2000, there were 54 loss making PEs in March, 2009. Overall position of loss making public enterprises is given in Exhibit 16.5.
Thus, the Exhibit 16.5 shows that PEs are sick and their accumulated loss is quite huge of Rs. 85,968. It is important to note that closure of sick PEs is not the solution. They need effective restructuring programme.
Factors responsible for sickness in PEs are as follows:
1. Historical Reasons:
The reason for sickness varies from enterprise to enterprise. In some cases, the cause of sickness is historical; textile companies which were taken over from the private sector on social consideration for protecting employment of workers in early seventies could not be modernized quickly. British India Corporation, Bird Jute & Exports and NTC belong to this group.
2. Lack of Modernization:
There have been other enterprises that were taken over from the private sector but could not be modernized. These include engineering and refractory enterprises like Andrew Yule & Co., Bharat Wagons & Engineering, Biecco Lawrie, Praga Tools, Burn Standard, Braithwaith & Co., Richardson and Crudass Ltd., drug companies like Bengal Chemicals & Pharmaceuticals Ltd., transportation/shipping companies like Hooghly Dock & Port Engineering Ltd., Central Inland Water Transport Corporation and consumer goods companies like Tyre Corporation of India and Hooghly Printing Co. Ltd.
3. High Cost of Operations:
These became sick over the years on account of high manpower cost, high cost of production due to inefficiencies and competition from private sector. These include fertilizer companies like Fertilizer Corporation of India, Hindustan Fertilizer Corporation, Pyrites, Phosphates and Chemicals Ltd., chemicals and drugs companies like Indian Drugs & Pharmaceuticals Ltd., Hindustan Insecticides Ltd., and Hindustan Antibiotics Ltd.
4. Macro-Economic Objectives:
Some of the loss making companies, such as, the Nagaland Pulp & Paper Company Ltd., Manipur State Drugs & Pharmaceuticals Ltd., and North Eastern Regional Agricultural Marketing Corporation Limited etc., have had macro-economic objectives to serve like development of backward areas providing remunerative prices to farmers, etc.
5. Other Reasons:
Adverse market/stiff competition, obsolete technology/machines, high manpower costs, weak marketing strategies and slow decision making process.
Revival/Restructuring of Public Enterprises – Strategies:
Some of the strategies adopted for restructuring/revival of sick CPSEs are mentioned below:
(i) Financial Restructuring:
Financial restructuring involves investment in PEs by the Government in the form of equity participation, providing loan, (plan/non-plan) grants and/or write-off of past losses as well as changing the debt equity ratio. Measures such as waivers of loan/ interest, panel interest, conversion of loan into equity, conversion of interest including panel interest into loan, moratorium on payment of loan/interest, Government guarantee, sale of fixed assets including excess land, sacrifices by State Government, one-time settlement with banks/financial institutions, etc.
(ii) Business Restructuring:
Business restructuring involves change of management, organizational restructuring, hiving off viable units from PEs for formation of separate company, closure of unviable units, formation of joint ventures by induction of partners capable of providing technical, financial and marketing inputs, change in product mix, improving marketing strategy, etc. are the steps taken under the business restructuring process as per need on case to case basis.
(iii) Manpower Rationalisation:
Salaries and wages are often a major component of cost for an enterprise. In order to shed excess manpower, PEs have often resorted to the Voluntary Retirement Scheme (VRS) from time to time. In case of PEs found unviable and decided to be closed, the Voluntary Separation Scheme is introduced in such units. Retrenchment of employees is adopted as the last resort in exceptional circumstances.
The revival packages granted by the Government amounting to Rs. 5221.65 Crore in 2005-06, Rs. 2438.89 crore in 2006-07, Rs. 769.94 crore in 2007-08 and Rs. 6698.49 crore in 2008-09 has helped these enterprises in a big way in improving their conditions. Some of the sick and loss making enterprises have turned around and recorded profit during the last two years.
The Government set up a Board for Reconstruction of Public Sector Enterprises (BRPSE) in December, 2004 to advise the Government, inter alia, on the measures to be taken to restructure/revive of PEs. The Board comprises of a part-time Chairman, three part-time Non- Official Members and three part-time Official Members including Secretary, Department of Expenditure, Secretary, Department of Disinvestment and Secretary, Department of Public Enterprises.
There is a full-time Secretary for BRPSE in the level of Additional Secretary to the Government of India. In addition, Chairman, Public Enterprises Selection Board, Chairman, Standing Conference on Public Enterprises and Chairman, Oil and Natural Gas Corporation Limited are the permanent invitees in the meetings of the BRPSE.
Secretaries to the Government in the Administrative Ministry/Department concerned with the PEs under consideration by the Board are special invitees. There is a full time secretary to the Government for BRPSE in the level/rank of Additional Secretary to the Government of India. The Board is located in the Department of Public Enterprises (DPE). The DPE provides necessary secretarial assistance to the Board.
Strategies for Revival or Restructuring of PEs are as follows:
1. The purpose of making reference to BRPSE, a company is considered ‘sick’ if it has accumulated losses in any financial year equal to 50% or more of its average net worth during 4 years immediately preceding such financial year, and/or a company which is a sick company within the meaning of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
The concerned administrative Ministries/Departments are required to send proposals of their PEs identified as ‘sick’ for consideration of BRPSE. Other loss making PEs may be considered by the Board either suo motu or upon reference by the administrative Ministry, if it is of the opinion that revival/restructuring is necessary for checking the incipient sickness (incurring loss for two consecutive years) and making the PE profitable, keeping the industry specific business environment in view. The Board is expected to make its recommendations within 2 months of the date of receipt of the complete proposal from the administrative Ministry/Department.
2. As per the definition of sick PEs given above and the performance evaluation of PEs for 2007-08 and previous years, 78 PEs were referable to BRPSE. Upto September, 2009, cases of 64 sick PEs have been referred to BRPSE; out of which the Board has made recommendations in respect of 58 cases.
In addition, the Board has also recommended to the Government to accord “in principle” approval for rescinding of its earlier decision to close the units of Fertilizers Corporation of India (FCIL) and Hindustan Fertilizers Corporation Ltd. (HFCL) and to explore various options for their revival.
The Board during the period from November, 2008 to September, 2009 reviewed the status of implementation of revival package sanctioned by Government to 5 PEs namely- (i) Mineral Exploration Corporation Ltd., (ii) Central Inland Water Transport Corporation Ltd., (iii) Heavy Engineering Corporation Ltd., (iv) Bengal Chemicals & Pharmaceuticals Ltd. and (v) Fertilizers & Chemicals (Travancore) Ltd. and also the status of its recommendations in respect of 3 PEs namely- (i) Hindustan Cables Ltd., (ii) Brahmaputra Valley Fertilizer Corporation Ltd. and (iii) Madras Fertilizers Ltd.
3. Out of these 58 cases, the Government has approved revival proposals in respect of 36 cases of PEs and winding up of two enterprises namely Bharat Ophthalmic Glass Limited and Bharat Yantra Nigam Ltd. as on 30.9.2009. Out of the 36 cases of revival approved by the Government till September, 2009, 15 cases were approved during 2005-06, 11 cases were approved during 2006-07, 6 cases have been approved during 2007-08, 4 cases have been approved during 2008-09, and 2 cases have been approved during 2009-10 (upto September, 2009).
The restructuring/revival proposals approved by the Government involved a total expenditure of Rs. 16253.36 crore including Rs. 2920.71 crore as cash assistance and Rs. 12332.65 crore as non-cash assistance. The enterprise-wise details of cash and non-cash assistance in respect of approved proposals.
Government have approved on 26.11.2007 transfer of Bharat Heavy Plates and Vessels Ltd. to BHEL and merger of Bharat Refractories Ltd. with SAIL on 24.4.2008. BIFR approved on 13.6.2008 merger of Praga Tools Ltd. with HMT Machine Tools Ltd. w.e.f. 1.4.2007. Government also approved on 7.2.2008 for transfer of Bharat Wagon & Engineering Co. Ltd. (BWEL) from D/o Heavy Industries to M/o Railways and administrative control of it was transferred w.e.f. 13.8.2008.
4. In addition to the above, Government have already approved revival package for Nagaland Pulp & Paper Co. Ltd. with a total assistance of Rs. 787.54 crores (Rs. 552.44 crores cash and Rs. 235.10 crores as non-cash). Government have also approved second revival package for Heavy Engineering Corporation (HEC) on 4th September, 2008 at a total cost of Rs. 615.43 crores (Rs. 310 crores as cash and Rs. 305.43 crores as non-cash).
Similarly, the Government have approved on 7.2.2008 a one-time interim grant of Rs.200 crores as non-plan funds to Fertilizers & Chemicals (Travancore) Ltd. (FACT) to enable it to sustain its operation till 31.3.2008. This package is in addition to the revival package approved in March, 2006.
In order to revive ITI Ltd., the Government have sanctioned a sum of Rs.1427 crores (Rs. 1403 crores as cash and Rs. 24 crores as non-cash) from December, 2004 till January, 2009. Further, the Government has also approved on 20.2.2009, inter alia, Rs. 3000 crores towards revival of ITI Ltd. Government have also approved 2nd revival package on for NTC for Rs. 6129.75 crores by way of waiver of Government of India loans and interest thereon.
The Government have also approved proposal of converting Semi-Conductor Complex Ltd. into a Society under the Department of Space on 23.2.2006. The proposal for transfer of assets, liabilities and manpower of National Instruments Ltd. (Kolkata) to Jadhavpur University, Government of West Bengal was approved on 8.2.2007.
Governments have also approved revival of Hindustan Fertilizers Corpn. Ltd. (Barauni Unit) on October 30, 2008 through Special Purpose Vehicle to be promoted by Fertilizer PSUs/Fertilizer Co-operatives. The Government have established an Empowered Committee of Secretaries (ECS) with the mandate to evaluate all options of revival of closed units of FCI and HFCL, and to make suitable recommendations for consideration of the Government.