How to divest from loss-making SOEs

Restructure loss-making SOEs to make them attractive targets and realise maximum value from their sale

India’s State-Owned Enterprises (SOEs), or Central Public Sector Enterprises (CPSEs), have played an important role in the development of the economy. They offer a wide range of products and services. They account for, as per the IMF, 22% of GDP in total assets. There has been a phenomenal and tremendous growth of SOEs. A large number of SOEs were set up, especially during and after the second five-year plan.

The Public Enterprise Survey-2020, tabled in Parliament in August 2021, reports that 256 SOEs are operational, 96 are under construction, and 14 are under closure or liquidation process. Of all SOEs, 10 are categorised as Maharatna, 14 as Navratna, 61 as Miniratana-I and 12 as Miniratna-II enterprises. 58 SOEs are listed in the stock market and several are large and have global operations.

The outstanding investment in SOEs by the government is continuously increasing. There were only five SOEs with an investment of Rs 29 crore at the commencement of the first five-year plan. It jumped to 366 SOEs, with a total investment of Rs 21.59 lakh crore in FY20. The investment is largely driven by long-term loans. Over the last five years, major investments in SOEs were made through long-term debt. The total long-term loan has increased from Rs 9.47 lakh crore in 2016 to Rs 18.47 lakh crore in 2020. The ever-increasing loan has become a fiscal burden for the government.

The aggregate profit of all operational SOEs has declined by Rs 0.5 lakh crore – almost 35% in FY20 against that in the previous year. It was mainly because of a decline in net profit of the manufacturing, processing and generation sector (52.7%) and mining and exploration (27.4%). Of the 256, two-thirds of the SOEs reported aggregate net profit of Rs 1.38 lakh crore, one-third of them reported aggregate net loss of Rs 0.45 lakh crore, and one SOE – the Food corporation of India -- was at break-even level.

Among the profit-making SOEs, the top five SOEs – ONGC, Coal India, Power Grid, NTPCL and GAIL -- accounted for 37.8% and the top 10 accounted for 57% of aggregate net profit in FY20. The loss-making units are reducing the aggregate profit of SOEs by offsetting the gains from the profit-making units. They are facing the challenge of ensuring a reasonable return on investment, while discharging their constitutional and social objectives.

The government should focus on loss-making units, especially the highest loss-making units. The aggregate loss of such units is widening. It has widened by Rs 0.13 lakh crore in 2020 from the previous fiscal year. The 10 top loss-making SOEs contributed 90.9% of the aggregate loss of the loss-making units in 2020.

The point is, five SOEs – RINL, MRPL, BHEL, ONGC Mangalore Petrochemical and Hindustan Copper Ltd) — which were profit-making in FY19, recorded losses and were among the top 10 loss-making units in 2020. BHEL, which had a net profit of Rs 1,209 crore in 2019 became a loss-making unit in 2020 and realised a net loss of Rs 1,473 crore. It was the seventh-highest contributor to the losses in FY20.

The continuously increasing loss and poor performance of SOEs have become a fiscal burden for the country. Therefore, the government adopted a disinvestment policy in 1991 to reduce the fiscal burden and further introduced a new strategic disinvestment policy in 2021. The new policy envisages the privatisation or closure of all SOEs in non-strategic sectors and keeping a bare minimum presence in the strategic sector.

Although the financial performance of SOEs is poor, their contribution in the form of corporate tax, dividend, excise duty and sales tax, to the central exchequer remains an important source of revenue for the government. Their contribution to the government was Rs 3.76 lakh crore in FY20. The major contributors: petroleum companies contributed the maximum share of 55%, followed by coal (12%), and trading and marketing (5%). They are also earning foreign exchange through the export of goods and services. In FY20, their earnings stood at Rs 1.22 lakh crore.

A point of discussion is whether profit-making or loss-making SOEs should be privatised, or strategic sector or non-strategic sector SOEs. A majority of the people believe that only loss-making units should be privatised and profit-making units should be retained. The government should avoid selling the profit-making units and focus on divesting from loss-making units.

However, we have seen in the past that the privatisation of loss-making units is very difficult. The divestment from Air India is a clear example. The government should restructure SOEs before disinvestment so that loss-making SOEs can be privatised and maximum returns realised.

(The writer is the author of ‘Privatisation of Public Enterprises in India’ and teaches at ITS Ghaziabad)