The Hindu Business Line : `Poor PSU performance drag on State finances'

THE dismal health of State finances in the country is largely due to the poor financial performance of the State public sector undertakings (PSUs) which need to "go a long way" to ensure a modicum of returns on the huge capital sunk, according to a study commissioned by the Planning Commission.

Sharing the findings of the study, Dr N.J. Kurian, Advisor (Financial Resources) in the Planning Commission and Chairman of the Study Group said at a select briefing that the report discusses the macro financial aggregates of the State PSUs.

(The study was commissioned in 1999 but could not be completed in time due to delay caused by the States in forwarding authenticated information on PSUs and inadequate resources at the disposal of the group.)

It also highlights the trends in performance for the period between 1990-91 and 1998-99.

The manufacturing and utility categories of State PSUs incurred losses consistently, with utility enterprises from power and transport emerging as the major loss-makers.

The report said that power sector enterprises should cut line losses, improve transmission and distribution, readjust labour force, bring tariffs in line with costs and improve the productivity of personnel.

Road transport corporations need to improve bus-staff ratio, occupancy ratio, fleet management and estate management practices. The innovative involvement of the private sector in the fleet could also improve their earnings.

Total investment with respect to 747 PSUs and corporations from 24 States and the Union Territories of Delhi and Pondicherry increased at a compound annual growth rate of 12.33 per cent during the 90s from Rs 77,760.02 crore in 1990-91 to Rs 1,97,105.47 crore in 1998-99. The net worth increased from Rs 14,563.66 crore in 1990-91 to Rs 53,579.31 crore in 1998-99 or a compound annual growth rate of 17.68 per cent.

"But the net worth was about Rs 1,49,727 crore short of capital employed during 1998-99, indicating a tremendous erosion of the capital base over the period. Total revenue earned was only around 55 per cent of the capital employed and about 57 per cent of total investment."

However, Dr Kurian said that the situation might have shown some improvement since then because of two developments.

First, during the last few years, a few State PSUs have been closed or wound up or sold to minimise the accumulated losses and most of the States have initiated some reform of the State electricity boards (SEBs) in the light of the Montek Singh Ahulwalia and N.K. Singh power reform committees' suggestions to tone up performance and fiscal restructuring.

Most of the losses piled up by the State PSUs were largely due to the poor performance of SEBs and State-run public transport corporations.

Giving a synoptic picture of the performance of the States PSUs studied, the report said that the cash profits/contributions (sales-direct costs) declined from about 20 per cent of the total revenue in 1990-91 to 16.6 per cent in 1998-99 against the warranted norm of 40 per cent.

The gross margin as a percentage of sales declined from 13 per cent in 1990-91 to 11.2 per cent in 1998-99 against the stipulated norm of 30 per cent.

Stating that the net profits were in the negative throughout the period of the study excepting for 1994-95 and 1995-96, the report said that dividends as a percentage of equity were minuscule at 0.6 per cent in 1998-99.

"Taking the opportunity cost of equity as 10 per cent, this implies that the State Governments subsidised the State PSUs by a huge amount, approximately Rs 4,900 crore in 1998-99."

As much as 90 per cent of the accumulated losses was incurred by Andhra Pradesh, Assam, Delhi, Gujarat, Karnataka, Kerala, Maharashtra, Orissa, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal.

"Delhi and West Bengal were the loss leaders, with Assam, Uttar Pradesh, Kerala and Tamil Nadu following," it said, adding that against the generally accepted norm of about 20 per cent of revenue earned, none of the States earned the benchmark profit before interest and taxes.

Though net profits should at least be equivalent to prime lending rate or 10 per cent of the revenue earned, but the net profit for all the States taken together averaged around (-) 1.2 per cent of the total revenue earned over the study period.

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