Financial Daily from THE HINDU group of publications
Friday, Jun 21, 2002
SAIL: Can the rusting be stopped?
THERE is an old Chinese proverb: "May you live in interesting times". While current scandals keep the country's political managers busy, a cancer appears to be eating away the Steel Authority of India Ltd, which has been experiencing a downslide since 1997.
After three consecutive years of net losses since 1998-99, aggregating over Rs 4,000 crore, SAIL's depleted surplus/reserves (Rs 4,359 crore in 1997-98) was Rs 34 crore in 2000-01 and will be wiped out this year-end. The net worth, around Rs 8,400 crore in 1997-98, was Rs 4,365 crore in 2000-01. Worse, the company will soon come under the ambit Sick Industrial Company Act (SICA).
In 2002-03, losses will touch a high of Rs 1,707 crore. All this while, SAIL has been trumpeting its rising sales. The figures in the press releases convey the wrong picture. However, when it is backed against the wall, SAIL has attributed its difficulties to the depressed steel market.
While the turmoil in Gujarat is subsiding, and political lines are being drawn for the Presidential poll, SAIL's problems are either being deliberately ignored or conveniently relegated to the background. The erosion of thousands of crores of rupees has not merited the concern of the media or leaders. Only a collapse, on a par with Enron, may merit their attention.
All this is after the whopping financial restructuring SAIL was granted in February 2000. Since then it has tinkered with its structure to no avail. SAIL's much-hyped proposal of forming strategic business units (SBUs) did not find favour with Udyog Bhavan.
None of the stipulations made during time of restructuring has been met.
According to a February 18, 2000, communication, while the Government promised Rs 5,072 crore and Rs 381 crore of loans by the Steel Development Fund (SDF), it had set out certain conditions to be fulfilled.
It also gave guarantees "with 50 per cent interest subsidy for loan and interest thereon of Rs 1,500 crore to be raised by SAIL from the market to finance reduction in manpower through VRS".
There was another provision of government guarantee for loan and interest thereon of Rs 1,500 crore (including Rs 500 crore already agreed to) to be raised by SAIL from the market primarily to meet the repayment obligations on past loans in 1999-2000. Simultaneously, SAIL was directed to initiate the divestment of non-core assets. These were the power plants at Bokaro, Durgapur and Rourkela; the oxygen unit of the Bhilai Steel Plant, the Salem Steel Plant, the Alloy Steels Plant, VISL, the Bhadravati plant, the fertiliser plant at Rourkela and the conversion of IISCO into a joint venture with SAIL holding the minority shareholder.
In the official communication, the Government noted that this was one of the largest restructuring proposals it had ever considered and involved Rs 8,000 crore but reiterated that financial restructuring alone was not a long-term solution. The Government directed the Ministry of Steel to sign an MoU with SAIL for the implementation of a business-restructuring plan with detailed milestones.
Interestingly, it also decided that the Committee of Secretaries would examine and review, at appropriate intervals, the business-restructuring plan with reference to the detailed milestones and submit a progress report six-monthly to the Cabinet Committee on Economic Affairs. At a January 8 meeting, the Committee of Secretaries observed that the restructuring package was going "very slow". Restructuring and downsizing without an implementable growth plan is like consuming assets rather than investing them.
However, more than two years on, SAIL has still not fulfilled the stipulations set out in the government communication. So, who is responsible for sinking the public's money into this behemoth once a blue chip making consistent profits from 1985-86 to 1997-98?
The falling domestic and international steel prices have been blamed for the present crisis. But none of the pundits has zeroed in on the causes. A rough calculation of the average sales realisation for saleable steel before freight and selling expenses in 2000-01 shows that SAIL's realisation is low. It is said that at meetings of HR (hot rolled) producers, SAIL is usually the most reluctant to agree to a price hike and has, at times, insisted that it be done every quarter and as dictated by the international market.
Is SAIL, after being funded by the SDF's largesse, stifling the domestic steel market? New private steel majors can blame SAIL (and Tata Steel, another SDF beneficiary) for the conservative approach to pricing. On the other hand, a strong SAIL could galvanise the steel industry's growth. (Incidentally, even after the write-off, the interest payable by SAIL to SDF totals Rs 446 crore.) So consider what the Commercial Audit had to say about SAIL's skewed priorities. It said that the company could not divest any plant/unit within the time schedule specified in the MoU. It described the divestment of the power plants as a `façade' since the Government continued to remain a major stakeholder in the joint ventures formed with other public sector units.
The funds which had been generated till now due to the so-called divestment of the power plant had been partly contributed by the company in the name of the joint venture after taking loans from financial institutions and banks. The remainder was taken from other PSUs.
Interestingly, the joint venture/subsidiaries have refused to bear the burden of the entire manpower working in those plants and the excess manpower remains with the parent company. The financial statements up to September 30, 2001, after the adjustment of the `profit from divestment' of these power plants do not represent the real financial position/performance of the company.
Had the company been following international accounting standards in the preparation and presentation of financial statements, the loss for 2000-01 would have risen up by Rs 143.5 crore over and above that already commented on by the CAG of India under Section 619 (4) of the Companies Act.
Further, SAIL's loss for the period ended September 30, 2001, would have increased from Rs 704 crore to Rs 1,064 crore. The audit concludes that "the very purpose of financial and business restructuring, approved with much fanfare in February 2000 for divesting non-core and loss making plants/units so as to concentrate on the core function of production of carbon steel to remain competitive, has been defeated because none of the identified non-core units could be either sold/divested to any party outside the jurisdiction of the Government of India or closed".
Significantly, the audit described the role played by the Steel Ministry as that of a post-office.
It did not enforce the decision of the Committee of Secretaries for the reduction of retirement age by using the powers of the presidential directives to force the Board of Directors to follow the decision of the COS. "Thus, due to lack of will, the views of the Ministries of Finance and Disinvestment, the Planning Commission and the decision of the COS of the Government of India could not be enforced.
It clearly indicates the indecisiveness on the part of the company's management." This was despite the fact that the company enjoyed "huge subsidies" from nationalised banks, taxpayers, etc. The audit said the CCEA had failed to take appropriate action while monitoring the progress of the business-restructuring plan with reference to the detailed milestones. It said SAIL's performance in the post-restructuring period was alarming considering that it continued to incur heavy losses year after year. The Union Cabinet's apprehension that financial restructuring alone was not sufficient has proved to be a reality. The tardy implementation and the lack of drastic action in reducing operational cost negated the financial restructuring.
The audit asserted that even after the implementation of the Rs 8,000-crore package, SAIL has become a potentially sick company. "The entire sacrifice made by the Government of India, nationalised bank, tax payers, etc, to fund the restructuring package of the company appears to have been wasted as the Ministry of Steel did not appropriately ensure timely and effective implementation of the plan."
So why have the decision-makers been caught napping? With the change of guard, now is the time the SAIL's machinery can be overhauled by learning from the lessons of British Steel and US Steel. It recently broke convention and recruited a professional, a non-IAS man, as Secretary, Ministry of Power.
Let the Government appoint a search committee of professionals such as Mr N. R. Narayana Murthy of Infosys and Mr Deepak Parikh of HDFC to find an appropriate person for the job. SAIL, notwithstanding its skilled workforce, has always been a Chairman-led company and his dynamism or the lack of it is reflected in its performance.
SAIL has now reached its nadir. Only a hands-on CEO can pull it out of its difficulties. If the Government does not see the writing on the wall, soon no trace will remain of what was once a blue-chip company.
(The author is a former Executive Director, Corporate Planning, SAIL, and currently an advisor to Ispat Industries.)
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