Exit policy for bad management

With the government having managed by hook or crook to have shaved off over Rs 12,000 crore from its divestment deficit with the help of the poorly planned and even worse executed sale of ONGC shares, the upcoming Budget session may see little dust or debate being kicked up over the issue of the government's disinvestment policy, and what it hopes to achieve by it. Which would be a pity.

As recent developments have shown, it is time the matter was discussed thoroughly at the political level, and a clear consensus established on whether the Government should disinvest its holdings in public sector enterprises (PSEs), and if so, at what stage and for how much.

That is because the Government has about reached the end of what can be achieved through its favoured modus operandi so far: Stealth. Reforms have inched ahead by stealth. So has disinvestment. Instead of having a thought out and planned strategy, disinvestment has taken place in dribs and drabs, often because the Finance Minister of the day is staring down the barrel of a gun on the deficit front, and needs some urgent cash inflows to help balance his books.

This means that nobody's purpose ends up getting served. The Government doesn't get anywhere close to the kind of numbers it wants to see in the receipts column after the sell-offs.

The concerned PSEs fail to receive any benefits from either the stock sale, or from the freeing up of bureaucratic oversight and control, usually the ostensible stated purpose for disinvestment. And, of course, the tax payers, in whose name and with whose funds the PSEs were set up in the first place, and for whose supposed benefit the sell-off was staged, end up being the biggest losers of all.

That's why we need to bring the issue out in the open and have the political class state their positions publicly — and defend them. Why do we need disinvestment? What is the case against there being a public sector at all? And most importantly, is disinvestment the solution to the public sector's problems?

The received wisdom on state-owned enterprises — at least among the reformist brigade — is that the government has no business running businesses. It should focus on its core responsibility — of providing governance — and leave the job of running for profit businesses to the private sector, the argument runs. But experience suggests that the real issue may not have anything to do with who owns a particular businesses. The biggest impact on bottomlines is caused by how businesses are run — and not who owns them.

Nature of ownership

The aviation sector provides a perfect example. It is no coincidence that the two airlines which are facing the most difficulty at the moment in India are Kingfisher and Air India. One is privately owned, the other by the state.

Both are in serious trouble, with staggering debts, huge accumulated losses, a deeply de-motivated staff further disincentivised by unpaid salaries and a business model which is driving them both deeper into the red.

In both cases, it is largely their owners who have brought about this state of affairs. Both Air India and Kingfisher have not had a professional CEO. Any attempt to professionalise has inevitably run afoul of their owners. Even the executives who are nominally in charge do not have the freedom to take executive decisions. And both have landed in this mess because of their owner's peculiar ideas about how their businesses should be run.

Kingfisher is sinking because of a disastrous and ill-advised decision to acquire the loss-ridden Deccan Airways, a failure to merge the business properly post-acquisition, and an inability to master the art of running low-cost operations.

Air India is sinking because of a disastrous merger with Indian Airlines, a failure to merge the business properly, post-acquisition, and, you guessed it, an inability to master the art of running low-cost operations!

A change of ownership might yet save both airlines, it is true. But that has nothing to do with the nature of ownership, which lies at the core of the disinvestment debate.

Replacing the Government of India, as represented by worthies like the former aviation minister Mr Praful Patel, with Mr Vijay Mallya, for example, is not going to solve anyone's problems.

Bad managements will certainly drive any business to disaster. But bad owners can have a much more devastating effect.

While a bad CEO will be shown up quickly by his results, and can hopefully be replaced in time, changing a bad owner is virtually impossible — at least till it is far too late for all stakeholders in that business.

The problem of talent

This is not to say that there is no case for disinvestment. There are many areas, and many PSEs, where the tax payer, who is paying the bills, will benefit most by their being either sold off or shut down.

But there are many more PSEs, assets created at staggering cost to tax payers and which have a critical place in the economy, which are suffering more because of the way they are run, rather than the way they are owned.

Many PSE executives will tell you that their real problem is not a lack of managerial talent — after all, steel tycoon Lakshmi Mittal built and runs his global steel empire largely with the help of talent cherry-picked from Indian PSEs — than the interference from ministry mandarins and the political bosses temporarily occupying the corner office in the ministries.

At least private sector owners have the fact of having put some of their personal capital into the businesses they may be mismanaging in their favour.

That is why we need a political resolution to the issue. If the decision is to stay — and carry on collecting losses — in the public enterprise space, then that decision needs to be politically defended and politically sold to the voters. Ditto, if the decision is the reverse. If, after this, voters decide to support those who took this decision, no one can have a quarrel with this.