The fortunes of India’s public sector depend a lot on government policy. A look at the government’s airline and telecom companies


Just how much of an impact does government policy have on state-owned companies? And does disinvestment help former state-managed companies to perform better? The answer to the first question: quite a bit, actually, as a look at public sector undertakings (PSUs) in the civil aviation and telecom industries shows. As for the second question, privatised companies have fared better, overall, than when they were run by the government. 

The government has blithely neglected its airlines, Indian Airlines (IA) and Air India (AI), for years. The net worth of IA has been wiped off, with the airline having incurred losses in 2002-2003 of Rs 196.56 crore. Air-India is in no better shape – it made operating losses of Rs 190 crore in 2002-2003, up from Rs 54.53 crore in the previous year. 
Net gains of Rs 49 crore in exchange rate variations and income booked from unutilised services (passenger/cargo) of Rs 250.6 crore helped the carrier post net profits of Rs 134 crore.

Yet this need not have come to pass, had the government implemented the recommendations of a report by a committee headed by economist Vijay Kelkar (who later became finance secretary) in 1995. Says a former IA managing director: “The demand for infusing Rs 325 crore in IA was made then.” The Kelkar committee crafted a comprehensive turnaround strategy, which included financial and organisational restructuring, route rationalisation and expansion on international routes. The committee sought Rs 900-odd crore in additional equity immediately to help the airline leverage this for aircraft acquisition.

The Naresh Chandra committee too favours the infusion of equity in IA and feels that the two issues of divestment and fleet acquisition, which IA desperately needs, should be delinked. Minister of civil aviation Rajiv Pratap Rudy has promised to place before the Cabinet in January a new civil aviation policy, drawing on the Naresh Chandra committee’s recommendations. 

AI officials are, however, not exactly thrilled with the committee’s suggestion to let foreign airlines avail of AI’s unutilised bilaterals. This would result in a lowering of AI’s income by Rs 500 crore annually, claims one official – yet another instance of how government policy can have a huge effect on its companies.

What’s true of the airlines is, alas, true of government-owned airports. The government has dithered on privatising the Delhi and Mumbai airports. According to an Airports Authority of India official, as many as eight Cabinet notes were prepared. One of the first announcements of prime minister Atal Behari Vajpayee after the National Democratic Alliance came to power was that Delhi and Mumbai 
airports would be privatised. 

It took almost six years for the government to finally appoint an empowered group of ministers to oversee the privatisation process. An exasperated AAI official says: “Even now, it is certain that the contract will not be awarded by the April, 2004 deadline set internally.”

The outcome of the official dawdling: in the International Air Transport Association’s 2000 global survey (the last survey done) of 57 big international airports, Mumbai and Delhi rank 56th and 57th, respectively.

State-owned telecom companies, on the other hand, have gained considerably from government policy. Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) appear to have been the biggest beneficiaries of the telecom polic. For instance, BSNL obtained Rs 550 crore and MTNL Rs 100 crore by way of compensation in the recently announced compensation package for cellular service companies. All the private cellular service companies together bagged only about Rs 500 crore.

Some telecom industry men accuse the government of deciding to impose an access deficit charge for telecom services primarily because it wanted to bolster BSNL’s bottomlines. BSNL and MTNL were also refunded their licence fees (Rs 1,500 crore) for another year, and the fee could be refunded for every year of the Plan. 

The official response is that when BSNL was corporatised in 2000, it carried a lot of government baggage. This included wages, pension, corporate tax and the responsibility of installing telephones in rural India. As a result, the government offered BSNL a financial package which included a refund of its licence fee till March 2004. 

This year, BSNL along with the department of telecommunications said that if BSNL were to function efficiently, the government would either have to absolve BSNL of achieving the government’s teledensity targets or fund it. BSNL had in fact sent the government a bill of Rs 40,000 crore which it would have to shell out by 2005 for being corporatised and taking on the responsibility of village phones. MTNL got a refund too.

A senior BSNL official agrees that the policy has been favourable to the PSU. “But rather than saying that the government is biased towards BSNL, the correct thing would be to say that the government has realised that if the objectives of teledensity and rural telephony are to be met, the PSUs need to be supported. Also, in a competitive and strategic sector like telecom, the government may not want only private companies to be in business. The presence of a strong PSU keeps the competition honest.”

Even so, such financial molly coddling can be counter productive in the long run. “Anyone can live off donations, but can businesses be sustained? Financial packages may have some benefits, but if the government really wants to benefit PSUs, it must make them competitive,” argues a telecom analyst at a multinational consulting firm. “One can expect a significant erosion in BSNL’s and MTNL’s value over the next few years if these issues are not adressed quickly,” he adds.

Government hand-holding has not done MTNL and BSNL much good, though. Both have lost market share (from 100 per cent to about 60 per cent), though in an expanding market. According to a Telecom Regulatory Authority of India report, the government-owned companies lost 5 per cent of the market between July and September 2003 to private fixed line service companies. 

In cellular services, MTNL has garnered only two lakh subscribers in Delhi and Mumbai – private service companies add that many subscribers every month. The exception to the rule: BSNL has become the number two global system for mobile company with over 45 million subscribers within just one year of dialling into the cellular services market.

Yet not everything is gloomy either. The government has been hawking its companies in the last three years and the results are visible. Says M Anandan, managing director, Cholamandalam Investment & Finance Company Ltd, part of the Rs 4,500 crore Murugappa group: “Disinvestment brings about a noticeable change in state-owned companies. Not only do they become more efficient in terms of better manpower deployment but they also witness better capacity utilisation.”

During the last three years, the government has privatised over a dozen PSUs including CMC Ltd, Videsh Sanchar Nigam Ltd, Bharat Aluminium Company, Modern Foods, Hindustan Teleprinters Ltd, Maruti Udyog, Paradeep Phosphates Ltd, Indian Petrochemicals Corporation Ltd, IBP and Hindustan Zinc Ltd. 

The sale of the government’s 74 per cent stake in Modern Foods to Hindustan Lever in January 2000 set the ball rolling. Modern Food’s losses in 1999-2000 stood at Rs 48.23 crore, including Rs 35.19 crore as provisions made for previous years. Its finances have improved since then, with the company registering an operating profit before interest and restructuring expenses of Rs 4.8 crore in 2002, against a loss of Rs 8.5 crore in 2001.

The bottomlines of seven of the eight companies in which the government transferred management control have improved. Their profits have shot up by as much as 110 per cent in some cases. Barring the Tata-run Videsh Sanchar Nigam Ltd, whose profits dipped, Modern Foods, Bharat Aluminium Company, CMC, Paradeep Phosphates, Hindustan Zinc, Indian Petrechemicals Corporation and Hindustan Teleprinters have all bettered their performance after the government sold a strategic equity holding in them to private companies. That sure is some track record.




Inside box


A profile of PSUs

The combined profits of 240 entities rose 66 per cent during 2001-2002, the latest year for which figures are available. Their turnover, however, rose marginally by 4.47 per cent, according to the survey of public enterprises.

But the top 10 PSUs, including Indian Oil, Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd and the Food Corporation of India, Bharat Sanchar Nigam Ltd and ONGC, accounted for almost 70 per cent of the cumulative turnover of all PSUs.

The top 10 profitable PSUs – BSNL, ONGC, National Thermal Power Corporation, Indian Oil, BPCL, Gail, Mahangar Telephone Nigam Ltd, Northern Coalfields, Neyveli Lignite and Nuclear Power Corporation – accounted for 98 per cent of the total profits of all PSUs.

Almost half the PSUs operated at less than three-fourth of their production capacities during the year and their inventories continued to rise.

Average annual per capita emoluments dipped 12 per cent to Rs 1,93,225. In 2000-2001, they rose by over 30 per cent to Rs 2,19,672.