COLUMNISTS
STOCKS
MUTUAL FUNDS
NRI TAX
INDIAN TAX
INTERVIEW
PERSONAL FINANCE
PERSONAL BANKING
INSURANCE
REAL ESTATE
GOLD
CURRENCY

The winds of change

A reformed shikari is the most efficient conservationist. By analogy, a union leader who has seen the light is probably the best man to implement reforms. And so it proved last month when the government won the first of many impending battles with organised labour. The breaking of the Uttar Pradesh State Electricity Board (UPSEB) strike without the government retracting from its position leads one to hope that things could improve in the power sector.

With a lakh-plus employees, UPSEB is next only to the railways as a dispenser of government appointments. It has accumulated losses of around Rs 19,000 crore and a woeful Transmission & Distribution (T&D) record with 50 per cent of generated power disappearing into the ether without any payments.

More than 60,000 villages remain unlinked to the grid, and power cuts exceeding 16 hours a day are considered normal. Until the T&D bottleneck is released, it is impossible to improve the ground situation. What's more, independent power producers (IPPs) are unwilling to set up projects since the UPSEB is bankrupt and cannot pay for generated units.

In Andhra Pradesh and Orissa, attempts have been made to address similar situations by spinning off the T&D process. This may work since it forces a certain level of accountability and decreases T&D losses. In the long run, it also makes it easier to sell off the T&D network or license it out to an efficient "collection and maintenance agency".

The lion's share of T&D losses is actually caused by de facto privatisation. At the junior engineer-linesman level, employees cash in on the inefficiency of the UPSEB. They have long ago set up their own billing systems with consumers paying them directly and bypassing the board.

So when the proposal to trifurcate the UPSEB was made, it caused consternation in the 12 labour unions. Apart from the legitimate fear of lost jobs, part of the unstated agenda was loss of the T&D franchise, which has made cellphone-toting millionaires out of the junior engineers of a bankrupt organisation.

Leading the charge to trifurcate the UPSEB was power minister Rangarajan Kumaramangalam. Now in 1988, a Planning Commission proposal to privatise power distribution at the equally badly run Delhi Vidyut Board (DVB, which was then DESU) was blocked by vehement protests from the Delhi Power Board Employees Union. The president of the DPBEU at that time was a certain R Kumaramangalam. This is both ironic and heartening. It means that the power minister understands the issues involved and also knows which buttons to press when it comes to labour negotiations.

At the time of writing, the ground situation is still bad. It will take at least a year to allocate losses to the new trinity. When the T&D is actually spun off in 2001, we will see more protests. But a beginning has been made. What's more, it was a politically brave decision taken ahead of an assembly poll. The government calculation is that votes lost to organised labour will be recouped from exasperated consumers who see light at the end of an unending tunnel. The political equation is simpler for the unions are, by and large, left-wing organisations who don't form a BJP vote bank.

This wasn't the only reformist item on the government's January agenda. Another positive signal came from the sell-off of 74 per cent of Modern Foods to FMCG giant Hindustan Lever (HLL) for a consideration of Rs 105 crore. HLL will infuse another Rs 20 crore to recapitalise the company. This is actually the follow-through to a United Front government decision in 1996 to get rid of the public sector undertaking (PSU).

Modern, which has 2000-odd employees, is one of the best brands in the organised food sector with a 32 per cent market share in bread. It had a 1998-99 turnover of Rs 171 crore and losses of around Rs 10 crore in that fiscal. So it isn't exactly a basket case, although it is over-manned by 3:1 given HLL estimates that about 700 people is ideal employee strength. The deal includes a one-year moratorium on retrenchments. That gives HLL time to ease surplus labour out without too much anguish.

Modern Foods is the first time the government has relinquished management control. That, in itself, sends a good signal. It is also well timed since the company was sold as a going concern rather than after it became a BIFR case. On the same day (January 25) the government also announced that Indian Airlines would be put on the block.

The only fly in the Modern Foods ointment is that the sale was undervalued. The company owns assets worth perhaps Rs 2100 crore. Apart from machinery at its 14 bakeries, it has 19 franchises and six ancillary units scattered across the country. Real estate alone in the form of 16 acres in Delhi, 4 acres in Kanpur and 18 acres in Mumbai would be worth over Rs 500 crore at going rates. In effect, HLL has paid for the brand and received the assets for free. As a result, there are all sorts of rumours of kickbacks flying around.

Leaving those accusations aside, one wonders exactly what the government could have done to maximise revenues. Perhaps the brand could have been sold to HLL and the real estate sold separately. Or the real estate could have been leased out to various parties (some of it is in the form of residential apartments, other bits are retail/distribution outlets, although the bulk is factory land) and the income used to soft-land workers.

Still, it is better that the deal is done and a precedent set rather than an interminable wrangle over price and control. It makes the next sell-off easier. The government must continue in this vein and gradually get out of running businesses. This is vital with Rs 258,858 crore of capital employed in PSU assets at a pathetic return of 5 per cent. If one compares that to the standard interest discount rate, the level of wealth destruction is awesome.

According to Pramod Mahajan's recent statement in parliament, 101 of the 227 central PSUs are losers and most profits come from telecom and energy. In 1998-99, the entire sector had a turnover of Rs 3,22,327 crore (Rs 2,85,225 crore in 1997-98) with a net profit of Rs 13,766 crore (no change from 1997-98). The top ten PSUs generated 61 per cent of profits.

Even these would be better run without constant interference from respective ministries. Still more ideally, those ministries would be redundant without control of the PSUs. Inevitable labour resistance could be eased by setting aside some proceeds for VRS schemes and pensions as proposed in 1991 by Manmohan Singh. Let's hope the trend set by the government in January continues.

Devangshu Datta

Tell us what you think of this column