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The perils of bailouts
January 22, 2009
Ramalinga Raju's January 7 revelations had Indian public opinion ricocheting back to an old orthodoxy: a government bailout. The government has so far wisely desisted, appointing instead a board of industry stalwarts to do some damage control and find a buyer for what was once the country's fourth largest software services provider.
Arguments for a bailout, either as a direct loan or by subscribing to some form of preference shares, certainly appear compelling. After all, much is at stake - 50,000-odd middle class jobs in an election year plus India's global reputation as a reliable supplier of back office services.
All the same, bai-out advocates ignore the bigger picture. The corollary of a bailout is government say in management. India's experience of taking over ailing companies from private proprietors - a trend that grew in the seventies as Indira Gandhi's nationalisation "ideology" took root - has hardly stood out for its success.
Most state governments have long lists of enterprises acquired from either venal or plain inefficient proprietors, ostensibly to save workers' jobs (and, presumably, win votes). Most of these companies have remained in their same unhealthy state with unpaid workers who stay on the rolls but join the ranks of India's vast unorganised sector labour force to seek livelihoods elsewhere.
West Bengal's long ailing jute industry is a good example of the hopelessness of government bail-outs. The state's jute industry consists of hundreds of small units that have been unviable for yonks. Most were acquired from proprietors who bailed out after building black money empires by exploiting a differential between a state-advised price for jute and what they actually paid farmers.
Many a corporate house in Delhi and Mumbai owes its fortunes to former jute baronetcies - and they present a tragic juxtaposition to the desperate poverty of jute mill workers. The tea industry is now rapidly heading in that direction.
The central government's track record in turnarounds isn't all that great either. One example can be had from the department of heavy industries. An assessment of the major public sector enterprise under it shows that nine of the 16 companies in this list are making losses. These include several companies that were acquired from the private sector: Andrew Yule, once a giant among the managing agencies, Scooters India [Get Quote], and Bridge and Roof.
This is not to say that the public sector as a whole is an underperformer. A forthcoming study by Dun & Bradstreet on public sector performance* contains a comparison of 31 public sector companies listed on the National Stock Exchange and 216 private sector companies over five years (2004 to 2008).
The private sector companies were identified as those with a turnover of over Rs 1,000 crore (Rs 10 billion). The study explains that this benchmark is to ensure "a fair assessment because out of the 31 public sector companies identified for the study the 31st company had a turnover of about Rs 1,000 crore." Significantly, the study excluded IT and IT-enabled services companies since the public sector has a negligible presence in this industry.
The study shows that in terms of sales growth, the 31 public sector companies have outperformed the private sector in four out of five years. This performance is in spite of the fact that they grew from a large base, being mostly monopolies in such industries as oil, coal and power, carry social obligations (such as acquiring other loss-making units and being unable to close down others), and face growing private competition in some sectors.
What the study does not say (and probably won't) is that this is a commendable performance given the government's notions of corporate governance. It is an open secret that public sector companies are considered free suppliers of perks for ministers and bureaucrats - cars, air travel, guest houses, jobs for the boys and sundry relatives, to name a few.
Few senior executives care to air these grievances openly - the forthright Subir Raha of ONGC [Get Quote] was not one of them, for which he forfeited an extension - but it's a reality that they privately admit.
The sense that the government has no business to be in the business of business became the established orthodoxy by the nineties when it became clear that taxpayer money was unlikely to stretch to financing the vast numbers of sick units in its ambit.
All the same, it is difficult to see how habits of governance that remained as deeply ingrained as ever among our public servants will help Satyam [Get Quote], which is reeling under the impact of a long-term deception practiced by the man who promoted it.
It is true that the US government is expected a bigger role in the running of banks and institutions it is bailing out. Given the vast sums of money at stake, the number of jobs and the fact that the global economy depends on America's revival, this is not an unreasonable position.
But evidence suggests that the US government sees itself as an ombudsman, rather than a strategist. India's government is playing just that role in Satyam now, and that's the way it should stay.*India's Top PSUs 2009
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