Reviving a loss making PSU

In the last seven decades, CPSUs have contributed significantly towards making India self- reliant in their respective fields. In addition to physical assets, these have developed significant competencies with regard to human Resources, intellectual property, research etc. and have always served the national priorities, over narrow business interests. Following the advent of Economic Reforms since 1991, the Government has aimed at creating a vibrant and dynamic market with the open entry of the private sector in most Industry and Services sectors barring a few strategic sectors. This strategy has been immensely successful and has helped create a strong and flourishing market with dynamic entrepreneurs.

The policy of opening up to FDI has made India an attractive Investment destination as one of the most open economies in the world. In this context, CPSUs which have made a stellar contribution to the nation, lack competitiveness on account of multiplicity of goals. While CPSUs in some sectors continue to serve the purpose of national interest, others have been continuously making losses over the years. It is pertinent to mention here that certain CPSUs came into being decades ago by taking over private sector enterprises which were facing operational losses in order to protect jobs. In the present scenario, loss-making CPSUs which suffer from operational inefficiencies or face technology obsolescence are seen as a drain on Government resources and the right remedies for them could unlock significant potential for the Government in meeting its social sector obligations. This is substantiated by the fact that the total loss made by the loss making CPSUs during 2016-17 is ₹ 25,045 crore as compared to ₹ 30, 759 Crore during 2015-16.

Periodically assessing the need for a CPSU

A thorough evaluation of CPSUs must be undertaken, in the context of the present-day Environment. Only CPSUs which serve a strategic national objective or are present in sectors where the market has failed, should be retained. Other CPSUs should either be divested or closed down. Likewise, all CPSUs intended to be set up / in the process of being set up must also be evaluated using this filter. Further, other Options (such as, offering short-term incentives to private players, partnering or incubating entities with a clear roadmap to divestment, etc.) must be considered before setting up a new CPSU.

Permitting operationally flexibility and control

Given the current dynamic environment, whether in terms of market, customer or technology, the ability to make rapid decisions is critical. The management should be given operational freedom, including selection of personnel, as in the case of private players. CPSUs must adhere to the highest standards of governance. However, excessive scrutiny from the Central Vigilance Commission and the Comptroller Auditor General, coupled with the threat of Central Bureau of Investigations often leads to stalled or over-cautious decision-making. Distinction must be made between mala-fide action and taking a business risk. The former needs to be punished, while the latter, protected. Further fraudulent and mischievous complaints (complaints with mala-fide intent) against CPSU management personnel should be penalised.

The private sector, while subject to statutory audits, is not faced with these levels of scrutiny, and thus can afford to take higher business risks.

Empowered and autonomous Board

Empowered CPSU boards, comprising independent experts, will enhance the quality of decisions, overall management supervision and governance, while ensuring that nearly all strategic decisions are taken at the Board level and not passed on to the respective Ministry thereby increasing the speed of decision-making. For instance, the Board must be sufficiently empowered to take nearly all strategic decisions such as formation or Dissolution of partnerships / joint ventures, mergers / acquisitions, appointment of CEO, creation of below-board level positions, etc. The Board must also be permitted to appoint new directors to replace retiring Board directors, as is the case with private organizations.

Principles for analysis

The financial performance of sick and loss making CPSUs is unsatisfactory, and many have requested for and received periodic support from budgetary resources. Over the years, this has become a significant drain on limited resources of the Government. Many of these CPSUs are in control of valuable resources (e.g. land, buildings, etc) that are, in many cases, not being put to good use. Given the significant budgetary outgo for these enterprises, and the potential for more efficient uses of capital, land and labour deployed in such enterprises, action needs to be taken to ensure efficient usage of resources by the enterprises. Therefore, the primary objective for such CPSUs should be to device strategies that will help in efficient and effectives use of resources that CPSUs already control and the additional resources government may invest in them.

Assessment of productivity of CPSUs

Although it could be argued that strategic sales should not be considered for financially healthy CPSUs even if they are low priority CSPEs, this is a very narrow perspective. Financial performance is only a partial indicator of a firm’s Health. What really matters in a decision about strategic sale is productivity of a firm. If, for example, the private firms in the same sector are found to be more productive, changing ownership of a government-owned firm in the sector would be socially beneficially, as it would enhance the productive usage of the resources in the firm. Moreover, weak low priority CPSUs that are not found to be at a high risk of becoming sick or incipient sick in the near term should be also categorised in terms of their productivity to identify those that should be sold in short to medium term. Hence, productivity measures can be used to classify such CPSUs, and prioritise the strategic sales.

Reviving a loss-making PSU is a complex and challenging task. However, it is possible to achieve success by following a systematic approach. The first step is to identify the root cause of the losses. This could be due to a number of factors, such as inefficient operations, poor management, or a lack of innovation. Once the root cause has been identified, a turnaround plan can be developed. This plan should outline the steps that will be taken to address the root cause of the losses and return the company to profitability.

The implementation of the turnaround plan will require the cooperation of all employees and stakeholders. It is important to communicate with employees and keep them informed of the progress of the plan. It is also important to involve stakeholders, such as shareholders and creditors, in the planning process.

The progress of the turnaround plan should be monitored regularly and adjustments made as needed. It is important to be patient and persistent in the face of challenges. It may take several years to turn around a loss-making PSU, but it is possible to achieve success with careful planning and execution.

Here are some additional details on each of the steps involved in reviving a loss-making PSU:

Identify the root cause of the losses. This is the most important step in the turnaround process. Without a clear understanding of the root cause, it will be difficult to develop an effective turnaround plan. The root cause of the losses could be due to a number of factors, such as inefficient operations, poor management, or a lack of innovation.
Develop a turnaround plan. Once the root cause of the losses has been identified, a turnaround plan can be developed. This plan should outline the steps that will be taken to address the root cause of the losses and return the company to profitability. The turnaround plan should be realistic and achievable, and it should be based on a thorough understanding of the company’s operations and financial situation.
Implement the turnaround plan. The implementation of the turnaround plan will require the cooperation of all employees and stakeholders. It is important to communicate with employees and keep them informed of the progress of the plan. It is also important to involve stakeholders, such as shareholders and creditors, in the planning process. The implementation of the turnaround plan will be challenging, but it is important to be patient and persistent.
Monitor the progress of the turnaround plan. The progress of the turnaround plan should be monitored regularly and adjustments made as needed. It is important to be flexible and to be willing to make changes to the plan as needed.
Communicate with stakeholders. It is important to keep employees, shareholders, and other stakeholders informed of the progress of the turnaround plan. This will help to build support for the turnaround effort and will also help to manage expectations.
Be patient. It may take several years to turn around a loss-making PSU. It is important to be patient and persistent in the face of challenges. With careful planning and execution, it is possible to achieve success.

What are the reasons for a PSU to make losses?

There can be many reasons for a PSU to make losses. Some of the most common reasons include:

Inefficient operations: PSUs are often not as efficient as private companies. This can be due to a number of factors, such as outdated technology, poor management, and Corruption.
Political interference: PSUs are often subject to political interference. This can lead to decisions being made that are not in the best interests of the company, such as hiring unqualified employees or awarding contracts to companies that are not the best value for Money.
Lack of competition: PSUs often operate in monopolies or oligopolies, which means that they do not have to compete with other companies. This can lead to them becoming complacent and inefficient.
Debt burden: PSUs are often heavily in debt. This can make it difficult for them to invest in new technologies or expand their operations.

What are the challenges in reviving a loss making PSU?

Reviving a loss-making PSU is a challenging task. Some of the challenges that need to be addressed include:

Political will: There needs to be a strong political will to revive the PSU. This is because it will require making difficult decisions, such as cutting jobs or selling assets.
Management expertise: The PSU needs to have a strong management team in place. This team needs to have the skills and experience to turn the company around.
Financial resources: The PSU needs to have access to financial resources. This can be in the form of loans, grants, or Equity investment.
Market conditions: The PSU needs to operate in a favorable market environment. This means that there needs to be demand for the company’s products or services.

What are the steps involved in reviving a loss making PSU?

The steps involved in reviving a loss-making PSU can vary depending on the specific circumstances of the company. However, some of the common steps include:

Conduct a diagnostic study: The first step is to conduct a diagnostic study to identify the reasons for the company’s losses. This study should also identify the potential opportunities for improvement.
Develop a turnaround plan: Once the reasons for the losses have been identified, a turnaround plan can be developed. This plan should outline the steps that will be taken to revive the company.
Implement the turnaround plan: The next step is to implement the turnaround plan. This will require making a number of changes, such as cutting costs, improving efficiency, and increasing sales.
Monitor progress: It is important to monitor the progress of the turnaround plan and make adjustments as needed.
Sustain the turnaround: Once the company has been revived, it is important to take steps to sustain the turnaround. This may include investing in new technologies, expanding into new markets, or improving customer service.

What are the benefits of reviving a loss making PSU?

There are a number of benefits to reviving a loss-making PSU. Some of the benefits include:

Job creation: Reviving a loss-making PSU can create jobs. This is because the company will need to hire new employees to fill the vacancies that were created when the company was making losses.
Tax revenue: Reviving a loss-making PSU can generate tax revenue for the government. This is because the company will be paying taxes on its profits.
Foreign Exchange earnings: Reviving a loss-making PSU can earn foreign exchange for the country. This is because the company will be exporting its products or services.
Competition: Reviving a loss-making PSU can increase competition in the market. This can lead to lower prices and better quality products or services for consumers.
National pride: Reviving a loss-making PSU can boost national pride. This is because it shows that the country is capable of turning around its failing companies.

Question 1

Which of the following is not a reason for a PSU to become loss-making?

(A) Inefficient management
(B) Overstaffing
(C) High debt levels
(D) Government interference

Answer
(D) Government interference

Government interference can be a reason for a PSU to become loss-making, but it is not the only reason. Inefficient management, overstaffing, and high debt levels can also lead to a PSU becoming loss-making.

Question 2

Which of the following is not a way to revive a loss-making PSU?

(A) Privatization
(B) Restructuring
(C) Liquidation
(D) Bankruptcy

Answer
(D) Bankruptcy

Bankruptcy is a legal process that is used to liquidate a company. It is not a way to revive a company.

Question 3

Which of the following is the most common way to revive a loss-making PSU?

(A) Privatization
(B) Restructuring
(C) Liquidation
(D) Bankruptcy

Answer
(A) Privatization

Privatization is the process of selling a government-owned company to private investors. It is the most common way to revive a loss-making PSU because it allows the company to access private capital and expertise.

Question 4

Which of the following is the least common way to revive a loss-making PSU?

(A) Privatization
(B) Restructuring
(C) Liquidation
(D) Bankruptcy

Answer
(C) Liquidation

Liquidation is the process of selling off the assets of a company and distributing the proceeds to creditors. It is the least common way to revive a loss-making PSU because it is a last resort option.

Question 5

Which of the following is the most difficult way to revive a loss-making PSU?

(A) Privatization
(B) Restructuring
(C) Liquidation
(D) Bankruptcy

Answer
(D) Bankruptcy

Bankruptcy is the most difficult way to revive a loss-making PSU because it is a complex legal process that can take years to complete.