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06StateOwnedEnterprisesSOEs.docxTWO ARTICLES THIS WEEK. READ BOTH.
The everything makers; Indian state-owned companies
The Economist. 423.9043 (June 3, 2017): p57(US).
Copyright: COPYRIGHT 2017 Economist Intelligence Unit N.A. Incorporated
Full Text:
Inefficient and unnecessary, most of India's state-owned firms are ripe either for sale or for closure
EARTH movers, fertiliser, artificial limbs, uranium, rickshaws, hotels, textiles, tea, mutual funds, petrol, broadband, pills, coal, fighter jets, sex toys and much more beside: the range of products and services purveyed by Indian state-owned firms would put even the most sprawling of conglomerates to shame. A legacy of India's socialist years from 1947 until the early 1990s when the country shifted towards a more market-based economy, few of the 244 "public-sector undertakings" (PSUs), as the government calls them, are paragons of productivity. Plans to slim down their collective girth, and so leave more room for the private sector in India's economy, are as tentative as they are overdue.
Roughly one in six of every rupee spent goes to a PSU. Only in China's avowedly communist economy does a greater share of spending go to state-owned firms. Often run by executives who have risen through the government bureaucracy, they eke out profits mostly in industries where government fiat grants them lucrative monopolies, such as coal and oil. Even in a buoyant economy, one in three made losses in the year ending in March 2016. One in five has racked up three years of straight losses including BSNL, a telecoms operator which offers 3G services in a market where 4G ones are the norm. Another example is Air India, a financial black hole that flies habitually-delayed aeroplanes.
That 1.2m Indians toil in companies that form part of the relatively unproductive PSU sector, a traditional mainstay of formal employment, is largely seen as a benefit, not a problem. But if labour is abundant in India, capital is not, and state-owned firms guzzle it. The assets they sit on are worth an estimated $500bn. Excluding four firms that have lucrative state-mandated monopolies, their return on capital employed is a meagre 8% and falling. Most gauges of financial returns have been on a long decline (see chart). That spells rapid value destruction in a country where a company's weighted cost of capital is usually in the double digits.
Not all are financial disasters. Some 80% of the total profit made by state-owned firms, or 1.2trn rupees ($18bn), comes from coal, petroleum products, power generation and oil PSUs. They receive regulatory protection that helps them relative to private-sector rivals. That does not mean they are efficient: Coal India, the biggest PSU by most measures, reportedly has an output per man-shift that is just one eighth that of Peabody Energy, an American rival. India has both funded a PSU domestic jet-fighter programme at vast expense, and bought similar jets from a French supplier, Dassault Aviation, when the homemade plane failed to meet the air force's needs.
Worse problems arise when flat-footed PSUs face the market. The economic liberalisation of the early 1990s introduced competition in many consumer-facing industries. This shunted PSUs off the commanding heights of their respective parts of the economy. Air India (the only airline whose cabin livery makes a brand-new Boeing Dreamliner appear mired in the 1970s) has lost money continuously since 2007, barely managing an operating profit even after a crash in the price of aviation fuel propelled its private-sector rivals, such as Jet Airways, to vast riches.Mostly, PSUs have drifted from monopolist to bit-player. Air India is a fading force. Few Indians willingly use PSU telecoms providers. Public ports have gone from handling nearly three-quarters of stuff being shipped in and out of India less than a decade ago to just over half now. HLL Lifecare went from being a monopolist condom-maker to an also-ran, hence its more recent foray into vibrating gizmos.
State-owned banks are in a league of their own in terms of dominating their sector: they form a network of 21 listed but government-controlled entities that account for 70% of India's banking system by assets. Many of their loans are unlikely to be repaid, a state of affairs that private lenders usually manage to avoid. The latter are growing at a rapid clip: they are responsible for nearly all the growth in the financial system. In the early part of 2016, the market capitalisation of all 21 listed public-sector banks was on a par with that of a single private rival, HDFC Bank, set up back in 1995.
The result is what Ruchir Sharma of Morgan Stanley, a bank, calls "privatisation by malign neglect": the PSUs stay in state hands, but their market share (and their value) seeps steadily to nimble newcomers. Soft loans, subsidies and bail-outs keep them afloat, protecting unproductive jobs at vast expense.
Such neglect has resulted in pockets of acute financial distress. Nearly two dozen PSUs have loans greater than their total assets; 84 generate too little operating profit to cover the interest on their borrowings. And PSUs owned by India's 29 state governments, of which there are thought to be over 1,000, are if anything in worse shape. A recent bail-out of local power distribution companies, which traditionally have overlooked non-payment of bills by customers whose votes politicians craved, has resulted in a vast and costly debt restructuring which has weighed heavily on the public finances.
Poor performance by PSUs is hardly surprising given the way in which they are managed. A report from the authorities in 2011 described how "over-governance promotes conservative, cautious and risk-averse organisational culture, with procedures being paramount and outcomes secondary." Bosses with no obvious qualification--the managing director of Air India, for example, is a rail and tourism civil servant--are overseen by pliant boards. Better not to make decisions than to make one which could attract the attention of the auditors who oversee public spending.
Pay scales borrowed from the bureaucracy mean chief executives get paid around $50,000, pushing the brightest sparks to the private sector. Replacing them is hard: according to a recent report in Asian Age, a newspaper, as many as 42 PSUs are lacking bosses after a change in the method to appoint managers in June 2016 stalled any new hires.
Even the 47 non-bank, listed PSUs, where the government owns a majority and calls the shots, are run for motives that include profit but much else besides. Just under half of all jobs are earmarked for selected, disadvantaged castes; a quarter of all unskilled workers must be ex-servicemen or dependents of those killed in action. Little thought is given as to whether such aims, noble as they might be, are best met through maintaining largely unprofitable corporate structures.
PSUs are made to foot the bill for government programmes that are uneconomical. Coal India and NTPC, a power utility, have been asked to revive two defunct fertiliser plants, in Jharkhand and Uttar Pradesh, for example, largely on the grounds that they have spare cash. The government also wants state-owned enterprises to take over running companies that have defaulted on loans made by all those state-owned banks (the default was often for good reason).
Many had expected the era of PSUs to be drawing to a close by now. A few were privatised in the early 2000s by a right-wing government which--not coincidentally, some think--was booted out of office soon afterwards. Narendra Modi, while running for prime minister in 2014 declared: "I believe that government has no business to be in business."
Sell-offs have long been mooted but have yet to materialise. Vaunted "disinvestment" of PSUs has so far consisted of listing them, or selling stakes in those already listed, while making sure the government keeps majority ownership. Neither achieves much. Around 462bn rupees was raised in this way in 2016-17, which was below the target that had been set but a significant increase from previous years. Many stake sales happen in the last few weeks of the financial year when the government is desperate to balance its books. PSU assets are sold to other PSUs, or to state-owned pension funds, doing little to shrink the overall size of the state.
Ominously, two years into Mr Modi's mandate, in April 2016 the so-called Department of Disinvestment was rechristened Department of Investment and Public Asset Management. Some suggest Mr Modi is lukewarm about flogging PSUs. As chief minister of Gujarat for over a decade before his rise to national office, he turned around a slew of state-owned firms there, and is said to believe the same can be done at national level. Job creation is perceived as one of the weakest spots in an otherwise solid economic record: privatising PSUs now, only to see them fire lots of workers in the run-up to elections in May 2019, is a non-starter.
Some progress has been made. Reformers hope that more minority stakes in companies being listed may force improvements in corporate governance. About a dozen "sick" PSUs, a euphemism the authorities use for often deeply dysfunctional firms, are in the process of being closed down. Many of them have had years or decades of no production (but plenty of workers still clocking in and out of factories, if only to pick up paychecks). Hindustan Photo Films, based in Tamil Nadu, whose black-and-white production equipment has been obsolete for decades, and Hindustan Cables, based in West Bengal, which stopped making said cables in 2003, are no more. Air India is now openly discussed as a sell-off candidate.
But moving from discussion to divestment has proved hard. "Privatisation is the art of the possible," says Arun Jaitley, the finance minister. Ministries protect the PSUs on their patch, which give their bureaucrats considerable power of patronage, for example when dishing out contracts. Labour unions that are affiliated with political parties are intent on stymying reforms. Extracting bureaucrats from India's boardrooms is likely to prove a slow process.
Source Citation (MLA 8th Edition)
"The everything makers; Indian state-owned companies." The Economist, 3 June 2017, p. 57(US). Academic OneFile, libproxy.clemson.edu/login?url=http://go.galegroup.com/ps/i.do?p=AONE&sw=w&u=clemsonu_main&v=2.1&id=GALE%7CA493846611&it=r&asid=a7a40e7e1de23ceee73253f8d11829f9. Accessed 9 Aug. 2017.
Gale Document Number: GALE|A493846611
National treasures; Privatisation in France
The Economist. 424.9052 (Aug. 5, 2017): p47(US).
Copyright: COPYRIGHT 2017 Economist Intelligence Unit N.A. Incorporated
Full Text:
The French state is mismanaging its valuable corporate assets
ONE reason for Italian anger over the decision on July 27th by Emmanuel Macron, France's president, to stop Fincantieri, a shipbuilder from Trieste, winning control of a French shipyard at Saint-Nazaire, was that recent cross-border deals have mostly gone France's way. Italian businesspeople have grown nervous about French firms' "colonisation" by means of acquisitions in luxury goods, media and telecoms, including the [euro]46bn ($55bn) merger between Luxottica, an Italian maker of spectacles, and France's Essilor, announced in January (the group's headquarters will be in Paris). The bad taste will linger even if the two governments strike a deal over Saint-Nazaire by the autumn, as they have pledged.
Yet Mr Macron's move has been even more dismaying for those at home who want the state to get on with privatisation. During his presidential run Mr Macron promised to raise [euro]10bn from sales of some of the state's sprawling portfolio of holdings in firms. The aim was to pay for a new fund to help other companies invest in innovation. His threat to nationalise the Saint-Nazaire yard (rather than cede control to Fincantieri) is a retrograde step.
The direction of travel was supposed to be towards sell-offs. For the past few years the French state has been quietly disposing of its stakes in various regional airports, including Lyon, Nice and Toulouse. It was Mr Macron, as economy minister in 2015-16, who oversaw the sales and who pressed for the disposal of Groupe ADP, a large company that owns the main airports in Paris, at Charles de Gaulle and Orly.
Mr Macron left office before he could finish the job and ADP remains 50.6% state-owned. But under his economic team, led by politicians drawn from the centre-right, its sale looks all but inevitable (and should raise some [euro]7bn). An obvious bidder is Vinci, a French infrastructure firm. Yet privatising airports only goes so far. The question is what comes next. Mr Macron's government will soon, probably after the summer, announce its plan for ADP and say which other stakes are to be sold off.
A smaller role for the state in business is long overdue. A couple of decades after most countries in western Europe sold off many of their corporate holdings, France still has a huge portfolio. According to a report in January by the Cour des Comptes, an independent public auditor, the state has investments in nearly 1,800 firms, holdings which together are worth almost [euro]100bn. The state-owned sector in France employs nearly 800,000 people, the most of all the countries surveyed by the Cour des Comptes (see chart). The number of firms in which the state has a majority stake has been rising since around 2006.
Public holdings are mainly managed by the Agence des participations de l'Etat (APE), by Bpifrance, a public-investment fund and the Caisse des Depots et Consignations (CDC), a state investment bank. The Cour des Comptes reckons the trio are doing a poor job; its report was scathing about public management of corporate assets over the decades (while recognising some recent improvements). It laments a lack of purpose in ownership and chronic failures of supervision, for example in the collapse of Areva, a nuclear firm 92% owned by the state. One curse for EDF, an energy utility that is another big holding, was being made to absorb some of Areva's struggling business last year.
The auditor also sees confusion between the three agencies, describes overall financial losses in recent years, poor governance and concludes that "the state has difficulty being a good shareholder". Even more damning is the verdict of a former boss of APE, David Azema, who ran it until 2014. His experience, he explains, taught him that lumbering, publicly owned companies always lose value to nimbler competition. Political meddling hurts, he says, as when ministers rather than boards pick chief executives--who cannot be sacked however badly they perform.
Politicians also bully, he says, citing pressure last year on EDF, forcing it to agree against managers' wishes to finance and build Hinkley Point C, a nuclear power station in Britain that risks becoming a huge financial liability. Mr Azema urges France "massively" to reduce the state's stakes in all listed companies, or at least create proxy boards to block political meddling.
All these problems help explain why the value of the 13 listed companies managed by the APE, worth some [euro]66bn as of mid-July, has declined in recent years. The performance of a few big firms, notably nuclear and energy companies, was particularly awful. Most striking is the withering of EDF, 83.4% owned by the state. The utility's share price was [euro]86 in 2007 and has fallen to under [euro]9. Despite generating over [euro]71bn in annual revenue, the company, which has enormous liabilities, is valued at less than [euro]26bn.
Politicians do show a new readiness to divest public holdings, partly because the national budget needs revenue. Trade unions, too, are likelier to accept at least limited change. Support for hardline unions has declined, notably with the emergence this year of the reform-minded CFDT as the single-largest union. Asked about sales of public assets, its leader, Laurent Berger, says it would be "idiotic" to separate the state from strategic sectors, but that his members could accept changes on a "case-by-case basis".
Yet some politicians are said to be lobbying to delay sales of public assets, arguing that innovation funds could instead be raised by setting aside cashflow from the firms. State bodies have grown cannier in finding ways of preserving their influence over companies, even as they reduce ownership. The APE's holding in Safran, a big aeronautical and defence firm that has thrived in recent years, for example, has been cut from 30% in 2010 to just 14% this year. Yet the state retains nearly one-quarter of voting rights. It keeps other leverage, especially in the defence industry where it is a huge customer. It might further cut its holdings in Safran and could reduce its current 26% in another defence firm, Thales (that stake is worth just over [euro]5bn). But it is less likely that the state would sharply reduce its 11% holding in Airbus, a plane manufacturer, that is worth some [euro]6bn.
Mr Macron is not entirely hands-off in his attitude to public assets and his decision about Saint-Nazaire shows a willingness to meddle in private ones too. As economy minister in 2015 he increased the state's stake in Renault, a big carmaker, by 4.7 percentage points, to nearly 20%, in order to force the firm to obey a new law giving double-voting rights to long-term shareholders (ie, the state). That infuriated Nissan, Renault's other big shareholder. Government officials now talk about selling some of the stake.
Will Mr Macron and his team dare introduce radical changes? Probably not. A likelier outcome is a gradual slicing away of parts of public holdings. Bruno Le Maire, the finance minister, talks of the state stepping back slowly from holding corporate assets. That would probably mean trimming its [euro]5bn stake in Orange, formerly France Telecom, for example.
The chairman of two large companies, one with a large state stake, suggests that in the end the role of state is "too important in French economic life" to be changed quickly. An official at the state-owned railways firm, SNCF, concurs. That firm devours billions in subsidies, but is popular with the public who would not countenance its privatisation, or that of any other firm seen as "strategic". Outright privatisation of airports might soon be inevitable, but other changes are likely to come one step at a time, with some in the wrong direction.
Source Citation (MLA 8th Edition)
"National treasures; Privatisation in France." The Economist, 5 Aug. 2017, p. 47(US). Academic OneFile, libproxy.clemson.edu/login?url=http://go.galegroup.com/ps/i.do?p=AONE&sw=w&u=clemsonu_main&v=2.1&id=GALE%7CA499813590&it=r&asid=13f914f556b2c11d40e369ee682d921e. Accessed 9 Aug. 2017.
Gale Document Number: GALE|A499813590
