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The sterling example to follow

“But they are fulfilling social objectives,’’ champions of the public sector yell. ‘‘You can’t judge them just...

“But they are fulfilling social objectives,’’ champions of the public sector yell. ‘‘You can’t judge them just by the rate of return they earn.’’ Actually, a low rate of return on the Rs 5 lakh odd crore that have been sunk into these units—a rate of return that is far, far lower than the rate that governments have been paying on the amounts they have been borrowing from year to year—means that there is that much less for meeting social objectives!

But there is another feature. Far from meeting social objectives etc, the public sector units in fact default even on elementary, statutory duties. It is only after the exercise began to privatise ITDC hotels—each of the 32 of which had been making losses even though they were housed in prime properties—that it came out that the ITDC had not been depositing even what the statutes mandated them to deposit on pain of punishment: the statutory dues of workers—into the provident fund, for instance. Government saw to its horror that the dues on this score alone were Rs 90 crore.

This discovery led us to gather information about other public sector units which we may be asked to handle. We were able to gather preliminary information about 68 of these crown jewels—excluding the hotels. They traversed several sectors, and were in the care of 16 ministries—in a word, a representative lot. It turned out that between these 68 jewels, they had not deposited statutory dues to the extent of Rs 1,578 crore. In addition, they had not paid even the wages of their workers to the extent of Rs 357 crore.

The law says that senior personnel in units—directors, managers etc—that do not deposit what is due towards gratuity etc will be severely punished. The punishment is to extend up to a year in prison. How is it that these organisations—owned and operated by government—had been violating the law in this blatant manner? How is it that no one had ever been punished on that count? What would government have been doing, what would our champions of the public sector have been shouting if these figures related to private firms?

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The only way to safeguard jobs is for the units to be competitive. That, as has been documented times without number, the public sector units are not. But efficiency apart, do facts that turned up about public land and buildings, for instance—lease documents lost; purchases never registered; encroachments of an unbelievable character on these assets—burial and cremation grounds created on them, illegal constructions; do such facts show that putting even so elemental an asset such as land in the hands of public sector units is the way to safeguard even those tangible public assets? Do facts about defaults on statutory dues show that keeping these units in the public sector—a sector in which no one is ever brought to book, in which no one can ever be brought to book—is any way to safeguard even money that the workers have been guaranteed by law, to say nothing of their jobs?

Indeed, I would wager two laws: a) The sicker the unit, the greater the insistence of champions of the public sector that it must not be touched—and for manifest reason: the sicker the unit, the greater the likelihood that it is one of their gadhs, that is what would have made the unit sick in the first place; b) The more strident champions of the public sector are about a particular unit, the more unaccountable it is—for every effort to reform it, to change its work culture will be thwarted by these champions.

The Progressives

There is a third law too: the more ‘‘progressive’’ the state and its rulers, the more cases we will find in it that document these laws. You have to just think of reforming the work culture of a unit in West Bengal or Bihar, for instance, to say nothing of privatising it, and a howl goes up. Writs are filed. Stay orders obtained. Legislatures are brought to a standstill. Committed journalists add to the din.


What are the facts about public sector units in these most progressive of states? There are 13 units of the Central Government in (the old) Bihar. Seven of them have been declared sick for years—and are lying in that mortuary, the Bureau of Industrial and Financial Reconstruction. There are 37 Central Government undertakings in West Bengal. Twenty of them are in the BIFR. Note three things about them. A unit is not declared ‘‘sick’’ and referred to the BIFR just because it has incurred losses for a year or two. It is declared ‘‘sick’’ and sent to the BIFR only after it has incurred losses for four years in a row, and only after its net worth has been eroded by 50 per cent or more of its peak net worth in the preceding four years.

In Bihar, for instance, the net worth of two other central public sector units has become negative, though they have not yet been referred to BIFR. In Bengal the number of such units is eight! The net worth of these eight has sunk to minus Rs 1,843 crore. Second, these units of Bihar and Bengal have been rotting in the BIFR for up to a decade: of the 20 units from Bengal that are with the BIFR, for instance, 12 were referred to it in 1992! Neither the BIFR, nor what is called the Operating Agency—an investment institution like the ICICI or IDBI, say—neither the Central nor the state Government has been able to find any way to revive them: in several cases attempts have been made to get private entrepreneurs to enter into joint ventures for reviving the units, in several other cases attempts have been made to induce private entrepreneurs to take them over. To little avail.

In several instances, having spent years and heaps of public money in these fruitless chases, the BIFR has had to recommend that the units be closed. Governments have not been able to act on the recommendation. Political pressure has been mounted to prevent closure. Stay orders have been secured from the courts. Pledges have been made that new revival schemes will be explored. And all the while, the public exchequer has continued to be bled —to keep the corpses around.


The condition of public enterprises of the states is of course much, much worse. And among enterprises of state governments, the condition of those that are owned and operated by the governments of Bihar and Bengal is much, much worse than of those in other states.

In March 2000, the year for which a study done for the CAG’s office was able to get data, Bihar had 54 public sector undertakings. Thirty-two of these were reported to be ‘‘non-working’’. A total of Rs 8,168 crore had been invested in the 54. In turn, they had accumulated net losses of Rs 5,060 crore.

The CAG report on West Bengal for 1999 furnishes data about the state’s public sector units. There are 77 of these—65 of them are government companies, 12 are corporations. Taking share capital and loans together, Rs 10,633 crore have been invested in them. Against this investment of Rs 10,633 crore, the state government received Rs 71 lakhs from two government companies and Rs 2.4 crore from one corporation! Finances of the West Bengal government have been under severe strain for years: even if the Central Government borrows, it has to pay around 10 per cent as interest. As against this, the rate of return from the state’s companies is an abysmal 0.04 per cent! CAG’s report on West Bengal for the year ended March 2001 (p. 15, Volume I, Civil) gives an instructive table in this regard.

Through these years, capital expenditure as a percentage of the state’s total expenditures kept dwindling: it was 12 per cent in 1996/97, and 5 per cent in each of the following years. In the meanwhile, the expenditure locked in ‘‘incomplete projects’’, the CAG found, had increased from Rs 766 crore in 1996/97 to Rs 1,083 crore! The ratio of ‘‘capital outlay’’ to ‘‘capital receipts’’ ‘‘has been less than even 0.50 during the last five years’’, the CAG noted, ‘‘and came down drastically from 0.43 in 1996-1997 to 0.14 in 2000-2001 indicating that almost the entire capital receipts were spent either on revenue expenditure or on repayment of debt’’. ‘‘As there is no return from such application of capital receipts, the sustainability of operations of government are (sic) weakened considerably,’’ warned the CAG.

Now, that is something to remember even when we consider ‘‘profit-making’’ PSUs. We should first ascertain the extent to which their profits are due just to the fact that they have been conferred a monopoly by government policy—the case not just of STC and MMTC in years when imports used to be ‘‘canalised’’ through them; that is the position of the petroleum companies in the retail market too. Second, we should ascertain whether this “profit” at least covers the cost at which the Government borrows money.


But to get back to Bengal. With that kind of an unsustainable operation, how did the state manage to continue this state of affairs? ‘‘Government of India provided special treatment to the state government despite the poor performance,’’ records the CAG—and that about a state whose rulers have always won by alleging neglect and discrimination by the Centre! ‘‘The special treatments were accorded through (i) special loan from HUDCO for infrastructure development and (ii) additional plan assistance for state plan schemes. Substantial amounts (Rs 2,912.87 crore) of these expenditures were transfers to deposits and shown as expenditure in the accounts. These reflect poorly on the quality of expenditure….’’ ‘‘Persistent lack of balance from current revenues, galloping deficits, mounting interest payments, declining tax compliance indicated continued poor financial condition of the government,’’ the CAG concluded. ‘‘…Due to its precarious ways and means position, the state government had to resort to huge ways and means advances and overdrafts throughout the year.’’

The Hidden Account

But there was an even more ingenious device, it turns out, involving the state’s enterprises. The corporations of the state were in such a condition that they could not raise funds on their own. The state itself was straining against the borrowing limits prescribed by the Reserve Bank. No problem! The state government provided a ‘‘guarantee’’ so that the corporations could borrow. And the corporations put the money at the disposal of the state government! The ‘‘guarantees’’ provided by the state government amounted to Rs 5,606 crore in 1999/2000. They increased to Rs 9,677 crore in 2000/01. Giving details for one year, the CAG recorded, ‘‘The guarantees given during 2000-2001 included Rs 4,277 crore guaranteed against loans obtained by WBIDFC (Rs 2,812 crore), WBKV & IB (Rs 871 crore) and WBPDCL (Rs 594 crore)….’’


And later in its report we learn what happened to these amounts. ‘‘WBIDFC (West Bengal Infrastructure Development Finance Corporation) raised Rs 4,540.55 crore during 1999-2001 through bonds/bank loans for the purpose of infrastructure development of the state,’’ the CAG noted, ‘‘but spent only Rs 291.54 crore while the remaining funds were kept in the deposit account, raising serious doubts about the stated purpose of raising these funds. Six government companies and statutory corporations parked schemes of Rs 281.47 crore, meant for implementation of various development schemes, in their deposit accounts with the Government.’’

Examining the Rs 1,567.93 crore that had been raised in 1999/2000 by the West Bengal Infrastructure Development Finance Corporation through bonds and bank loans, ostensibly for infrastructure development, the CAG found that Rs 1,117.93 crore of this had been placed by the corporation ‘‘in the deposit accounts with pay and accounts officer, Kolkata, for utilisation by the state government for other purposes. During the year 1999-2000, an aggregate of Rs 1,215 crore was taken by the state government from WBIDFC as loan.’’


But that, it turned out, was not even one-third of the story! The CAG observed, ‘‘Scrutiny (September 2001) revealed that Rs 582.31 crore remained in the deposit account of WBIDFC as on 31 March, 2000, awaiting conversion to loans. In addition, during the year 2000-2001, WBIDFC raised Rs 2,972.62 crore through bonds (Rs 1,689.85 crore), loans from Housing and Urban Development Corporation (Rs 590.77 crore) and term loans (short term: Rs 542 crore, and long term: Rs 150 crore) from commercial banks at interest rates varying from 11.75 to 14 per cent per annum for the purpose of infrastructure development of the state.

Out of Rs 2,972.62 crore, Rs 2,549.07 crore were parked in the deposit account with PAO, Kolkata. The state government converted Rs 2,508.89 crore into loans repayable in 92 equated monthly installments, along with interest, at the rate of 18 per cent per annum. Thus, the total loans received by government from WBIDFC amounted to Rs 3,723.89 crore, of which government repaid principal amount of Rs 183.59 crore and paid interest of Rs 485.76 crore during 1999-2001.’’

How very convenient! You can’t borrow. Therefore, you get a corporation under you to borrow. Then, instead of using the amount for the purpose for which that entity borrowed it, the corporation puts it as a deposit with you. And you convert that deposit into a loan to yourself!

(To be concluded)

First published on: 04-07-2004 at 00:00 IST
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