WILL RESTRUCTURING OF PSUs-MMTC, STC, PEC BE
MEANINGFUL?
TEJINDER
NARANG
To upgrade performance of three PSUs—MMTC, STC,
PEC-- Government is reportedly considering their restructuring and future role,
with aid of a consulting firm. Similar
attempts were made earlier too in 2002-03, yet status quo was maintained. In 1989-1990,
these three companies were put under umbrella of an outfit-- BBIL—Bharat
Business International Limited—to prevent cross competition. Under this
dispensation, Chairman BBIL reported to Ministry of Commerce. Heads of three
PSUs were responsible to Chairman BBIL. BBIL arrangement was discontinued in
less than two years as it created dual centers of responsibility-- as to who
will be accountable for the performance of PSU-- Chairman of the PSU or BBIL’s
chief!!
STC, MMTC, PEC established respectively in
1956, 1963 and 1971, acted as canalizing agencies to cater needs of socialist policy
regime in India that lasted till 1990. DGFT (Director General of Foreign Trade)
earlier named as CCIE-Chief Controller of Imports and Exports, issued licenses
for import/export of canalized items to three companies as per the quota or
trade plan provisions of East European countries. Their primary task was to
import from GCA—General Currency Area or RPA-- Rupee payment Area—against such
licenses, and then to distribute imported items to actual users as per
directions of a specified Ministry.
Canalization meant monopoly of a particular
business and therefore PSUs were not exposed to any competition. They were virtually government departments
dependent upon work assigned by different ministries and earned about 1-2%
service charge.
When Soviet Union ceased to exist around 1990,
Eastern European trade was disrupted. Simultaneously Indian economy was
liberalized. These three companies had to survive in open market environment.
Distinction in commodities to be dealt amongst them disappeared. MMTC and PEC
started business in Agro commodities which was forte of STC. Similarly STC
entered business of fertilizers which was handled by MMTC. Likewise import of Bullion (gold/silver) and
coal, earlier done only by MMTC was also undertaken by STC and PEC. Export of engineering and allied items under
the aegis of PEC was also picked by other too. Canalized export of railway
rolling stock through PEC ended. MMTC diversified in to six or more joint
ventures and has been able to create a niche in mineral exports and brand name
in bullion business.
PSU as NBFC
Total export of agro/minerals/other commodities
of three PSUs in three years FY 2014,2015, 2016 is Rs 14935 crores while bullion
imports are Rs.50671 crores. Overall business is import intensive while efforts
are made to generate export with
assistance of other private or public companies, called “associates”.
Since
in-house expertise in commodities is not comparable to what market demands,
PSUs rely upon costings and technical parameters provided by associates,
especially for export.
Associates seek financial help—called
pre-shipment credit from these PSUs—for execution of export business and “letter
of credit facility” (LC) for import business against 10-20% margin money. PSUs
from mid 1990s were actively acting like NBFCs (Non- Banking Financial
Companies). Associates indemnify PSUs against any risk/loss. With zero risk to
PSU on paper, service charges are minimal--not more than 1-2%. Experience reveals
that in the process of de-risking, these very associates become the risk by
creating counter liabilities for PSUs. Either due to failure/mismanagement/hyper-speculation
of associates or market volatility, businesses/exports/imports financed by PSUs
resulted in partial or full defaults especially after economic meltdown of
2008.
Just as NPAs of the PSU banks have created
problem of twin balance sheet, likewise such defaults have substantively eroded
profits and net worth of MMTC, STC, and PEC.
INTERVENTION
BUSINESS
In last 15years, PSUs are frequently doing “buy
and sell” operations of export or import as an interventionist business for the
government. For example: export of wheat/Rice for FCI; import/distribution of
pulses for Department of Consumer Affairs. Any loss incurred on such imports/exports
is to Government’s account—thus 100% de-risked.
Official
guidelines mandate that Buying/selling be done through tendering—which is time
consuming and imperfect too. Such tenders inflate international prices. Chinese
do such trades quietly. A bidder with weak credentials can quote attractive
price but may renege from the contract.
TRADING AS DISTINCT FROM BUY/SELL
Trading
involves cultivating buyers or sellers in India or abroad, taking logical
market risk, hedging in future markets to mitigate risk, positioning for
purchase or sale by going long or short. In absence of these activities, it
will be erroneous to call them “trading” enterprises.
All businesses entail profit and loss. But in a
governmental set up loss is an unpardonable sin. Profit is shared by all; loss
is meant to punish a few who handled the deal. Officials saddled with such a
rule book of fear cannot do trading. If ethos of business is not geared for
trading, then merging or any other permutation may not improve performance of any
newer entity.
Ratio of export to turnover is dismal currently
(See chart). Imports, especially gold/silver, have much higher percentage in turnover—upside
being 76% in STC in 2013-14. Bullion is
sold at nominal margin but has a very high risk probability. The continuation of bullion imports through
PSUs can be reviewed though MMTC is a dominant national player. Issue being
whether bullion imports can be privatized to curtail it.
Speed of communication has jumped in last
decade, where real time information is available to all and sundry on various
commodity exchanges and on Google. What is “extra input” that PSUs can provide these
days. With financial muscle dwindling—
why would a private party engage with a PSU?
RESURRECTION of these PSUs will be rewarding if
they are empowered to “trade” in real sense, allowed to take reasoned risk,
develop competence in select commodities, demonstrate significant export
performance, reduce dependency on associates/private parties and Government
gifted business, given freedom to trade with or without tender depending upon
circumstances and offer something “extra” to counter parties. Restructuring, though a laudable idea, but
devoid of above element may not be meaningful.
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