Investigation: SAIL restructuring: the other guy blinked

It's a face-off between the mentor and the pupil. Between V. Krishnamurthy, the former chairman of Steel Authority of India Ltd (sail), and the current CEO, Arvind Pande, who was once his blue-eyed boy. The heated duel centres around a 13-letter word: modernisation. A word that has proved to be a convenient panacea used by each of the 4 CEOs-including Pande-that sail has had in the past 15 years. Each one, in a bid to outdo his predecessor, has smelted his unique modernisation plan. But when the going gets tough, past strategies offer an excuse to explain the current dismal performance.

THE WAR OF TOWARDS

The Charges...
Cost over-runs at Durgapur and Rourkela units pushed up debt and, hence, interest costs

The 2 units had to go through a learning curve to extract maximum benefits from modernisation

Investments proved unfruitful as the hike in capacities came in the middle of a demand crunch

The new modernisation blueprint will help SAIL raise production of value-added products

...The Defence

Since the investments happened after my tenure, I cannot be held responsible for cost over-runs

The plan was not followed up in toto; fresh investments were made in the Bhilai and Bokaro units

Without modernisation, SAIL's survival would have been threatened during the recession

More expenditure will not help; it needs a change in mindset, and better operational efficiencies

That's convenient too. For, it shifts the searchlights on the past. It also allows the men in the hot seats-that is, the CEO and the minister-to roll out a new modernisation mantra that is hyped as a solution for past mistakes. Thus, Union Minister for Steel, Dilip Ray-supported by Pande-contends that Krishnamurthy's Rs 9,850-crore plan for the 2 units at Durgapur and Rourkela were responsible for sail's cumulative losses, estimated at nearly Rs 3,500 crore, in the past 2 years. Ray has decided to ask the Central Bureau of Investigation (CBI) to probe Krishnamurthy's plan since it ''crippled the (2) steel plants.''

Sure, the earlier modernisation programmes were ill-conceived. Even the Comptroller & Auditor General (CAG) of India, in its 2 reports on the Durgapur facility (1998) and the Rourkela plant (1999), has criticised them. Stated its Report No. 6 of 1999: ''...at least in Durgapur and Rourkela, huge investment...on modernisation has been largely unproductive...''

Paradoxically, during Krishnamurthy's tenure, Pande was the head of the sail working group that took the decisions pertaining to these programmes. And, in his chairman's address in August, 1998, Pande enthusiastically remarked: ''With the completion of the modernisation schemes, substantial improvements are likely to take place in terms of techno-economic parameters...besides better quality and increase in production capacity...''

To an extent, they didn't. But that didn't stop Ray and Pande from casting their own Rs 5,000-crore investment blueprint. In fact, Pande has gone on record saying that instead of the past strategy of opting for ''large turnkey (modernisation) projects, we will go for projects that will provide quick returns.'' And, instead of spending huge sums in a single stroke, sail will spend about Rs 1,000 crore each year on a regular basis over the next 5 years. Well, that translates into a similar expenditure game: while Rs 9,850 crore was invested under the Krishnamurthy plan over a 9-year period, Pande wishes to invest Rs 5,000 crore in 5 years.

However, as the objectives of modernisation have not been realised in the past, there is no reason to believe that they will be now. According to Krishnamurthy, the only reason why modernisation is pursued is that ''it becomes an expenditure programme and everyone benefits from it.'' Don't forget that the 75-year-old Krishnamurthy was alleged to have received kickbacks for finalising contracts for the Durgapur unit, but the CBI dropped the charges for lack of evidence. And similar charges may be hurled in the future against past CEOs like S.R. Jain, M.R.R. Nair, and Pande, who assumed control in the post-Krishnamurthy era.

So, while modernisation becomes the battleground to justify the present in the context of the past, the future remains bleak. More importantly, while modernisation becomes a scapegoat to blame for current travails, it is also positioned as a harbinger of better things in the future. BT investigates why modernisation programmes fail, why the same fate may await the current one, and why the Government Of India (GOI) consistently falls into the modernisation trap.

Three factors were responsible for the modernisation programme at Durgapur and Rourkela becoming a drain on the company. The most important was the implementation delays of between 4 and 6 years that led to huge cost over-runs and resulted in high interest and depreciation costs. For instance, the expenditure at both Durgapur and Rourkela shot up by over 100 per cent to approximately Rs 5,000 crore each. That forced sail to raise resources through market borrowings. Consequently, its debt burden catapulted from Rs 4,454 crore in 1989-90, when the 2 programmes were finalised, to Rs 20,851 crore a decade later. Obviously, interest costs rose by 7 times to more than Rs 2,000 crore in the same period.

The second reason for the modernisation programmes becoming a drain on resources was that they were based on wrong assumptions. For instance, as the CAG reports revealed, in the case of Rourkela, the requirement of hot metal in the post-modernisation scenario was estimated at 2 million tonnes per annum (tpa). However, there was no attempt to increase the annual capacity of the blast furnaces, which was assessed at a mere 1.35 million tpa. In fact, Trilochan Singh, the then-director, sail, categorically said that the ''entire downstream investment could prove infructuous if (the production of) 2 million tpa of hot metal was not achieved.''

Similarly, in the case of the Rs 4,850-crore Durgapur modernisation programme, it was envisaged that the plant would produce 8.61 lakh tpa of semi-finished steel with no finishing mill to convert them into finished products. The result: the company was selling low-margin, garden-variety products during 1997-99-a period that witnessed a demand recession. Worse, there was little possibility of increasing production during the recession. Stated the 1999 CAG Report that criticised the investments at Rourkela: ''...even after modernisation...the envisaged target production of 2 million tpa of hot metal was not achieved. It (the production) remained at 1.40 million tpa during 1996-97 and 1997-98 against 1.20 million tpa before modernisation.''

The result: modernisation did not help sail in either selling quality products, or higher quantities. While Pande refused to speak to BT, a spokesperson of sail responded to a detailed questionnaire. The company's argument: ''Since the modernisation was completed during a period which witnessed recession, it caused sharp decline in steel prices. Do you think it would have made sense to keep producing, and get saddled with huge inventories?'' Even Krishnamurthy parries the censure: ''Without modernisation, sail would have been out of business. It has failed to reap the benefits since it has not been able to improve the quality of its products.''

In fact, the former chairman has a poser: if modernisation was such a bad thing, why did his successors spend Rs 2,450 crore on the Bokaro unit, and formulate a Rs 5,000-crore investment plan for the Bhilai unit? And this is exclusive of the Rs 5,000 crore that Pande wants to spend in the next 5 years. ''My plans were not taken to their logical ends, like setting up a unit at Durgapur to convert the semi-finished steel into high-margin flat products. Instead, my successors found new toys in the form of modernisation plans at Bokaro and Bhilai,'' says an angry Krishnamurthy.

In order to provide a quick-fix solution, the current chairman has proposed fresh investments to help sail manufacture only value-added flat products and carbon steel. While that sounds good in theory, Pande will have to go through a reality check. Like his predecessors, he believes that sail can finance the bulk of the future investment through its own resources. In fact, that conviction proved to be the nemesis in the case of the Rourkela modernisation plan. In April, 1992, sail indicated to the Cabinet Committee on Economic Affairs that 50 per cent of the investment cost at Rourkela would come from internal accruals. In reality, the company's own contribution was less than 10 per cent, forcing it to go for huge borrowings.

However, this time the money will come from the sale of sail's non-core businesses, including its 3 captive power units (asset value: around Rs 900 crore), a fertiliser unit, the beleaguered Indian Iron & Steel Company that now looks profitable since its loans have been written off by the GOI, and the steel unit at Salem (asset value: Rs 500 crore). sail expects an inflow of nearly Rs 2,000 crore from such exits. Even if that figure is a realistic one, sail's first priority will be to reduce its debilitating debt, that still stands at over Rs 15,000 crore despite the revival plan that was cleared by the GOI last February. A clause in the revival strategy was the loan-waiver of over Rs 5,000 crore in the case of borrowings from the Steel Development Fund.

In addition, since Pande loves to evolve a consensus, and the bureaucracy will work at its own pace, it could take as long as 4-5 years to sell the non-core units. That would leave too little, too late for sail to invest in its proposed re-modernisation. Agrees a former senior manager of sail: ''The company needs to take decisions fast.'' Counters a sail director: ''Now that the GOI has cleared our financial restructuring plan, it would become easier to take sensitive decisions like hiving off units. Moreover, Pande has already evolved a consensus among the workers on the issue.''

Still, sail's attempted turnaround will fail if its 4 main units do not operate profitably. And that's management-driven, not investment-driven. For example, the Rourkela unit incurred a loss of Rs 765 crore in 1998-99 while the figure was Rs 717 crore in the case of the Durgapur unit. In the same year, the Bokaro plant-which was one of the most cost-efficient units in the world-incurred a loss of Rs 159 crore for the first time in its history.

In the same vein, sail's disadvantage in the current competitive scenario is its lack of marketing savvy. Its sales plans are not in sync with demand, its production targets are out of gear with the sales plan, and its pricing policies are based on the concept of selling whatever is produced at whatever price it can get. According to the 1999 CAG Report, in 1997-98, sail's production of pig iron, re-rollable products, and plates was 157 per cent, 155 per cent, and 135 per cent, respectively, of the targets specified in its sales plan. In the same year, three-fourths of its saleable steel products were pushed into the market ''by extending various financial benefits.'' Pande's job is to hone sail's marketing skills. And that too is management-driven, not investment-driven.

Clearly, by harping on the revival package and another modernisation plan, the GOI is missing the wood for the trees. By simultaneously blaming the previous modernisation plans for the current financial mess, it is ensuring that Pande is not held accountable for it. Worse, by not concentrating on issues relating to production efficiencies of existing assets and marketing, the GOI is only pushing sail into a financial blast furnace.