By M.V. Ramakrishnan

The criteria governing the intricate question of disinvesting public sector enterprises are very complex and are often in conflict with one another. The elementary argument, of course, is that the public sector, as a rule and by its very nature, is inefficient and ineffective. But even efficiency and effectiveness in this context are not always synonymous as an organisation can be run very efficiently and still be ineffective in the light of the true objectives that justify its existence.

The ordinary citizen, who is worried about the constant drain of public funds caused by many government companies, would naturally be inclined to think that the obvious thing to do in any earnest programme for reforms would be to disinvest (or simply close down) companies that are hopelessly sick and are piling up enormous cumulative losses and borrowing endlessly from the government or from financial institutions. 

There are dozens of such cases at the level of both at the centre and the states. But who would normally want to buy or invest in such losing concerns? And closing them down is not easily done either, because of the severe pressures exerted by their employees and by vested business interests, which stand to gain by their recurring losses.

Sooner or later, practical solutions will have to be found for such basic problems. Meanwhile, the ideal candidates for immediate privatisation seem to be companies that are intrinsically healthy and are not yet incurring overall losses, but are nevertheless steadily going downhill (and are likely to go on doing so) because they are viciously cramped by the close government connection.

One convincing example is the Central Government undertaking Bharat Earth Movers Limited (BEML), which is controlled by the Ministry of Defence. The travails of this company have been highlighted by the Comptroller and Auditor General of India (CAG) in a commercial audit report presented to Parliament in May, 2000.

VANISHING PROFITS

Established in 1964 and spread over three locations in Karnataka (Kolar Gold Field, Mysore, and Bangalore), BEML has been producing heavy earth-moving equipment such as bulldozers, excavators, rope shovels, walking draglines, dump trucks, motor graders, and towing tractors. It has also been making heavy transport vehicles and trailers for the Army, rail coaches, electrical multiple units and track-laying equipment for the Railways, as well as diesel engines for earth-moving machines. The main customers for earth-moving equipment are Coal India and its subsidiaries. The company also serves the metal-mining, cement, and irrigation sectors. It is recognised as an export house although the exports are not substantial.

The authorised share capital is Rs 60 crore, and the paid-up capital was Rs 37 crore in March, 1999. As a result of the partial disinvestment since 1992, the Central Government now owns 61.23 per cent of the equity, with the rest being held by banks and other financial institutions and corporate bodies (10.59 per cent) and the public (28.18 per cent). The Board of Directors includes part-time directors representing the Defence and Coal Ministries, the Railways and the State Government.

The trend of sales and profits shows that during the nineties the value of sales grew slowly and steadily, from about Rs 750 crore in 1990-91 to about Rs l,200 crore in 1998-99. However, Profits Before Tax (PBT) and Profits After Tax (PAT) declined steeply (with some ups and downs on the way) from Rs 67 crore and Rs 46 crore, respectively, in 1990-91 to just Rs 3 crore and Rs 1 crore in 1998-99. The proportion of PBT and PAT to sales fell from 8.97 per cent and 6.16 per cent, respectively, in 1990-91, to 0.22 per cent and 0.05 per cent in 1998-99.

Provisional data for 1999-2000 obtained from BEML indicate that there was a mild revival last year; and the PBT and PAT is likely to move up to Rs 22.50 crore and Rs 15 crore, respectively, against sales of about Rs 1,300 crore (1.71 per cent and 1.14 per cent).

Over the decade, the company's net worth increased from Rs 350 crore to nearly Rs 600 crore, but the return on capital employed declined from 18 per cent to 7 per cent.

CAUSES AND EFFECTS

One of the reasons for the potential profits vanishing was that BEML's main clients in the bureaucratic set-up were quite unreliable, and several expensive projects turned out to be largely unproductive because the initial expectations of very high volumes (created by the government departments concerned) were not actually fulfilled. The heavy shortfalls led to gross under-utilisation of the large infrastructure created by BEML. They also scuttled its efforts for progressive indigenisation of imported technology and made its corporate plans meaningless.

This was the fate of vital projects like manufacturing heavy-transport vehicles, hydraulic system of battle-tank stabilisers and combat-vehicle transmissions for the Army, and walking draglines for the coalfields. The part-time Directors representing the Government of India in the Board failed to provide any effective liaison with their own departments in this regard.

Certain provisions in the Customs tariff also went against BEML's interests. Till 1999, Customs duty for imports of finished earth-moving equipment was only 25 per cent, but the duty on imports of raw materials and components required for indigenous production was between 30 and 40 per cent, with another 9 per cent by way of special and additional duties. The Government removed this disparity in 1999 by levying a countervailing duty on imported finished equipment. However, for several years, BEML had lacked a level playing field vis a vis importers.

Moreover, in such contexts, the government itself tended to let the company down. For example, although the Defence Ministry had required BEML to set up costly facilities for producing a large number of heavy transport vehicles, some of its departments made substantial imports though BEML's capacity remained underutilised, because the Defence Ministry did not have to pay any Customs duty on its direct imports.

In another instance the Bharat Electronics Limited (BEL) was manufacturing stabilisers for the T-2 battle tanks, and had asked BEML to provide the hydraulic system. But when the production facility was ready, BEL preferred to import nearly 300 hydraulic sets because that was cheaper, leaving BEML's capacity, created specifically to meet BEL's requirements, completely unutilised. And the Defence Ministry allowed this, though both the companies were under its control.

The Railway Board had also given BEML quite a raw deal. Since 1994, it had placed orders only in fits and starts, and was also paying such unremunerative prices that the company had to incur huge losses.

STILL MORE REASONS

Constrained by its bureaucratic roots, BEML could not effectively cope with the intense competition that materialised in the liberalised economic climate of the Nineties.

The marketshare of earth-moving equipment shows that over the decade its position declined steeply in the case of excavators, wheel loaders and dumpers. Even with regard to motor graders, after achieving 100 per cent market share up to 1996-97, BEML had let it collapse in the next two years.

The new competition was not only from the private sector in India, but also from foreign companies. And at least one major collaborator, Komatsu of Japan, teamed up with an old competitor to set up L&T Komatsu in Bangalore as a rival enterprise.

However, such external factors were not the only reasons for BEML's troubles. Some of its infrastructure was too expensive; its labour and overhead costs were sky-high, with a workforce exceeding 15,000; its market intelligence was generally poor; and its judgement was at times faulty.

Very heavy losses were incurred for various reasons in the manufacture of hydraulic excavators, electric rope shovels and diesel engines; and there was a lot of infructuous expenditure on projects relating to arc-welding robots and bulldozers.

DEBT TRAP

It is a measure of the intrinsic worth of the organisation that, despite all these setbacks, BEML did not post a net loss in any financial year during the last decade. And the financial picture would have been brighter if it had not been clouded by enormous bad debts.

Figures for March, 1999, show that at the end of 1998-99 debts outstanding for more than one year amounted to Rs 124 crore. Of these, Rs 51 crore was due for more than two years, and Rs 23 crore for more than three years. The defaulting debtors were mainly government departments and public sector undertakings--the Defence Ministry, Railways and Coal India in particular.

The worst case was that of Coal India, which was compelling BEML to make large supplies of earth-moving equipment to sick coalfields on credit, although the prospects of recovering the dues were very dim. Its subsidiary, Bharat Coking Coal, owed BEML Rs 27 crore for more than a year as of March, 1999. Its own accounts show that Bharat Coking Coal suffered a net loss of Rs 450 crore in 1998-99, raising its accumulated losses to Rs 2,100 crore. Will it ever be able to pay the outstanding amounts? Coal India itself always makes huge profits (PAT in 1998-99: Rs 606 crore). But, apparently, it has no way of settling the debts of its subsidiaries.

JUST LET G0!

An anomalous feature of the whole set-up is that BEML is under the control of the Defence Ministry, although the latter is only marginally concerned with its business, which has no delicate strategic significance (unlike that of BEL, for instance).

The trend of sector-wise sales shows that Defence Ministry purchases accounted only for 5-17 per cent of BEML's sales (by value) during nine successive years. It could hardly be expected to concern itself seriously with the company's overall affairs.

Which part of the government should then have administrative control over BEML? Even the Coal Ministry does not seem to be a proper choice, because BEML has to make a much wider and stronger impact on private-sector users and on the export front, if it is to prosper. The CAG's report does not raise this question; but it is very relevant, and the obvious answer is that the government would do well to disinvest its stake in BEML at once completely (except for the Rail-Coach Division, which must be taken over by the Railways) and let it find its own destiny in the private sector. Of course, the government can perhaps retain a small fraction of the equity, so that it can have a place in the Board to take care of its own interests as the most important customer.

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