Restructuring State-owned Enterprises of a State Government of India: Problems, Prospects, and Lessons Learnt

Abstract

Poor performance has become a regular feature of the state-owned manufacturing enterprises in spite of their having experienced workforce, old brand reputation, etc. Most of them have fallen into a vicious cycle due to their prolonged poor performance. The problem starts with the poor working capital position, leading to high raw material cost and uncompetitive final product pricing. This leads to the generation of a very low investible surplus. Not having investible surplus has forced the state-owned manufacturing companies to a financial situation where they are facing severe dearth of capital. The age-old plant and machineries coupled with outdated technology used for production face severe problem under the dearth of capital condition and the manufacturing units become incapable of generating sufficient investible surplus. Lack of modernization of machinery and upgradation of people skills lead to constraints in producing value-added product which have both market demand as well as the potential for greater contribution than the regular product. Therefore, the manufacturing companies continue to perform poorly, without any product-mix diversification. The poor operational performance also gets reflected in their financial performance. Despite having positive contribution at operating margin before direct labour, most of the state-owned manufacturing companies are incurring losses at Earning Before Interest, Tax, Depreciation and Amortisation (EBITDA) level, even under the best-case scenario, mainly because of huge amount of employee cost. This paper suggests two solutions for these manufacturing companies — restructuring and disinvestments. The financial restructuring of the state-owned enterprises has become a unique programme in the country having the following key features: Broad political consensus has been arrived at on the financial restructuring programme. Unique and extensive stakeholder consultation process has been adopted to facilitate buy-in of staff associations and unions on restructuring proposals Innovative framework and principles have been established for: categorization of enterprises early retirement scheme for employees Social Safety Net programme financial restructuring transparent and competitive bidding process with in-built safeguard A Public Enterprises Cell has been created for guiding the restructuring efforts. Impact of government's budgetary resources is seen in reduction of the State loan exposure to the tune of around Rs.344 crore, primarily through conversion of loans to equity. Impact on performance of enterprises identified for restructuring is reflected in the reduction in aggregate net loss to the tune of around Rs. 67.5 crore. Further improvement of the state-owned enterprises has been recommended based on the lessons learnt during the process of financial restructuring. It is believed that opportunities do exist for widening the scope of the programme.