Don't talk, do
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At the Brics Competition Conference last week, Prime Minister Manmohan Singh underlined the need to rework the state's approach towards public sector undertakings. PSUs not only need to be given more functional independence, he pointed out, the government also has to stop using its fiscal and legislative powers to shield them from competition. But the government has a long history and habit of doing exactly what the prime minister said it should not.
Outrageous bailouts have been doled out to PSUs, which are both the cause and effect of their inefficiency. For instance, Air India, despite years of being in the red and accumulating huge debt, was granted a Rs 30,000 crore bailout in April last year. Air India is also a telling case study about how the government protects PSUs in other ways — until recently, it had the "right of first refusal" over bilateral air services agreements. This implied that only once Air India declined to service a particular route could other airlines fly the same. There is no dearth of examples of policy decisions taken to make up for the incompetence of PSUs that end up reinforcing it — MTNL and BSNL got to return their spectrum when they ran into trouble, a courtesy the government would never have extended to a private player.
At the same time, it is also true that PSUs face exceptional impediments in their functioning, what is famously called "L1-itis" — they can't choose the best contractor and must typically hire the one that costs the least. Given the bureaucratic procedure and oversight — ministerial, judicial and parliamentary — they are subject to, it's no surprise that PSUs aren't as nimble as private firms. More often than not, they are treated like extensions of the executive, cornered into making imprudent decisions. Directed by the telecom ministry, both BSNL and MTNL started work on offering 3G and BWA services a year before the price to be paid for this spectrum was to be decided, because they were told they had to match what the private firms would pay in a later auction. A gameplan to make PSUs more autonomous and therefore efficient must be worked out urgently. The economy-wide consequences of not doing this are more than evident from the case of Coal India.