Page 131 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes

Case Study PSEs: You Decide

here has been much debate about public sector enterprises (PSEs) ever since
Chidambaram set up the Disinvestment Commission under G V Ramakrishna.
TSome speak of restructuring before disinvestment, others the reverse, and yet others
hang on to their socialist shibboleths. This column is no place to evaluate the debate,
except to say that the raison d'etre for State intervention — externalities and market
failure — have been long debased by having PSEs in hotels, textiles, cement, bread, aerated
water, leather, bicycles, tyres, photo-films and virtually everywhere else where markets
work perfectly well. Instead, let us discuss some incontrovertible evidence about the
performance of PSEs so that readers can come to their own conclusions.
Facing the Facts
The facts about centrally owned PSEs that are presented here are culled from two reputable
sources (i) the Public Enterprises Survey, which is published annually and covers 240 odd
PSEs excluding banks, financial institutions and insurance companies, and (ii) the annual
accounts of 500 top private sector manufacturing companies, ranked by sales. The analysis
is from research that was undertaken for the Organisation for Economic Cooperation and
Development.
Fact Number 1
In the last 10 years, these 240 PSEs have never earned returns exceeding 5 per cent of capital
employed. In other words, a taxpayer is better off putting hard-earned money in one-year
fixed deposits (see Chart A). Indeed, compared to the government's 365 day treasury bills,
the PSEs have consistently given negative returns that exceed 6 percentage points.
Fact Number 2
On the whole, these PSEs are far less profitable than comparable private sector companies.
In the last five years, the difference in net profits as a percentage of sales between PSEs as
a whole and the private sector has been substantial, as Chart B shows.
The divergence is even more dramatic if one nets out of the 14 PSEs which form the state-
owned petroleum monopoly. Today, the difference in profitability between the private
sector and non-petroleum PSEs is a staggering 6 percentage points.
15

12

9

6

3

0
91-92 92-93 93-94 94-95 95-96
PSE returns on capital Interest on 1 year FD

Chart A: PSEs don’t give much, do they?
Contd...

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