BSNL

Dear PM, If Things Are Improving for PSUs, Why Not Declare Complete Numbers?

narendra_modi

In the Independence Day speech made on August 15, 2016, the prime minister Narendra Modi talked about the turnaround of three public sector units(PSUs)—Air India, Bharat Sanchar Nigam Ltd(BSNL) and Shipping Corporation of India.

As the prime minister remarked: “The PSUs are formed to fall in a pit, to fail, to get locked or to be sold out. That has been the history. We have tried to bring in a new culture. And today for the first time, I can say with satisfaction that Air India which had a bad image, has succeeded in registering an operational profit last year. At a time when telecom companies all over the world were earning, BSNL was falling in a pit. For the first time, BSNL has succeeded in earning operational profit. Nobody knew whether Shipping Corporation of India would ever be in profit. Today Shipping Corporation of India is making profit.”

Operational profit is the profit that a company makes from its business operations. It is what accountants call earnings before interest and taxes. In case of Air India, as I have written in the past, the airline has made an operational profit primarily because of the fall in oil prices. I will not repeat the argument here. (You can read the column explaining this here). Also, just because the airline has made an operational profit doesn’t mean that the airline is not losing money.

What Mr Modi forgot to tell us is that the airline lost Rs 2,636 crore in 2015-2016. Herein we need to differentiate between the operational profit of the company and the net profit/loss. Anyone who has studied Finance 101 knows that operational profit and net profit are two different things all together.

Operational profit is the profit that a company makes from its business operations. After this, the company needs to pay interest on its debt, as well as taxes to the government. What remains is the net profit or net loss, as is the case with Air India. In case of Air India, the airline had a debt of Rs 51,367 crore as on March 31, 2015 and interest needs to be paid on this debt. After paying this interest, the airline ended with a net loss.

Also, the complete profit and loss statement of the airline for 2015-2016, hasn’t been made public yet. From the data that is available in the public domain it can be said that the airline made an operating profit primarily because of a fall in oil prices. If there is anything more to it, then the government needs to make available the complete set of numbers, as soon as possible, in the public domain.

Further, the Modi government, in the process of projecting itself positively, has shown a tendency in the past, to take credit for falling oil prices as well. Take the case of the total savings made through Pahal, the scheme in which the subsidies available on domestic cooking gas are transferred directly into the bank accounts of citizens, after they have bought a cooking gas cylinder at the full price and not the subsidised price as was the case in the past.

In June 2016, the finance secretary Ashok Lavasa said that the government had saved Rs 14,872 crore by paying the subsidy amount directly into the account of people. This turned out to be incorrect.

A CAG Audit Report on Pahal published in August 2016 eventually pointed out that while there were some savings from Pahal, they were nowhere near the claims being made by the government as well as the oil companies which sell cooing gas cylinders.

In a report the CAG said that the reduction of Rs 23,316 crore in cooking fuel subsidy for the first three quarters of 2015-2016, in comparison to 2014-2015, was largely due to a sharp fall in oil prices and not due to the Pahal scheme.

As the report pointed out: “While implementation of PAHAL scheme coupled with the LPG ‘Give it up’ campaign has resulted in the reduction of offtake of domestic subsidised LPG cylinders, the resultant savings was not as significant as that generated through fall of subsidy rates.”

The CAG said that the savings due to implementation of Pahal were only Rs 1,764 crore. The remaining Rs 21,552 crore fall in cooking gas subsidies was largely due to a fall in oil prices. Another interesting point that the CAG made was that while calculating the fall in subsidy, the national average offtake of 6.27 cylinders a year should be used and not the maximum number of 12 cylinders that consumers are allowed subsidy on, during the course of the year.

This isn’t surprising given that politicians and governing political parties all over the world, like numbers which show them in good light. As Philippa Malmgren writes in Signals—How Everyday Signs Can Help Us Navigate the World’s Turbulent Economy: “Why would politics demand that the numbers be skewed in a particular direction? Power. Politicians and policymakers want power. They want votes. They want the mathematics to show whatever will favour them in an election. If they want a different answer they simply change the assumptions or the parameters of the algorithm.”

The thing is that Pahal is actually working and has helped whittle down a good number of bogus domestic cooking gas connections which were being used to divert domestic cooking gas in the black market. Also, Rs 1,784 crore is a very good amount of saving and need not have been misrepresented in the way it eventually was.

If the government had reported the correct number, that in itself would have been a good beginning. By doing what it did, the government gave an opportunity to naysayers to say that “we told you that economic reforms don’t work in India”. And that is not a good message to spread.

The other company that prime minister Modi talked about in his speech was BSNL. Talk about BSNL having made an operating profit in 2015-2016 has been there in the media for some time now. In fact, the former telecom minister Ravi Shankar Prasad in July had said that the company would report an operating profit of around Rs 2,000 crore in 2015-2016.

A news-report in The Economic Times now suggests that the company might have made an operational profit of Rs 3,378 crore in 2015-2016. Again, there is no data available in the public domain on this. The latest numbers I could find where from the department of telecommunications annual report for 2015-2016.

Figure in * Crore

Financial Year2012-132013-142014-152015-16 (Up to September 30, 2015)*
Total Income27,12827,99628,64512,929
Total expenditure35,01235,01637,29216,734
Net profit(-) 7,884(-) 7,020(-) 8,234(-) 3,462

Note: * Data is Provisional & Un-audited

For the first six months of the year, it seems BSNL was on its way to make massive losses that it usually does. What changed over the next six months will become clear only once the complete profit and loss statement of the company is available in the public domain. Right now we only have statements from the government, and a few leaks, and nothing more.

Both Air India and BSNL are unlisted companies. But given that they are eventually owned by the taxpayers, it is only fair that the government puts out their complete set of numbers as soon as possible. While these numbers will eventually be declared but by then it will be too late.

So that leaves us with Shipping Corporation of India, which is listed on the stock exchanges. In 2011-2012, the company made losses of around Rs 428 crore. In 2015-2016, the company made a net profit of around Rs 377 crore. How did this turn around happen?

In fact, the cost of fuel (bunker fuel is the main type of oil used aboard ships) in 2011-2012 was at Rs 1,560.3 crore. By 2015-2016, this had fallen by more than 59.3 per cent to Rs 637.5 crore. In 2011-2012, the cost of fuel amounted to 36.2 per cent of net sales. In 2015-2016, the cost of fuel amounted to 15.5 per cent of the net sales of the company. In fact, the sales of the company have gone down during the period.

The difference in performance of the company lies in the fall in the fuel bill of more than Rs 900 crore. This has pushed the company into a profitable zone. There is nothing more to it.

Also, in 2014-2015, 77 out of the 234 PSUs were loss-making. The number was 70 in 2013-2014. How have things changed on this front, is something that the government needs to tell us.

Currently, the government is busy making out a positive case for itself, on the basis of incomplete data and taking credit for fall in oil prices, as well. It can do better than this.

The column originally appeared in Vivek Kaul’s Diary on August 19,2016

Of Venkaiah Naidu, Air India and Privatisation by Malign Neglect

VenkaiahNaidu

Yesterday afternoon something weird happened on Twitter.

An irate flyer sent out four tweets against Air India. No it wasn’t me. Here are the four tweets:

1) I had to travel to Hyderabad by Air India AI544 which is to depart at 1315 Hrs… was told on time…reached airport by 1230 Hrs.

2) was informed at 1315hrs that flight was delayed as d pilot had not yet come.Waited up to 1345 Hrs, boarding didn’t start. returned 2 home.

3) Air India should explain how such things are happening. Transparency and accountability are the need of the hour.

4) Hope Air India understands that we are in the age of competition. Missed an important appointment.

The tweets were sent out by senior BJP politician and the Union Minister for Urban Development, Housing & Urban Poverty Alleviation as well as Parliamentary Affairs, M Venkaiah Naidu. Naidu is a heavy weight in the Modi government. The fact that he took to Twitter to criticise the government owned airline means he must have been extremely irritated by the airline’s failure to depart on time.

Air India replied in true government style saying that the pilot was stuck in a traffic jam and an enquiry had been ordered. (I wonder why pilots of other airlines do not get stuck in traffic jams?)

Minister Naidu got a feel of what happens when people travel Air India. This is a good thing where the politicians and the bureaucrats get a feel of how the system they help build and run, actually works.

As Reserve Bank of India governor Raghuram Rajan, had said in a speech sometime back: “A lot of officials, including myself, learn the difficulties of working in India as an ‘aam aadmi’ only once we leave office, lose the assistant, the assistant to the assistant, and the assistant to the assistant’s assistant. Post retirement, and I have seen this with all the people I know, they realise the system is much harder to deal with.”

It was Naidu’s opportunity yesterday to have that kind of day. The sad part is that those who run Air India still don’t get it. The airline has managed to accumulate huge losses over the years and continues to survive on borrowing as well as equity infusion by the government (i.e. basically the taxpayer).

Anyone in their right mind, stopped traveling Air India a while back. The airline now runs simply because of government employees who when travelling officially have no other option (in most cases) but to travel in the airline and pay the full fare.

The airline now has 14.7 per cent market share. This has been a huge fall from the days when it had 100% of the domestic market share given that no private airlines were allowed to operate. (The domestic airline back then was called Indian Airlines. There was also Vayudoot, another government owned airline, which travelled to smaller locations).

This is nothing but what Ruchir Sharma calls privatization by benign neglect. As he writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “India…has adopted a de facto policy of what I can only describe as privatization by malign neglect. The political class can’t bring itself to sell off the old state companies, or to reform them either. Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance. Thirty years ago state-owned Air India was basically the only way for Indians to fly, but the rise of agile private airlines including Jet and Indigo, has reduced its share of flights to less than 25 percent.” As mentioned earlier Air India now has 14.7% of the domestic market share.

The business flyer who is willing to pay a premium and for whom time is of utmost importance, has more or less abandoned Air India and moved on to other airlines. Guess, it’s time that minister Naidu also does that, the next time he has to reach on time for any meeting outside Delhi.

Air India is not the only example of the government not being able to withstand competition. Sector after sector has seen the government companies being decimated wherever they have had to face competition. As Sharma writes: “The same goes for telecommunications, where former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India’s 900 million telecom subscribers.”

But the government (this government as well as the ones before it) have kept these companies going. Of course, a lot of taxpayer money which could have been better utilised elsewhere has been lost in the process. Air India has lost close to Rs 35,000 crore between 2010-2011 and 2015-2016. Last year it managed to make an operational profit primarily because of lower oil prices.

The point being that it would have been better for the government to have sold off these companies long back. As Sharma writes: “The state would have done a lot better to simply sell of these companies when they were still valuable, but now it is losing money on them hand over fist, and they are worth a pittance. This approach—refusing either to privatize or protect state monopolies—is the worst possible combination for government’s finances.”

And that is precisely what the previous governments did. The Narendra Modi government continues to run on the same principle. One doesn’t expect radical decisions from a government which couldn’t even push through a five basis points interest rate cut on the Employees Provident Fund(EPF). One basis point is one hundredth of a percentage.

The airline business is a very tough and competitive business to be in. Any airline hoping to make a profit needs to be run by a professional who has some experience in the airline business. Air India has never had that luck for a sustained period of time. No such moves have been made by the current government either. This belief that bureaucrats and not specialists, can do everything, has been one of the primary reasons behind the degradation of India.

In fact, Air India has now reached a stage where even if the government were to try selling it, there would be no buyers. As civil aviation minister Ashok Gajapati Raju said sometime back: “Its (Air India) books are so bad. I don’t think that even if it is offered, anybody would come for it.”

The more things change the more they remain the same. The taxpayer will continue paying for this national loot.

The column originally appeared in Vivek Kaul’s Diary on June 29, 2016

Air India Has Turned Profitable and That’s Got Me Worried

Air_India_001

Air India, the airline owned and run by the government, has made an operational profit of Rs 8 crore during 2015-2016.

The minister of civil aviation, Ashok Gajpathi Raju, said this in the Lok Sabha last week. The airline was able to cut operational expenses by almost 11% during the course of the year, the minister added.

For an airline which has been facing huge losses over the years, this is good news. Take the look at the following table.

YearLoss (in Rs crore)
2014-20155859.1
2013-20146279.6
2012-20135490.1
2011-20127559.7
2010-20116865.2
Source: Public Sector Enterprises Survey32053.7

Between 2010-2011 and 2014-2015, the airline faced total losses of a whopping Rs 32,053.7 crore. In fact, even in 2015-2016, the airline is expected to make a net loss of Rs 2,636 crore, though operationally it has made a profit.

Having said that, an operational profit of Rs 8 crore will now be used as an excuse to keep the airline running. In the years to come, more money is likely to go down the drain in trying to keep the airline up and running. In fact, the minister of state for civil aviation Mahesh Sharma told the Rajya Sabha yesterday that the government has no plans of disinvesting Air India.

It is important to ask here as to why Air India made a profit in 2015-2016, after having lost loads of money in the previous years. One reason as Raju pointed out in the Lok Sabha has been operational efficiency.

What the minister did not say was that a major reason for the turnaround has been lower oil prices. In May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

A March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

Further,  the Mint newspaper quotes aerospace journalist Hormuz P. Mama as saying: “I feel that Air India’s improved performance is almost entirely due to the very low jet fuel prices. There does not seem to be much of a turnaround effort in place.”

The jet fuel price is beyond the control of the Air India management. When the price starts to go up again, Air India will be back to making losses. But then the taxpayer is always there to foot the bill. Also, it needs to be pointed out here that as on March 2015, the airline already had a debt of Rs 51,367 crore. The airline was also given a lifeline of Rs 30, 231 crore lifeline by the government in 2012.

Air India is a symbol of all the taxpayer money that the government wastes to keep loss making public sector enterprises going. In fact, when it comes to the quantum of losses Air India is number two behind Bharat Sanchar Nigam Ltd, which made losses of a whopping Rs 8,234.09 crore in 2014-2015. The company has made losses of Rs 23,138 crore between 2012-2013 and 2014-2015.

As the Public Sector Enterprises Survey 2014-2015 points out: “Amongst the top ten loss making companies, Bharat Sanchar Nigam Ltd., Air India Ltd., and Mahanagar Telephone Nigam Ltd. were the top three loss making CPSEs during 2014-15. The top ten loss making companies claimed 85.45% of the total losses made by all the (77) CPSEs during the year. The top three loss making CPSEs namely, Bharat Sanchar Nigam Ltd, Air India Ltd. and  Mahanagar Telephone Nigam Ltd incurred a loss equal to 62.09% of the total loss of all loss making central public sector enterprises in 2014-15.”

These losses are borne by the Indian government. In fact, if you look at the table carefully, the fourth largest losses of Rs 2,164 crore were made by a company which makes photo films. Yes, you read it right.

Why should this government or for that matter any government lose more than Rs 2,000 crore in a year, making a product, which doesn’t have any utility left in this day and age? I really don’t have an answer for that.

It isn’t exactly that the government of India is floating around with a lot of money at its disposal. To give you a sense of comparison, India’s agriculture budget in 2015-2016 was Rs Rs 15,809 crore. This was lower than the total losses faced by the seventy-seven public sector enterprises.

In fact, it was lower than the total losses of Rs 16,987 crore faced by the top three loss making enterprises—Bharat Sanchar Nigam Ltd, Air India and Mahanagar Telecom Nigam Ltd. Now who needs more money? Indian agriculture or the few lakh employees employed by these loss making firms?

Hence, the government spends thousands of crores of rupees every year to keep running the loss-making companies, in order to sustain the livelihood of around 2.5 lakh people working in these companies.

The question is why is the government mollycoddling 0.02% of the nation’s population, when the money going towards sustaining the losses of these companies can easily be better utilised somewhere else.

This is basically a crime in a country as poor as India is. As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads To Disaster: “As a society grows richer it can afford more illusions, more entertainments, more re-distribution of wealth, more regulation, higher taxes, and more unproductive people.”

Right now India cannot afford the huge bunch of unproductive people working at public sector enterprises being subsidised by the government. Further, every rupee that goes towards sustaining these companies is taken away from something else.

Of course, loss-making or not, every minister likes a few public sector enterprises under him. Take the case of the Civil Aviation minister, how much value would he have with Air India not continuing to be government owned? Or how much value would the telecom minister have without MTNL and BSNL, the two government owned telecom companies, continuing to be government owned.

Hence, understandably there is a resistance at the level of ministers in the government as well as bureaucrats, to the entire idea of privatisation. But then in economics there are no free lunches, and someone has to pay for it.

Postscript: In the original column I had said that an operational profit of Rs 8 crore would mean that the government will not have to pump any more money into Air India. That is incorrect. The airline has made a net loss of Rs 2,636 crore in 2015-2016, which means taxpayer money will go into the airline and which actually makes the situation much worse, with almost all the drop in losses coming in from the savings on fuel costs.

The column originally appeared in the Vivek Kaul Diary on May 11, 2016