Financial Performance of State Level Public Enterprises in Uttar Pradesh

The Vol. Journal of Institute The Journal of Institute of Public Enterprise, 38, No. 3&4 of Public Enterprise, Vol. 38, No. 3&4 ISSN : 0971-1856, © 2015, Institute of Public Enterprise © 2015, Institute of Public Enterprise

Financial Performance of State Level Public Enterprises in Uttar Pradesh Nagendra Kumar Maurya*, Sapana Singh** & Ajit Kumar Singh*** The paper makes a critical analysis of the financial health of the SLPEs of Uttar Pradesh and attempts to contribute policy suggestions. As far as the methodology is concerned financial and operating ratios have been used to analyse the financial health of these commercial entities. Four types of financial ratios have been applied in the process, namely liquidity ratios, profitability ratios, leverage ratios and asset management ratios. Thus the paper provides an analytical study of the financial health of the 40 SLPEs of Uttar Pradesh on the basis of financial and operating ratios computed from the latest available data i.e. from 2008-09 to 2011-12 from the Bureau of the Public Enterprises, UP. Analysis of the financial performance of energy sector SPSUs and non-energy sector SLPEs reveals that while the later earned a net income during all the four years, the energy sector SLPEs incurred huge losses. The operating performance SLPEs during the period showed that 31 out of 36 SLPEs were earning profit during the period, though in many cases the profit was small or nil. Select financial ratios show low return on capital, negative net worth, low gearing, poor utilization of financial resources and low labour productivity. It has been concluded with relevant empirical findings that the SLPEs are putting a serious financial burden on the state budget and many of them are not serving the purpose for which they were set up especially. Keywords : SLPEs, Financial Ratios, State Subsidies, Disinvestment.

Introduction After independence India adopted stateled growth which resulted in mushrooming of public sector undertakings at both national and state level. Following the trend of nationalization prevalent in the economies of the contemporary world, India too chose state ownership both as the remedy for market failures and a means to achieve social objectives. With the social obligations entrusted to them it was envisaged 84

that these Public Sector Enterprises (PSEs) would also be able to contribute in the tempo of economic development of the economy. Generally, * Nagendra Kumar Maurya, Assistant Professor, Giri Institute of Development Studies, Sector O, Aliganj, Lucknow-226024. ** Sapana Singh, Research Associate, Giri Institute of Development Studies, Sector O, Aliganj, Lucknow-226024. ***Ajit Kumar Singh, ICSSR National Fellow, Giri Institute of Development Studies, Sector O, Aliganj, Lucknow-226024.

Financial Performance of State Level Public Enterprises in Uttar Pradesh

PSEs besides providing basic services and social overhead capital are also expected to facilitate an array of economic activities. The role of social goods in accelerating the process of economic growth is well noted and it has been seen that “private enterprises either cannot invest in such projects because of huge investments or they do not because of commercial non-profitability or too lengthy the period involved” (Bhatia, 2009). Thus, social overheads, the commanding heights of the economy, formed the foremost category whose creation and maintenance as public undertakings was theoretically warranted. It was thus expected that the public undertakings provide social goods on continuous basis. As Mulay and Kant (2009) argue “being the largest commercial enterprises in the country, public sector undertakings provide a huge leverage to the government to intervene in the economy directly or indirectly to achieve the desired socio-economic objectives”. Not only national government but state governments too created many State Level Public Enterprises (SLPEs) with the intention to set up infrastructure for development, generate employment opportunities, promote growth and reduce inter-regional disparities. However, over a period of time the working of the Central Level Public

Enterprises (CPSEs) and the SLPEs was adversely affected by political intervention. Operation and management of SLPEs became a matter of politics rather than being based on principles of efficiency and competition. As Kanchan and Herlekar (2013) observe : “Their market shares were eroded mainly due to high costs of production and poor quality of product techniques. Lack of professional leadership, autonomy, technological bankruptcy and inadequately trained manpower coupled with politicized trade unionism rapidly drove many of these enterprises towards bankruptcy”. Thus, these SLPEs failed miserably in meeting out the basic objectives of promoting development and equity. The financially ailing units also created huge pressure on the state finances in terms of budgetary support for capital infusion and to provide hedge against market competition in terms of product pricing (Nagraj, 2006; Pillai & Nagaraj, 1993). Against this backdrop, the present study makes a critical analysis of the financial health of the SLPEs in Uttar Pradesh, which has the largest number of SLPEs among the states in India. The paper is organized in the following manner. Section-II discusses the data sources and financial ratios used to measure the performance of the SLPEs. Section-III presents a detailed discussion 85

The Journal of Institute of Public Enterprise, Vol. 38, No. 3&4 © 2015, Institute of Public Enterprise

on the financial performance of SLPEs on the different financial parameters. It also discusses the financial repercussions of losses incurred by the SLPEs on the state finances in terms of subsidy and budgetary outgo towards SLPEs. Section-IV offers about the issues pertaining to restructuring of SLPEs. The final Section presents the important conclusions and policy implications emerging from the paper.

Data and Methodology The analysis of the financial performance of SLPEs is hampered by lack of data. We could get data only for 40 working SLPEs including 4 energy corporations that too for four years only i.e., from 2008-09 to 2011-12 from the Bureau of the Public Enterprises, UP. Discussion in this paper is, therefore, confined to these 40 SLPEs. The list of 40 SLPEs covered in the analysis is given in Appendix-1. Financial and operating ratios have been used to analyse the financial health of commercial entities. Four types of ratios have been applied namely liquidity ratios, profitability ratios, leverage ratios and asset management ratios. To assess the liquidity position of the SLPEs, current and quick ratios have been estimated. Gross profit loss to total income, gross profit/loss to capital employed and net profit/loss to net worth ratios have been used for measuring the profitability of SLPEs. With a view to estimate the capital structure 86

of undertakings, debt-equity ratio and state government funds/total funds ratio have been calculated and the asset management quality was assessed through value added to capital employed and value added to employee ratios. The financial ratios used in analysis are explained below : Liquidity Ratios Current Ratio = (CA*+L&A)/CL&P Quick Ration = (CA + L&A – I)/ (CL&P-BO) Profitability Ratio Gross P/L to Total Income = GP&L/TY Gross P&L to Capital Employed or Return on Capital Employed (RoCE) = GP&L/CE Net worth ratio = NP&L/NW Leverage Ratios D/E Ratio = LT Debt/SF SGF to TF Ratio = SGF/TF Asset Management Ratios VA to CE ratio = VA/CE Labour Productivity or VA to E ratio = VA/E Where CA – Current assets; L&A – Loans and advances; CL&P – Current liabilities and provisions; I – Inventory;

Financial Performance of State Level Public Enterprises in Uttar Pradesh

BO – Bank overdraft; GP/L – Gross profit and loss; TY – Total income; CE – Capital employed; NP&L – Net profit and loss; NW – Net worth; D/E – Debt to equity; LT Debt – Long term debt; SGF – State government funds; TF – Total funds; VA – Value added; E – Employees. To avoid the effect of year-to-year fluctuations, ratios are calculated on the basis of 4 years average values i.e., 2008-09 to 2011-12. The ratio analysis has been done only for the major sixteen SLPEs i.e., twelve non-energy SLPEs (selected on the basis of total business) and 4 energy sector SLPEs.

Results and Discussion There were 84 government companies (44 working and 40 non-working) and seven working statutory corporations in UP in 2002. The number of government companies increased to 121 (78 working and 43 non-working PSUs) as on 31 March 2012 (CAG, 2013-14).

The number of statutory corporation remained at seven. The high number of non-working companies reflects poor management of SLPEs and the slow pace of disinvestment and closure of the sick units. The working SLPEs registered a turnover of 42,987.46 crore during 2011-12 as per their latest finalised accounts (C&AG Report, 2013). This turnover was equal to 6.25 per cent of GSDP. The SLPEs had 79,000 employees as of 31 March 2012. Total investment of the SLPEs was 97,987.69 crore as on 31 March 2012. This consisted of 61914.91 crore by way of capital invested and 35952.78 crore by way of loans (Table-1).

Financial Performance of SLPEs The financial performance of the 40 SLPEs for which data was available has been shown in Table-2. Total income of the SLPEs increased from 29,287.41 crore in 2008-09 to

Table-1 : Total Investment in SLPEs as on 31 March 2012 in UP (in crore) Government Companies

Statutory Corporations

Type of SLPE

Capital

Loans

Total

Capital

Loans

Total

Grand Total

Working

60617.05

34433.96

95051.01

601.3

1040.02

1641.32

96692.33

NonWorking

696.56

478.8

1175.36

-

-

-

1175.36

61313.61

34912.76

96226.37

601.3

1040.02

1641.32

97867.69

Total

Source : Report of CAG on the Working of Public Sector Undertakings in UP, 2013.

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42,239.26 crore in 2011-12. The cost of sales/operations jumped from 33,910.17 crore to 46126.89 over the same period. After taking into account the cost of operation, interest on loan, tax provisions and provision for bad debt, the SLPEs suffered huge losses in all the years. Analysis of the financial performance of energy sector SLPEs and non-energy sector SLPEs reveals an interesting picture. In terms of total income and expenditure the energy SLPEs dominate. Thus, total income of energy SLPEs in 2011-12 was 27046.6 crore, while that of the 36 non-energy SLPEs was 15,192.7 crore (Table-3). On an aggregate level, the non-energy SLPEs earned a net income during all the four years. On the other hand, energy sector SLPEs incurred huge losses. The

result was that the public sector units as a whole were in the red in all the four years. The operating performance of the individual non-energy SLPEs during the period 2008-09 to 2011-12 shows that as many as 31 out of 36 non-energy SLPEs were earning profit during the period, though in many cases the profit was small or nil. Highest profit-making SLPEs were UP Avas Evam Vikas Nigam, UP Jal Nigam, UP Forest Corporation, UP State Industrial Development Corporation, UP Rajkiya Nirman Nigam and UP Warehousing Corporation. Five non-energy SLPEs incurred losses in most of the years namely UP Drugs and Pharmaceuticals Corporation Ltd., UP State Spinning Company, UP State Road Transport Corporation Ltd., UP State Handloom

Table-2 : Consolidated Results of 40 SLPEs (in crore) Particulars

2008-2009

2009-10

2010-2011

2011-12

Total Income

29287.41

34510.79

36616.04

42239.26

Cost of Sales/Operation

33910.17

34136.77

37560.32

46126.89

Interest on Loan

1225.01

1613.69

2180.87

3083.51

Tax Provision

130.89

168.16

120.55

116.08

Provision for Bad Debts

198.07

189.09

275.10

376.30

Total Expenditure

35464.14

36107.71

40136.84

49702.78

Net Profit/Loss

-6176.74

-1596.92

-3520.80

-7463.52

Source : Bureau of Public Enterprises, UP.

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Financial Performance of State Level Public Enterprises in Uttar Pradesh

Table-3 : Operating Performance of Energy and Non-Energy SLPEs (in crore) Year 2008-09

Non-Energy SLPEs (36)

Energy SLPEs (4)

Total SLPEs (40)

Total Income

11153.1

18133.9

29287

Total Expenditure

10267.9

25196.3

35464.3

885.2

-7062.4

-6177.2

Total Income

13607.8

20903

34510.8

Total Expenditure

12823.4

23284.4

36107.7

784.4

-2381.3

-1596.9

Total Income

14450.1

22165.9

36616

Total Expenditure

13566.6

26570.2

40136.8

883.5

-4404.3

-3520.8

15192.7

27046.6

42239.3

Total Expenditure

14583

35119.8

49702.8

Net Profit/Loss

609.7

-8073.2

-7463.5

Financial Indicator

Net Profit/Loss 2009-10

Net Profit/Loss 2010-11

Net Profit/Loss 2011-12

Total Income

Source : Bureau of Public Enterprises, UP.

Corporation Ltd., and UP Alpasankhyak Vittiya Evam Vikas Nigam Ltd. In the case of energy sector SLPEs, except UP Rajya Vidyut Utpadan Nigam Ltd., all others were making losses. Although 31 out of 36 non-energy SLPEs were profit-making, 90 per cent of the total profit was contributed by six SLPEs only. It needs to be noted that the profit earning SLPEs receive bulk of their revenue from the government or semi-government work/projects. They are mostly dependent on the works awarded by various departments

of the government itself and hardly participate in tenders to obtain works from non-government sector. They are thus operating in a non-competitive environment and basically supported by government orders.

Ratio Analysis We now discuss the performance of the selected SLPEs based on the financial ratios. The analysis is done separately for the non-energy SLPEs and the energy SLPEs. Table-4 gives the descriptive statistics of financial ratios for non-energy and energy SLPEs like minimum and 89

The Journal of Institute of Public Enterprise, Vol. 38, No. 3&4 © 2015, Institute of Public Enterprise

maximum value, average and standard deviation. These values are indicative of large variations in the financial performance of the SLPEs.

Non-Energy SLPEs

The low liquidity of non-energy SLPEs explains their poor financial conditions. However, the picture is a bit different in the case of quick ratio or acid test ratio. Except UPSKNN, UPJN, UPPCL and UPSRTC, all other SLPEs are able to maintain a quick ratio around one, which is considered to be ideal. The liquidity position cannot be termed as satisfactory as current ratio for most of SLPEs is below 1.50. It implies that SLPEs have low margin to meet their short-term obligations. In fact, the situation is alarming in the case of UPSRTC, UPPCL, UPJN and UPSKNN which have quick ratio below 0.50. Such SLPEs definitely need to work on managing their working capital better in order to improve their short term solvency.

Liquidity Ratios : The analysis of SLPEs in terms of their liquidity shows a mixed picture (Table-5). Short-term solvency as shown by current ratio seems to be a cause of concern, though most of them have enough working capital to meet their current obligations. Except UPSCL and UPAEVP none of the SLPEs are able to maintain ideal current ratio (2:1). In fact, UPSRTC’s current ratio is only 0.35. Low financial liquidity may lead to reduced rate of return and foregoing of profitable opportunities. Table-4 : Descriptive Statistics of Financial Ratios Ratio

Liquidity Ratios CR

QR

Profitability Ratios GP

RoCE

NW

Leverage Ratios

Value added to Capital Employed

DE

SGF

VA/CE

VA/E

0

0.5

0.05

-3.61

Non-energy Minimum

0.35

0.32

-0.04

0.69

3.2

Maximum

2.16

1.59

39.85

50.06 341.14

0.92

1

3.93

19.83

Average

1.36

0.97

7.41

24.89

54.01

0.19

0.92

1.01

6.37

Std. Dev.

0.51

0.48

10.96

16.69

96.22

0.31

0.15

1.14

5.66

Energy Minimum

0.97

0.75

-23.23 -25.24 -639.22

0.07

0.51

-0.16

-130.55

Maximum

5.46

5.16

32.77

1.11

0.95

0.19

14.77

Average

2.95

2.68

8.88

-3.03 -161.22

0.76

0.7

0.08

-23.29

Std. Dev.

1.86

1.85

24.32

14.86 318.67

0.47

0.19

0.17

71.52

Source : Author’s calculations.

90

6

-1.84

Financial Performance of State Level Public Enterprises in Uttar Pradesh

Profitability Ratios : Regarding operational performance based on total income, except UPSRTC which show a marginal gross loss, all other SLPEs are earning profits. However, as far as the adequacy is concerned, high profits seem to be enjoyed only by UPAEVP as the mean GP ratio stands significantly low for the rest. Even the overall mean GP ratio of 7.41 reflects the same scenario. The analysis of the operational performance based on investment reveals that at least seven out of twelve SLPEs are able to earn a high

return on capital. Remaining all others present a dismal picture. The mean RoCE score (24.89) indicates an average level of performance with reference to efficient utilisation of resources. On examining the operational performance based on equity shareholder’s funds, it is found that at least half of the concerned SLPEs are earning positive returns whereas many of them are lagging far behind. The considerable variation in the mean NW ratio scores is confirmed by a substantially high

Table-5 : Financial Performance of SLPEs (Non-energy) SLPEs

Liquidity Ratios

Profitability Ratios

Leverage Ratios

Asset Manage ment and Productivity Ratios

CR

QR

GP

RoCE

NW

DE

SGF

VA/CE

VA/E

2.16

1.59

14.64

25.98

3.20

0.09

0.99

0.13

-3.61

UPSF & EC 1.33

1.28

0.95

20.89

16.11

0.28

1.00

1.26

10.13

UPSAICL

1.70

1.32

3.04

31.79

49.80

0.10

1.00

0.60

5.73

UPSICL

1.20

1.06

1.74

19.32

44.52

0.92

1.00

0.14

1.70

UPBVK

1.45

1.35

4.30

20.78

15.97

0.00

0.84

1.15

19.83

UPSKNN

1.02

0.40

2.89

49.97

24.81

0.00

1.00

1.92

7.88

UPSBCL

1.14

1.00

4.00

4.00

29.56

0.05

1.00

3.93

7.22

UPRNL

1.11

1.03

4.14

39.12

25.20

0.00

1.00

0.81

8.75

UPAEVP

2.02

1.53

39.85

11.26

11.30

0.00

NA

0.05

3.98

UPJN

1.83

0.44

9.49

0.69

341.14

NA

1.00

0.06

3.32

UPPCL

1.03

0.32

3.95

50.06

32.47

0.00

0.84

1.05

8.14

UPSRTC

0.35

0.32

-0.04

NA

NA

0.68

0.50

NA

3.43

UPSCL

Source : Authors calculation.

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standard deviation of 96.22. Except UPJN and UPSCL which record NW of 341.14 and 3.2 respectively, other SLPEs have net worth between 11 to 50 per cent. The low NW ratios of most of the SLPEs reveal how poorly the SLPEs have performed. The profitability indicators broadly suggest diversity among the SLPEs. Financial self-dependence along with a certain level of profitability or surplus is quite essential to serve the larger objectives of socio-economic development. The SLPEs in UP do not even maintain their profit and loss accounts properly. It would be worthwhile to quote the CAG report 2011 on this point : “In the absence of accounts and their subsequent audit, it cannot be ensured whether the investments and expenditure incurred have been properly accounted for and the purposes for which the amount was invested have been achieved. Thus outcome of the investment of the government in such SLPEs remained outside the scrutiny of the State Legislature. This delay in finalisation of accounts apart from being a violation of the provisions of the Companies Act, (1956), may also result in risk of fraud and leakage of public money.” Leverage Ratios : On the financial strength front, all the SLPEs present a ‘low-geared’ proposition. In the case of 92

D/E ratio, only a few SLPEs have managed to reach to the score of 1. It implies that even the best performing SLPEs could not attain the minimum acceptable score of 2 which is considered as the norm by the financial institutions for project financing. The remaining of the SLPEs are quite below the norm-level and five of them show a zero D/E ratio. While in a positive sense, this also can be interpreted as their lesser dependence on debts or outsiders’ funds in comparison to shareholders’ funds, yet the fact that such no-risk or very low-risk bearing capacity does not assure a firm of high profits, cannot be ignored. As far as the share of state government’s funds in the total funds of SLPEs is concerned, the mean SGF ratios scores say it all. Except seven SLPEs which show the score of 1, every other SLPE stands with more than half of their total funds as the share of state government. The discernible excess of state government’s hold in the concerned SLPEs cannot be considered a very healthy indicator as in this era of liberalisation, privatisation and globalization (LPG) and public-private partnerships, a more diversified structure of investment would help in accruing greater profits indeed. Given that the leverage ratios measure the long-term financial stability of a business unit which in turn is dependent on its ability to meet long-term

Financial Performance of State Level Public Enterprises in Uttar Pradesh

obligations, the concerned SLPEs can be put under the category of below satisfactory performance. Nonetheless, attempts to attract additional capitalfrom varied sources for further expansion and production, with viable measures to deal with the riskiness attached to each of the sources can, undoubtedly, help them to compete efficiently with their private counterparts. Divestment of government equity stake in SLPEs will not only release huge financial resources but also increase the participation of general public and private players. Increased participation of public and private sector will also be helpful in increasing financial accountability as a whole. Asset Management and Productivity Ratios : A perusal of the asset management and productivity ratios of the SLPEs shows mixed results. The VA/CE ratio is quite low for most of the SLPEs. The only ones who have shown a capital turnover ratio of more than 1 are UPSF& EC, UPBVK, UPSKNN, UPSBCL and UPPCL; with UPSBCL emerging as the best performer with a consistently high score. Hence the scenario is miserable for most of the units in terms of utilization of the employed capital in revenue generation, which is also visible in the low mean VA/CE score (0.76) computed for all the SLPEs together. To sum up, the management of most of the undertakings has not

been able to efficiently convert its capital employed into sales and thereby revenue. Again, asset management efficiency based on the productivity of employees too does not show an encouraging picture. Even the best performer in the group, namely UPBVK, exhibits a small mean VA/E ratio score of 6.37. However, except UPSCL all the SLPEs have shown a positive ratio. Employees, being one of the major components of cost incurred by an organization, must be productive and efficient enough to add value to the later. In case they are not able to convert the expenses incurred on them into revenues, they prove to be a burden for the organization. The SLPEs must look into the performance of their employees in terms of their per unit cost to the undertaking and should focus on enhancing their efficiency on one hand, and reducing the overall operating expenditure on the other hand. Human resource redundancies, if any, must be done away with before it is too late.

Energy SLPEs Financial performance of energy SLPEs is totally different from non-energy SLPEs and needs to be discussed separately. There were large variations even among energy SLPEs (Table-6). Liquidity ratios reflect comfortable liquidity situation except in case of UPTCL. CR and QR are more than 5 in the case of 93

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UJVNL. High liquidity ratio shows inefficient product cycle and loss of potential investment opportunity. On the other hand, UPTCL has CR and QR less than one, which indicates poor working capital management. Its current assets are less than its current liabilities. UPPCL and UPRVUNL are enjoying comfortable level of CR but have high QR. Power utilities have to reorient their working capital management strategies so that they could maintain neither very high nor very low liquidity. Profitability indicators show huge variations among the power utilities. UPPCL is incurring huge losses which are also reflected in negative RoCE. Due to continuous losses its net worth has eroded by more than 600 per cent. Thus, UPPCL is experiencing a huge fiscal strain in recent years. This poor financial position can be ascribed to the reasons like low user charges, low collection rate, high transmission and distribution losses, high power theft and highly

subsidized or free power to certain sections. UPRVUNL also has very low profitability as reflected from low GP (4.66) and RoCE (2.82) ratios. However, UPTCL and UPJVNL were able to record satisfactory gross profits (GP 21.32 & 32.77 respectively) but their return on capital employed (RoCE 4.30 & 6.00 respectively) is still below comparable levels. Surprisingly, none of the power utilities was able to avoid erosion of its net worth. Unlike non-energy SLPEs which were mainly financed through equity funds, energy SLPEs are having mix of both debt and equity but none of them have D/E ratio near to 2 which is considered to be an ideal level. Thus, it indicates a low gearing in energy SLPEs which is indicative of low returns as well as poor long terms financial stability. Poor performance of energy SLPEs is also reflected from asset management and productivity ratios. UPPCL has a

Table-6 : Financial Performance of SLPEs (Energy) SLPEs

Liquidity Ratios

Profitability Ratios

CR

QR

UPPCL

2.77

2.75

UPRVUNL

2.60

2.04

4.66

2.82

-1.92

UPTCL

0.97

0.75

21.32

4.30

UJVNL

5.46

5.16

32.77

6.00

Source : Author’s calculations.

94

GP

RoCE

NW

Leverage Ratios

Asset Management and Productivity Ratios

DE

SGF

VA/CE

VA/E

-23.23 -25.24 -639.22 0.07

0.95

-0.16

-130.55

1.11

0.51

0.18

14.77

-1.84

0.95

0.60

0.19

11.78

-1.90

0.94

0.74

0.13

10.84

Financial Performance of State Level Public Enterprises in Uttar Pradesh

negative value added to capital employed ratio and negative labour productivity. In the case of other power utilities, value added per unit of capital employed and labour productivity is positive but far from satisfactory. Asset management and productivity ratios show not only under utilization of capital employed but also inefficient employee management. In short, lack of professionalism and management has been a constant deterrent in the swift performance of SLPEs. It has not only hampered the progress of these units in the competitive markets but has also contributed to their poor profitability. The Audit Reports of Comptroller and Auditor General of India (2011) shows that the SLPEs losses of 35,838.70 crore and infructuous investments of 315.46 crore were controllable with better management. Thus, there is tremendous scope to improve the functioning of the SLPEs and minimize losses.

performance of SLPEs assigned high importance to timely monitoring and incentivisation of these units. The Commission recommended that :

Attempts have been made to improve the financial health of the SLPEs through one-time settlement (OTS) schemes for loans defaulted upon by them conversion of loans into equities for improving the balance sheet and waiving off of interest payable on loans provided by the state government. However, all these measures put a huge financial burden on the state exchequer. The Thirteenth Finance Commission while discussing the

The state government has been providing support to SLPEs through subsidies. Total subsidies to SLPEs increased from 6572.46 crore in 2008-09 to 11566.63 crore in 2011-12 (Table-7). UP Jal Nigam received the lion’s share in total subsidies. In 2011-12, it alone got a subsidy of 11,105 crore, which amounted to 97 per cent of total subsidy to SLPEs. The next largest share of subsidy went to UP Power Corporation Limited.

“An apex monitoring body under the administrative control of the Finance Department should be set up to take stock of the financial health of the PSEs on a regular basis. There should be a laid down policy that all PSEs (except the ones in the welfare sector) should become financially viable (exclusive of grants/subsidies provided by the state government) within 3 to 5 years of its inception and should earn profit in at least two out of three consecutive years. All the enterprises should be compulsorily rated by an independent rating agency which will provide a benchmark and incentivize them to do better (as this will help them to access cheaper loans from the market)”.

State Subsidies to SLPEs

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Total subsidy to SLPEs accounts for about 11 per cent of total non-plan revenue expenditure of the state. The subsidy to SLPEs constituted about onethird of the gross fiscal deficit (GFD) of the state in 2008-09. This proportion increased to three-fourth of GFD

by 2011-12. Thus, the SLPEs are putting enormous burden on state finances due to the heavy losses suffered by them. However, most of the subsidy was given to the UP Jal Nigam, which is a public utility responsible for drinking water supply, considered as a merit good.

Table-7 : State Subsidy and Grants to SLPEs (in crore) S.No.

Name of the SLPE

2008-09

2009-10

2010-11 2011-12

Non-energy SLPEs 1

UP Matsya Vikas Nigam Ltd.

4.16

4.05

5.31

6.58

2

UP State Food & Essential Commodities

1.11

1.11

1.11

1.11

3

UP Small Industries Corporation Ltd.

0.25

0.25

0.25

0.25

4

UP State Handloom Corporation Ltd.

0.61

0.59

0.57

0.56

5

UP Handicrafts Development & Marketing

7.47

6.83

6.72

6.66

6

UP Alapsnkhyak Vittiya Evam Vikas Nigam Ltd.

0.38

0.27

0.27

0.27

7

UP Mahila Kalyan Nigam Ltd.

0.76

0.74

1.09

0.99

8

UP Jal Nigam

6150.12

7626.65

9

UP Anusuchit Jati Vitta Evam Vikas Nigam Ltd.

100.41

150.3

10

Total (1 To 9)

6265.27

7790.79

9547.62 11263.34

9420.49 11105.07 111.81

141.85

Energy SLPEs 11

UP Power Corporation Ltd.

267.75

267.75

267.75

267.75

12

UP Jal Vidyut Nigam Ltd.

24.82

24.82

24.82

24.82

13

UP Rajya Vidyut Utpadan Nigam Ltd.

14.62

13.32

12.02

10.72

14

UP Power Transmission Corporation Ltd.

0

0

0

0

15

Total (11 to 14)

307.19

305.89

304.59

303.29

16

All (10+15)

6572.46

8096.68

9852.21 11566.63

Source: : Bureau of Public Enterprises, UP.

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Financial Performance of State Level Public Enterprises in Uttar Pradesh

Budgetary Outgo Towards SLPEs Subsidy and grant do not measure the full impact of SLPEs on the state budget. Total budgetary outgo towards SLPEs includes outgo towards equity, loans, grants/subsidies, guarantees issued, loans written off, loans converted into equity and interest waived in respect of SLPEs. The details of budgetary outgo towards SLPEs for the three years ended 2011-12 are given in Table-8. The total outgo towards equity capital, loans, grant and subsidy to SLPEs was 8111.91 crore in 2009-10. It declined somewhat to 7233.22 crore in 2010-11 and stood at 7446.16 crore in 2011-12. In addition, substantial amount of loans were converted into equity to help the SLPEs. The state government has also been issuing guarantees to the SLPEs on market loans, which adds to contingent liabilities of the state.

Kaur et al. (2014) observed that “the strong presence of contingent liabilities calls for a holistic assessment of debt position of states by reckoning their offbudget fiscal position, including the impact of operations of state public sector enterprises”. Direct financial assistance in the form of subsidy and grants and indirect financial obligations in the form of equity capital, loans, issued guarantees and commitments form a huge financial stress on the state finances. It also leaves little space for fiscal maneuvering in favour of developmental expenditure.

Disinvestment, Privatization and Restructuring of SLPEs A large number of state SLPEs have become sick/non-working over time. Substantial financial resources, manpower and capital assets are locked up

Table-8 : Budgetary Outgo towards SLPEs (in crore) Particulars

2009-10

2010-11

2011-12

Equity Capital

5146.82

3502.49

4325.5

Loans

1021.96

113.2

11.85

Grants and Subsidy

1943.13

3617.53

3108.81

Total Outgo

8111.91

7233.22

7446.16

Loans converted in equity

1943.13

3617.53

3108.81

Guarantees Issued

6245.25

10549.5

1194.65

Guarantee Commitment

7380.11

17718.22

9578.49

Source : Report of CAG on the Working of Public Sector Undertakings in UP, (2013).

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The Journal of Institute of Public Enterprise, Vol. 38, No. 3&4 © 2015, Institute of Public Enterprise

in these sick/non-working SLPEs. Taking note of this serious problem, the state government formulated the policy of privatization/disinvestment of SLPEs in June 1994. The policy provided for review of all enterprises (excluding those engaged in social and welfare activities and public utilities) whose annual loss was more than 10 crore and which had eroded their net worth by 50 percent or more. An Empowered Committee was constituted in December, 1995 to review and decide cases of privatization/disinvestment/reference to Board for Industrial and Financial Reconstruction (BIFR) and to recommend other alternatives such as partial privatization, management by private entrepreneurs and lease to private entrepreneurs, etc. On the recommendation of the Empowered Committee a State Disinvestment Commission and a Central Committee were set up in January, 2000. The Central Committee was assigned the task of giving suggestions to the State Disinvestment Commission on the issues related with reform in working, merger, reorganization, privatisation or closure of the SLPEs. It was mandated that the State Disinvestment Commission would forward its recommendations to the Central Committee (CAG Report on UP, 2011). In April 2003, a High Power Disinvestment Committee was constituted for disinvestment of State SLPEs. In June, 98

2007 the state government issued guidelines for selection of consultants/ advisors, developers for Public-Private Partnership (PPP) projects and private partners for disinvestment in UP. The guidelines provided for formation of various committees, prices to be followed for disinvestment, appointment and functions of lead adviser, legal adviser, accounting advisers, assets valuers, procedure to be followed for bidding and methodologies of valuation of enterprise. A decision was also undertaken by the state government in June 2007 to privatise/sell the sugar mills of UP State Sugar Corporation Ltd (UPSSCL) including all its subsidiaries. Consequent on these decisions the sale of 10 mills of UPSSCL was finalized in July 2010. In March 2011, the sale of 11 mills of UP Rajya Chini evam Ganna Vikas Nigam Ltd was also finalized. As per CAG (2013) report no further disinvestment was done after the year 2010-11. However, the achievement on the front of disinvestment/privatization/restructuring cannot be termed satisfactory. Disinvestment is still required in many more SLPEs and private sector and retail investors should also be allowed to participate in the decision making.

Status of Non-Working SLPEs According to the CAG Report on the state finances of UP (2013), there were

Financial Performance of State Level Public Enterprises in Uttar Pradesh

43 non-working SLPEs in the state at the end of fiscal year 2012. Out of these, 12 SLPEs had gone into liquidation process. During the year 2010-11, three companies were finally wound up. The companies opting for winding up by the court order are under liquidation for a period ranging from 8 years to 35 years. In respect of the remaining 31 units, closing orders/instructions have been issued but liquidation process has not yet started. Though, the process of voluntary winding up under the Companies Act is much faster, but it has not been adopted by many companies. Such a step needs to be adopted for speedy disposal of the cases. The government may take a decision regarding winding up of 31 non-working SLPEs where no decision about their continuation or otherwise was taken after they became non-working. The government may consider setting up a separate cell to expedite closing down the nonworking companies.

Conclusion and Policy Implications The paper has analysed the status of financial health of SLPEs of UP in terms of various ratios. The analysis of liquidity ratios showed that most of SLPEs were able to meet their short-term obligations. Profits earned by most of the SLPEs were very small. Operating performance ratio shows that only seven

out of sixteen major SLPEs are able to earn a good return on their capital. However, mean of net worth ratios of SLPEs is negative indicating poor operating performance and failure to attract new investments. Leverage analysis shows SLPEs were heavily dependent upon the state government for the capital needs. The apparent locking of huge funds in the SLPEs cannot be considered a good sign in terms of fiscal management of SLPEs. Similarly poor fiscal management in terms of utilization of capital employed in revenue generation is reflected from the low mean VA/CE ratio. Productivity ratios too reveal dismal performance. Most of the SLPEs show low per employee returns, in many cases failing to recover cost incurred upon them. Efforts have been made by the state government for restructuring the SLPEs through disinvestment and privatization. However, little progress has been made in this regard. Winding up of nonworking SLPEs has also been very slow in the state. Lack of planning on the commercial operations front of SLPEs gets reflected in their poor financial performance. The Uttar Pradesh Resource Mobilisation and Taxation Reforms Committee, (1996) while reviewing the working of the UPSRTC observed that: “There seems to be no strategic 99

The Journal of Institute of Public Enterprise, Vol. 38, No. 3&4 © 2015, Institute of Public Enterprise

thinking in the corporation regarding its future… This needs to be reversed and the corporation should frame a plan whose objective should be viability of operation and provision of adequate services to the people.” The analysis reveals that power utilities, especially UPPCL, put heavy financial burden on the state resources. Low user charges and high operation inefficiencies have been the major reasons for financial woes of the power utilities (Ahluwalia, 2000). Thus, there is a need of determined efforts from the state to unshackle the power sector from political and electoral considerations. The SLPEs need to be insulated from the frequent political interference and politicisation. Autonomy at managerial level with accountability is the need of the day to make SLPEs financial viable. The SLPEs are putting a serious financial burden on the state budget and many of them are not serving the purpose for which they were set up especially. “Subsidies have been seen as a disincentive. There could be an inherent fear that subsidies would be withdrawn, if the profitability of a SLPE was to be maximized. That may also have been a reason for fixing targets lower than the optimum” (Kanchan & Herlekar, 2013). While assistance in the form of subsidies to these public policy instruments 100

is justified, it is draining the state’s resources and misuse by the SLPEs in this manner cannot be afforded for long. A time bound programme of restructuring of the state SLPEs should be adopted to deal with this unhappy situation. The non-working units should be wound up as early as possible. Some of the working units which are not serving useful social purpose should be closed down. The remaining SLPEs should be revamped to improve their working. These should be managed in a professional manner and state intervention should be minimized. Special attention needs to be paid to the power sector utilities, which are running into huge losses and straining the government finances. To expedite the procedure of closure of non-working companies the government may consider setting up a separate cell. Among other factors plaguing the health of SLPEs, lack of man-power planning is an important factor. CAG Report (2011) highlights this problem in the following words : “The actual available manpower of superintending, executive and assistant engineers was much in excess of the sanctioned strength. No assessment was made for manpower requirement considering the increase in units/zones and also the subcontracting of majority of the works.”

Financial Performance of State Level Public Enterprises in Uttar Pradesh

Rightsizing the manpower would be an important step in the restructuring of the SLPEs. Along with this, SLPEs should make strong efforts to improve their internal financial management and pay attention to timely execution of works, cost effective procurement of materials and upholding of needed control records. Finally, the accounts should be streamlined and updated in time. It is high time that the restructuring of SLPEs should be put on agenda of economic reforms at the state level to make them financially viable and to enable them to serve the purpose for which they were created. References Ahluwalia, M.S. (2000) “State Level Performance Under Economic Reforms in India”, paper presented at the Centre for Research on Economic Development and Policy Reform Conference on Indian Economic Prospects : Advancing Policy Reform, May 2000, Stanford University. Bhatia, H.L. (2009) Public Finance, (26th Ed.), Vikas Publishing House Pvt. Ltd., Noida, Uttar Pradesh.

CAG (2014) Report of the Comptroller and Auditor General (CAG) of India (Public Sector Undertakings) for the year ended 31 March 2013, Government of Uttar Pradesh Report No. 2 of 2014, New Delhi, Government of India. Finance Commission of India (2009) Report of the Thirteenth Finance Commission, New Delhi, Government of India. Government of Uttar Pradesh (1996) Report of Uttar Pradesh Resource Mobilisation and Taxation Reforms Committee, Vol. III, Finance Department, Lucknow, Government of Uttar Pradesh, pp. 683. Government of Uttar Pradesh (2010) Epitome of CAG’s Reports on the Government of Uttar Pradesh for the year ended 31 March 2010, Principal Accountant General (Civil Audit) Lucknow, Government of Uttar Pradesh, pp. 23-24. Kanchan, M. &Herlekar, R. G. (2013) Ailing Public Sector Undertakings : Revival or Euthanasia, Economic and Political Weekly, Volume XLVIII, No. 50, pp. 20-22. Kaur, Balbir, Mukherjee A., Kumar N. & Ekka A.P. (2014) “Debt Sustainability at the State Level in India,” RBI Working Paper Series, Department of Economic and Policy Research, July 2014. Mulay, P.& Kant, K. (2009) “Role of PSU’s and India’s Macroeconomy”, The Economic Times, 24 November.

CAG (2011) Performance Audit Report on Sale of Sugar Mills, New Delhi, Comptroller and Auditor General (CAG) of India.

Nagraj, R. (2006) “Public Sector Performance Since 1950 : A Fresh Look,” Economic and Political Weekly, Vol. 41, No. 25, June 24-29, 2006, pp 2551-2557.

CAG (2013) Report of the Comptroller and Auditor General (CAG) of India (Public Sector Undertakings) for the year ended 31 March 2012, New Delhi, Government of India.

Pillai, M.S. & Nagaraj, R. (1993) Macroeconomic Impact of Public Sector Enterprises : Comment [with Reply], Economic and Political Weekly, Vol. 28, No. 22 (May 29, 1993), pp. 1121-1124. 101

The Journal of Institute of Public Enterprise, Vol. 38, No. 3&4 © 2015, Institute of Public Enterprise

Appendix-1 : List of Working SLPEs in Uttar Pradesh Energy Sector

Trading/Business Related

U. P. Power Corporation Ltd. (UPPCL)

U.P. State Agro Industrial Corporation Ltd. (UPSAICL)

U.P. Jal Vidyut Corporations Ltd. (UPJVCL)

U.P. Small Industries Corporation Ltd. (UPSICL)

U.P. Rajya Vidyut Utpadan Corporations Ltd. (UPRVUCL)

U.P. State Handloom Corporation Ltd. (UPSHCL)

U.P. Power Transmission Corporation Ltd. (UPPTCL)

U.P. Handicraft Development and Marketing Corporation Ltd. (UPHDMCL)

Production Related

Financing

U.P. State Sugar Corporations Ltd. (UPSSCL)

U.P. Financial Corporation (UPFC)

U.P. Forest Corporation (UPFC)

The Pradeshiya Industrial and Investment Corporation of U.P. Ltd. (PICUP)

U.P. Fisheries Development Corporation Ltd. (UPFDCL)

Promotional and Financing

U.P. Drugs and Pharmaceuticals Company Ltd. (UPDPCL)

U.P. Backward Class Finance and Development Corporation Ltd. (UPBCFDCL)

U.P. State Spinning Company Ltd. (UPSSCL)

U.P. Scheduled Caste Finance and Development Corporation Ltd. (UPSCFDCL)

Service Sector

U.P. Minority Finance and Development Corporation Ltd. (UPMFDCL)

U.P. Development Systems Corporation Ltd. (UPDSCL)

U.P. (Central) Sugar Seed and Development Corporation Ltd. (UP(C )SSDCL)

U.P. State Employee Welfare Corporation (UPSEWC)

U.P. (Western) Sugar Seed and Development Corporation Ltd. (UP(W)SSDCL)

U.P. State Food and Essential Commodity Corporation Ltd. (UPSFECCL)

U.P. Seed Development Corporation (UPSDC)

U.P State Road Transport Corporation (UPSRTC)

Construction

U.P. State Warehousing Corporation (UPSWC) U.P. Samaj Kalyan Nirman Nigam Ltd. (UPSKNNL) (Contd...)

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Financial Performance of State Level Public Enterprises in Uttar Pradesh

U.P. State Tourism Development Corporation Ltd. (UPSTDCL)

U.P. State Bridge Corporation Ltd. (UPSBCL)

U.P. Purva Sainik Kalyan Corporation Ltd. (UPPSKCL)

U.P. Rajkiya Nirman Nigam Ltd. (UPRNNL)

U. P. Waqf Development Corporation Ltd. (UPWDCL)

U.P. Awas and Vikas Parishad (UPAVP)

Sectoral/Sectional Development

U.P. State Industrial Development Corporation Ltd. (UPSIDCL)

U.P. Electronics Corporation Ltd. (UPECL)

U.P. Police Housing Corporation Ltd. (UPPHCL)

U.P. Women Welfare Corporation Ltd. (UPWWCL)

U.P. Jal Nigam (UPJN)

U.P. Land Improvement Corporation (UPLIC) U.P. Projects Corporation Ltd. (UPPr.CL)

— x — x —

103