Tuesday, June 2, 2015

Lateral entry and reforming public sector units

Some time back, in an article on lateral entry, I had advocated open competition to recruit for leadership positions in certain public sector entities where private sector expertise could be invaluable. So here is a choice.

In 2013, the combined turnover of India's top 15 public sector units was $330 bn, or nearly 18% of the country's GDP. Further, they sit on massive cash surpluses and have huge investment plans - SAIL plans to invest $25 bn over the next 15 years and NTPC $10 bn over next five years just on green energy projects. These companies include banks, insurers, energy exploration and marketing, mining, steel, and heavy equipment makers. They are large enough to be critical factors in influencing their respective industry itself. It is also arguably true that all of them suffer from inefficiencies arising from poor management, political interference, and, in many cases, weak and compromised leadership. 

In this context, two sets of reforms have the potential to be transformational. One, lateral entry to the top leadership position in these firms through a very rigorous, open competitive process involving company insiders, public sector executives, civil servants, and private sector executives. Second, accord complete operational autonomy consistent with good corporate and public governance standards. This should include flexibility in procurements and investment decisions that are not shackled by excessive regulatory and judicial oversight.

Open competitive recruitment to leadership positions coupled with complete operational autonomy, far more than the piecemeal disinvestments, can be the loudest and most credible signal of the government's commitment to reforming these entities. Further, it can dramatically improve the performance and therefore valuations of these entities, thereby increasing the value capture from their subsequent divestment.

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