States: Andhra Pradesh; Rocky Reform Road

With state-owned enterprises failing to deliver, Andhra Pradesh CM Chandrababu Naidu takes several measures to generate funds.

Getting rid of white elephants is not easy. Andhra Pradesh Chief Minister N. Chandrababu Naidu, armed with a Rs 2,200 crore World Bank loan and a restructuring programme, is learning this the hard way. Naidu, who takes pride in being called the CEO of Andhra Pradesh wants to close, downsize or merge loss-making state-owned enterprises (SOEs). But his grandiose plan has run into rough weather. While employees of a couple of these companies have accepted the Government's golden handshake, others are reluctant, thus putting a spoke in his reform programme.

Andhra Pradesh Scooters Limited, the first enterprise to down its shutters during the Congress rule in 1992, is still to pay terminal benefits to its 550-odd employees. Naidu has managed to close the Andhra Pradesh Fisheries Corporation and Republic Forge Company without much protest, but the move to shut Allwyn Auto Limited has run into trouble with 819 of its 1,734 employees refusing to accept the golden handshake. The employees are out on the streets challenging the Government's right to wind up the company's operations.

"The Government is not sensitive to the human problems involved," complains Congress Legislature Party leader P. Janardhan Reddy. Sensing employees' resistance and possible hurdles, the Government has opted for a three-stage restructuring process.

THE LOSSES

The loss from 39 SOEs rose from Rs 13.35 crore to Rs 223.68 crore between 1994 and 1997.

The return on investment fell from 7.65 per cent to 1.87 per cent during the same period.

THE MEASURES

Using the Rs 520 crore mobilised from the Vidyut Bond to pay a part of the state's high-cost debts.

Floating an infrastructure corporation to tap the capital market for an additional Rs 1,000 crore.

Selling non-performing assets of loss-making SOEs.

A working group, set up in 1995 (when Naidu was the state finance minister) and headed by retired civil servant K. Subramanyam, initially recommended measures after assessing the potential and financial performance of the SOEs. These were then examined by a cabinet subcommittee before being okayed by the Cabinet. However, the process has been so slow that plans to wind up sick units like AP Small Scale Industrial Development Corporation (APSSIDC), AP Textile Development Corporation (APTDC), AP Handicrafts Development Corporation and AP Travel and Tourism Corporation have been delayed. Now cash flow to these SOEs have dried up.

The state has already paid heavily for the delay. In the three years ending 1996-97, the combined losses of the 39 SOEs rose from Rs 13.35 crore to Rs 223.68 crore while the return on investment fell from 7.65 per cent to 1.87 per cent. Individual companies have fared worse. APTDC, launched to help weavers outside the cooperatives, has helped just 5,000 of them in 25 years. APSSIDC, set up to procure materials and market finished products, has outlived its objectives because materials like cement, steel and aluminium sheets are freely available today. And the Andhra Pradesh Meat and Poultry Development Corporation has become redundant following the success of the poultry producers network, which has made the state the country's egg basket.

The Government has no option but to restructure the SOEs as it is a recommendation of the World Bank to reduce wasteful expenditure and reduce debt in order to make available funds for priority areas-health, nutrition, education and development and maintenance of essential irrigation and rural road networks. However, with elections due in the state next year, Naidu is playing safe. For the first phase that started on October 1, the Government has selected 12 small and medium enterprises "that operate in competitive markets and whose restructuring and privatisation would not involve complex institutional and social issues".

The move is likely to affect some 14,000 employees but only 1,450 of them will actually lose their jobs. The majority of them, about 5,800, are workers of Nizam Sugars Limited, Allwyn Watch, Andhra Pradesh Irrigation Development Corporation and four cooperative spinning mills, which are to be privatised only by 2001. The Government's pre-condition is that buyers must retain all employees or pay a special severance packet. But that may be a tall order. Already, a buyer has backed out after signing the MOU for the Hindupur Sugar Mill.

Naidu wants to ensure that terminated employees get additional money apart from the benefits provided under labour laws. The Government has ordered a gratuity of 45 days pay for every working year instead of the customary 15 days pay a year. Moreover, all those eased out are to be covered by a social safety net programme funded by the Department of International Development, UK. "Some of them will be helped to upgrade their skills for private jobs or start self-employment ventures," says P.P. Williams, the state commissioner of public enterprises.

Significantly, those cashing in on the voluntary retirement scheme will not be re-employed in SOEs, the Government or any other state-funded organisation. This follows the World Bank suggestion to reduce staff in all government departments, excluding primary education, by 1.9 per cent a year for the next five years. "We are taking this cautious approach because the Government is expected to demonstrate the feasibility of the reform process and help build acceptance," admits a senior official.

To achieve his long-term development goals, Naidu is creating alternatives for some sick SOEs and exploring avenues for funds by tapping the capital market. His most striking success so far has been to ram through a legislation creating three entities for installing power stations and transmission and distribution of electricity in place of the monolithic Andhra Pradesh State Electricity Board (APSEB). But he is yet to find the state's share of funds to avail of several large loans from the World Bank. So when the recent Rs 100 crore Vidyut Bond mobilised nearly Rs 520 crore, the Government decided to retain the money and pay off high-cost debts. Evidently, a return of 15 per cent and Naidu's image as a reforms dynamo helped apseb. "The Government may find it easy to raise money in this manner as it has improved its credibility among lenders through several development programmes," argues a Finance Department official.

Enthused by the response, the Government is planning to float the Andhra Pradesh Infrastructure Development Corporation with Naidu as chairman to tap the capital market for another Rs 1,000 crore. "An exclusive corporation to create basic facilities for drinking water, sanitation and sewage disposals in all towns and villages through municipalities, panchayat raj organisations and development committees can help raise funds quickly," explains state Revenue Minister T. Devender Goud.

Predictably, information technology is to get special attention. The Andhra Pradesh Industrial Development Corporation has started the Hyderabad Information Venture Enterprises Limited to support information technology companies coming up in the new Hitec City. With government funds at a premium, Naidu needs all the gimmicks at his command to show that reforms are an economic priority for him-at least on paper.