Salvaging SAIL

LAST WEEK'S DECISION of the Union Cabinet on the restructuring plan for the country's ailing steel conglomerate - the Steel Authority of India Limited (SAIL) - represents a belated acceptance of the inevitable. The SAIL turnaround strategy based on the reports of the Industrial Development Bank of India (IDBI) and Mckinsey's (consultants) has been with the Government for months now and there is no valid reason for the decision on loan- waiver of the order of Rs. 5,454 crores to have been kept under wraps for so long. What however marks a bold stroke in the Government's decision is the empowering of the management of SAIL to hive off power, oxygen and fertilizer plants which do not constitute the core business of the public sector giant with a turnover of around Rs. 15,000 crores.

The travails of SAIL in the post-liberalisation period have had much to do with the uneconomic nature of its production process, given the fact that most of the steel plants under SAIL had to contend with obsolete technologies and excessive manpower. Intense competition from imports aggravated by demand recession during the last three years has virtually crippled SAIL. The Government of India, owning around 86 per cent of the equity stake in SAIL, has had to watch helplessly while the dividend rate on the equity capital of Rs. 4,130 crores shrank from 6.6 per cent in 1995-96 to zero in 1998-99, after which in 1999-2000, the company suffered a net loss of Rs. 1,574 crores.

A comprehensive turnaround strategy for SAIL will have to go far beyond financial restructuring which is what the debt waiver and the Government's willingness to guarantee external borrowings of the company would facilitate. Annual interest savings of the order of Rs. 400 crores to Rs. 500 crores apart, there is no knowing how much the proposed sale of the company's non-core facilities - power, oxygen, fertilizer and special steels - will generate by way of much-needed cash support. As against this, the daunting magnitude of severance payments, for the surplus staff of around 50,000 whom the company may have to part with, would pose a formidable challenge. Even apart from the severe financial strains which the ailing steel giant would find difficult to withstand, on this account, the political fallout can by no means be underestimated. The Union Cabinet seems to have invested too much confidence in the proposed committee to be headed by the Cabinet Secretary and comprising the Secretaries for Finance and Steel, which is to be charged with the task of implementing the restructuring strategy for SAIL. The decision to seek strategic partners for the Alloy Steel plant at Durgapur, the Salem Steel plant and Visveswarayya Iron and Steel, which is a euphemism for privatisation, cannot be put through without the cooperation of the State Governments concerned. As for the beleaguered SAIL subsidiary, Indian Iron and Steel Company (IISCO), a mere write- off of accumulated losses can only be a palliative. Much as the West Bengal political establishment would resist it, privatisation of IISCO with an inexorable component of modernisation and downsizing seems to be the only viable course.

The SAIL bail-out strategy involves a rather dubious device of applying the Steel Development Fund (SDF) towards the correction of an inflated debt component in the capital structure of the company. That TISCO and other newer private sector steel companies could legitimately claim the benefit of SDF support for mending their own finances is a possibility which the policymakers seem to have overlooked.

That the market scenario for steel has qualitatively improved during the current year - both in terms of domestic and export demand - is a good augury for SAIL. Yet without significant control of operational cost, especially employee cost, the company might continue to languish as a giant in torment.

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Section  : Opinion
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