Forms of Public Enterprises

UNIT 1 PUBLIC ENTERPRISE: CONCEPT

AND POLICY
Objectives
After going through this unit you should be able to:
• Understand the concept of public enterprise;
• Understand the rationale of the public enterprises;
• Differentiate between the dimensions of the public sector policies.
Structure
1.1 Public Enterprise in Economic Development
1.2 Models of Economic Growth
1.3 The Rationale of Public Sector
1.4 Public Sector Enterprise: Concept and Form
1.5 Summary
1.6 Self Assessment Questions
1.7 References
1.8 Further Readings

1.1 PUBLIC ENTERPRISE IN ECONOMIC

DEVELOPMENT
The role of the state in the lives of the people of a country has been a matter of
intense debate ever since the institution emerged centuries ago. The functions and
systems of the state have oscillated between an autocratic or a mercantilist state
(with deep penetration into the socio-economic fabrics of society) to total
unbridled laissez faire. Whenever it was found that the freedom of the weaker
sections of the community was threatened, the state made heavy inroads in
curbing the freedom of the people who wielded dominant and disproportionate
economic power. It generated, over a period of time, an antithesis leading to an
upsurge against the overbearing power of the state.
th
The emergence and decline of the public sector during the 20 Century is only a
part of this societal difference. The concentration of economic power in a few
hands, the marked economic inequalities and intense poverty among the millions in
the world compelled the state to intervene. The intervention was either regulatory
or participatory (or both).

The latter process took the forms of socialism, command economies and
centralised planning. The public sector is a product of this process and
consequent initiatives. The first half of the 20th Century saw the prevalence and
growth of the public sector in a large number of economies, industrialised as well
as developing. Towards the end of the 1970s, it was discovered that the state
organs became the instruments of uncontrolled power. The resources were
inefficiency utilized leading to low productivity and less effectiveness in most
cases. This was the experience in a number of countries necessitating a close
scrutiny and examination of the public sector. The scrutiny has become much
more imperative due to globalization and global changes in the social, political and
economic evironments which has been a trigger - indeed a powerful one.
th th
Looking back historically, the industrial revolution in the 18 and 19 centuries in
the West and the colonial rule in a number of countries left a part of the world 1
Public Enterprise: An undeveloped and consequently poor. As people became conscious of the stark
Overview realities of existing economic disparities, the need for development was felt.

Economic development was sought to be achieved in different countries at

different stages of development through divergent economic models. Though the
need for and methods and models used, have varied from period to period and
from one country to another. The ills and aberrations of the prevailing systems
led the policiy makers and the administrators to spell out strategies for changing
the economic and social order. Two distinct economic and political ideologies
th
capitalism and socialism, emerged since the second half of the 19 Century.
Their configurations demonstrated wide variations, subject to divergent cultures,
ethos and contemporary problems of development.

1.2 MODELS OF ECONOMIC GROWTH

Capitalism

Capitalism emerged when feudalism with its medieval system of land tenure lost
its relevance due to the invention of steam and new energy sources for a host of
industrial applications.

Capitalism (Burns etal, 1948) has been defined broadly as a system based on
private ownership of means of production regulated by market forces, in which
each producer seeks to maximise profit. The capital is privately owned and the
owners have the freedom to allocate and dispose of resources and to employ
workers to serve the owner interests. The system seeks to meet the economic
needs of the society through entrepreneurial efforts of individuals (or groups of
individuals) who own the resources and hire the workers. Workers, like land and
machinery are just another tool of production. The basic motivation, is to make
profit the bottomline of share holder value.

Mercantilism began to dominate the economic thinking by the end of the 17th
Century (ibid p,35) and, towards the end of the next it witnessed the decline.
In its economic dimension, mercantilism sought the growth of capital to create
industry and trade which would provide the nation-state with powerful economic
band. In effect, the activities of mercantile class were helped by the State.

Growth of trade was basic to the philosophy of mercantilism. The strength of a

nation was measured largely by its merchant fleet and the gold and silver earned
from trading. A favourable balance of trade for a country meant that its gold
and silver coffers were growing. East India Company is a classic example of
the mercantilist government in which the United Kingdom (UK) fostered export
trade by granting monopoly privileges to the trading company. The aim of
mercantilism was to strengthen the nation-state.

Most of the countries in Europe were ruled during the period by monarchs,
whose dominant interest was to strengthen their kingdom through policies of state
intervention to produce goods, both for domestic consumption and for exports,
such as woollen textiles in the U.K. or iron in France. Production of machines
and inputs for manufacturing was encouraged by all mercantilist governments,
either through subsidies or by compulsion. State regulation became the order of
the day.

It is thus interesting that the state intervention is not a new phenomenon of the
20th Century. Encouragement to and protection of domestic industry was a
deliberate state policy. Gradually, the allocation of economic resources and the
composition of national output became matters of governmental responsibility.
The systems imposed by the mercantilist states weakened during the 19th
2
Century, mainly in the face of rising demand of the colonies for independence, Forms of Public Enterprises
starting from America, where the traditions of British and European mercantilism
did not take firm roots.

Laissez Faire

The decline of mercantalism led to economic liberalism. Under this dispensation,

the individual was accorded the freedom to buy and sell, to produce and
consume, as he liked. Individualism was motivated by self-interest. The
government’s role in people’s economic activities receded in importance with
laissez faire or ‘let alone’ style of administration. The philosophy was to allow
trade to move freely and to remove governmental restrictions on production,
employment, prices, wages, and consumption. Free market economy became the
guiding force. It was assumed that it would result in furthering the common
wealth (Smith Wealth of Nations). The underlying assumption was that the sum
total of individual interests constituted the public interest. A growing segment of
the business community saw in the economic freedom an abundant scope for
profitable ventures.

Laissez faire was dominant in Britain during the Nineteenth and early Twentieth
Centuries. Even in the United States, it remained dominant as a social
philosophy, though, it waned overtime.

The theory of laissez faire, in sum, represents the maximum degree of freedom
for the individual in economic activities (investment, production, trade, distribution,
consumption), perhaps regulated only when serious concerns of national security
arose. Free enterprise system, there, is therefore the quintessence of capitalism.

This system, however, led to concentration of economic power in the hands of a

few and exploitation of the labour – The workers were subject to long working
hours and harsh working conditions, with little or minimal concern for their
welfare. Only those with advantage of wealth and concomitant social connections
succeeded. This led to wide disparities in income and wealth among people in the
society.

It was discovered that self interest could not be trusted to guide the processes of
production, income distribution and consumption. Private interest needed to be
modified, regulated and supplemented by government interventions. In Europe,
two World Wars and the widespread depression led to restoration of considerable
authoritarian control over the economic processes. While North America
remained largely wedded to free enterprise, Europe, especially, the UK, turned to
socialism.

Socialism

The ground conditions which helped sowing the seeds of socialism were the
appalling living conditions imposed by industrialisation in the early 19th Century.
The towns became overcrowded as people were forced out of rural
occupations and ways of life. Profits earned by the industrialist class were high
but wages to the workers were low and the living conditions of the wage
earners were miserable. Some reformist measures were set in motion in England
after 1832 with a slant towards humanitarianism – movements to protect child
and female labour. Several social thinkers and activists, however, developed the
belief that those conditions cannot be made better under the prevailing capitalist
order. They felt the need for creation of a new social system to undo the evils
caused by the capitalistic system.

3
Public Enterprise: An As the capitalist model of economic development was associated with the
Overview exploitation of both workers and consumers from the very inception of the
Industrial Revolution in the 18th Century, the consequent economic and political
pressures led to a new philosophy of social organisation. It took the form of
socialism. It was an alternative economic social order in which a major part, if
not all, of the economic resources came to be directly controlled by government
through ownership of means of production, and meeting the needs of the society
through regulated production and distribution.

The rationale of the socialist doctrine rests on three premises: (a) capitalism as a
system builds itself through monopolistic activities; (b) it generates glaring
inequalities of income and wealth; and (c) it perpetuates poverty among a large
segment of the population. These could be ameliorated through the Government
ownership of the means of production and distribution.

The trigger for the socialist movement was provided by the French Revolution
(18th) century revolution) which dismantled a political and social order dominated
by the French Catholic Church and nobility. A dominant variety of socialism,
however, took shape only with the October Revolution in Russia inspired by the
Marxian philosophy propounded in Marx’s The Communist Manifesto and Das
Kapital.

The adoption of the socialist doctrine by the Union of Soviet Socialist Republics,
Eastern Europe and subsequently by China and some of the newly independent
countries of Asia, Africa and Latin America, gave fillip to the public sector
assuring greater importance and role in development..

There are a number of schools and practitioners of socialism with varying

configurations. The concept translated and operationalised into practice led to
further divergencies. According to Bertrand Russell, a British philosopher,
“Socialism like everything else that is vital, is rather a tendency than a strictly
definable body of doctrines”. The essence of socialism in his view is the
advocacy of community’s ownership of land and capital by a democratic state. A
concern for the hitherto denied or deprived section of the community is a marked
feature of socialism.

Fabian Socialism

A moderate variant of socialism is the Fabian variety. In the 1880s, a group

styled themselves as Fabian Socialists, as opposed to Marxists following a
philosophy of overthrowing governments by violent means, emerged in the U.K.
The fabians as they, came to be known, which included distinguished social
thinkers like Bernard Shaw, H.G. Wells and Sidney and Beatrice Webb. The
writings and essays of the Fabian Society led to the formation of the Labour
Party in the U.K., many of whose intellectual elite were either members of the
society or closely associated with it. The Fabians believed in the inevitability of
socialism sweeping the world because of the injustices of capitalism. The Fabian
Socialists opted for a peaceful political change sharply different from the
Marxists. This evolutionary Fabian Socialism, which emerged in Britain, got
extended to Germany and some other countries of the continent (Dutt). The first
Prime Minister of independent India, Jawaharlal Nehru, broadly subscribed to the
Fabian philosophy and was committed to the non-violent form of socialism
through a democratic process.
Marxism
The radical school of socialism was propounded by Karl Marx (1818 – 1893).
The Europe’s movements of socialism in the late Nineteenth and early Twentieth
4 Centuries drew inspiration from the Marxist thesis.
Marx called his socialist doctrine as communism and scientific socialism. In their Forms of Public Enterprises
monumental work, The Communist Manifesto, Marx and Eagels (Mars &
Engles, 1948) established that capitalism was inherently a system of exploitation
and it was doomed to collapse. Labour theory of value is a marked contribution
to the literature on socialism which, in essence, means that value is created only
by human labour. Since it is only the labour-power which produces value, the
capitalist, who owns the means of production (land, buildings, machinery and raw
materials), extracts surpluses from labour and claims these as his profit.

As an ideology, therefore, communism is based on the premise that there would

always be conflict of class interests between the ‘haves’ and ‘have nots’ and a
change must occur - or be forced - if an equitable society has to be established.

The Communist Manifesto maintained unequivocally and forcefully that a new

social and economic order “can be attained only by forcible overthrow of all
existing social conditions. Let the ruling classes tremble at a communist
revolution. The proletariat, that is, the wage earners, have nothing to lose but
their chains. They have a world to win. Let the working men of all countries
unite” (Das Kapital 1867). The Manifesto states that “the history of all hitherto
existing society is the history of class struggles, implying thereby that the
capitalists and workers are opposed to each other in an adversorial position. The
cherished - but the initial phase of the communist movement was the dictatorship
of the proletariat which was anticipated eventually to lead to a classless society.
The concept questions the very basis of democracy. The Soviet State symbolised
the essence of Marxism to the world.
Other types of socialism which flourished at that time were syndicalism of
France or guild socialism or Fabian Socialism of Britain.
The state ownership of the means of production translates itself into the concept
of the public sector. The public sector is that segment of production and
distribution system in a country which is owned and controlled by the community
through the state or its organs.
The World Wars I and II ravaged a number of countries, both on the European
and Asian continents. Great depression was witnessed in 1930s. Employment
became scarce and destitution was witnessed everywhere. Thinkers of the time,
like John Maynard Keynes (propounded the General Theory of Unemployment,
Interest and Money) advocated a greater role for the government to address the
issues of unemployment, economic disequilibria and misery of the common man.
The General Theory of Keynes was published in 1936, the seventh year of the
Great Depression, when the older policy of laissez faire (minimum intervention of
the state and the operation of free markets) had failed. Unlike the traditional
policy-makers who expressed the view that depression and unemployment are
caused by supplies drying up, Keynes felt that infusion of demand for goods,
services, manpower and capital would lead to growth - demand-led growth - in
the economy. The General Theory was also supported by the market collapse of
1929 that wiped out a lot of savings and incomes of people. The only way to
arrest the downturn in the economy, the theory envisaged, was to increase
spending. It would be unrealistic to expect individuals to open their wallets during
a downturn and the only agency which could boost demand is government. The
centrality of government making massive investments to trigger growth is the
core of the Keynesian economics of state-funded job creation - “dig trenches and
fill them up”.
Mixed Economy Model
The Indian brand of socialism chose a middle path – avoiding the fundamental
doctrines of both capitalism and communism. Violent or revolutionary path was
5
Public Enterprise: An not acceptable to the Indian ethos and culture. Peace and tolerance are deeply
Overview embedded in the Indian philosophy (of different denominations).
India’s approach to economic development was a compromise between a
centrally planned economy and market economy. While the public sector
emerged in the West, particularly in the U.K. and France, through nationalisation
of existing industries, the approach of the Indian experiment was different. The
country, when it became independent in 1947, was miserably underdeveloped. It
was considered counter-productive to destroy something that was existing and
accordingly, the country decided to focus on the creation of new production
capacities and to accelerate development at minimal cost.

Although the Indian National Congress, as early as 1931, adopted a resolution at

its Karachi session which advocated nationalisation of key industries, Jawaharlal
Nehru, the first Prime Minister, who dominated the political scene, held the view
that the interest of development would be best served by utilising the resources,
the state could spare in setting up new units of production in the public sector.

The economic policy and programmes of the Congress, the ruling party, for
decades after independence, envisaged that the new undertakings in defence,
key and public utility industries and those which were in the nature of monopolies
or served the country as a whole, be publicly-owned. The Economic Policy
Report also recommended that private industry be subject to state control and
regulation and that banking and insurance be nationalised while financial
cooperatives be set up. The Report envisaged the establishment of a planning
body “to plan integrated development of the country’s economy in order to
establish a just social order eliminating exploitation in production”.

The undercurrent in the thinking was that while the existence of private sector
was transitional in nature, a transformation of the social order should be brought
about without upsetting the existing economic pattern. It observed that the private
units in the transitional period should not only be allowed to exist but, in fact,
should be given the opportunities for growth within their own spheres of activity.

The mixed economy model presupposes the existence and growth of private
enterprises along with public enterprises. It, however, envisioned that the public
sector would occupy the commanding heights of the economy. The concept of
the commanding heights was articulated further. Under the model, the role of
the private sector would be limited and controlled through a planning system. The
first Industrial Policy Resolution in 1948 implicitly spelt out the mixed economy
concept combining the essentials of the American model of market economy and
the Russian model of centrally planned economy.

It was recognised that barring a few large scale industrial undertakings in steel,
textile and sugar sectors which belonged to the industrial houses of the Birlas,
the Tatas and a few others, India possessed hardly any industrial base or
infrastructure, which could enable the country to achieve the required rate of
economic development.

The private sector had neither the financial resources of the magnitude needed
nor the capacity or experience to manage giant projects. The government had,
therefore, no option but to make investments in various socio-economic sectors
like infrastructure, industry, education, health, and other essential services. The
country needed massive investments in almost all sectors - agriculture, industry
and other tertiary sectors, in infrastructure (power, roads and road transport,
communications, railways, aviation, shipping). The development of backward and
inaccessible regions was equally urgent to bring about balanced social and
economic development of the people.
6
It was found later that, because of outdated technologies and bad managements, Forms of Public Enterprises
a large number of private sector industrial undertakings had fallen sick. To
protect the employment of these units, it was felt that it was imperative for the
government to step in the absence of any other viable alternative.

1.3 THE RATIONALE OF PUBLIC SECTOR

In this way, ideological, strategic, economic and social considerations provided,
the genesis, growth and development of the public sector in several countries like
India. A structural shift from the agrarian economy to the industrial economy
created the base for the socio-economic structural changes. In order to
accelerate industrialisation and address other economic and social problems of
the day, active involvement of the state in the processes of development became
an economic necessity for many countries, especially the developing countries.
The historical developments of the last two centuries thus provide the backdrop
of how the public sector emerged as a problem-solver to the fallouts and
ramifications of the prevailing economic systems.

The recourse to the instrument of the public sector thus emerges from at least
two strategies of economic dynamics: first, to undo what the private enterprises
do or are not able to do for the people’s welfare; and second, to accelerate the
industrial and economic development of the country in the desired direction, at the
least social and economic cost to community. The first is achieved through
takeover (or nationalisation of the existing activity); and the second by the
creation of new production or related facilities with fresh investments.

The growth of the public sector had been a global phenomenon since the 1950s
and India was no exception. By design and policy, the public sector expanded
and occupied a vital position in different economies, such as Great Britain,
France, Italy. Only the state, it was believed, could mobilise massive means to
invest in infrastructure and public utilities like railways, telecommunications and
power generation and distribution. The public sector became a major instrument
of planned economic development (Mohnot, 2003) and was viewed as its prime
mover in several countries. The state intervention was considered necessary also
to regulate the use of scarce resources depleted by war efforts and undo or
prevent the distortions arising from undiluted profit motive of private
entrepreneurs. The public sector and planned economic development became
inseparable. Bereft of ideological considerations, a practical approach adopted in
many countries through the instrumentality of state was to fill the gaps left
uncovered by private endeavours. Strategic considerations and control over
natural monopolies were other objectives.

Some important strategies adopted in India include the following:

• the state to take the initiative to set up industries or other activities

(industrial, trading infrastructural or service-related) in which the scale of
investment, gestation period and risk factors are such as to make them
unattractive to private investors;

• the industrial or other enterprises made sick by private promoters be

rehabilitated to ensure continued employment and production (Rolls-Royce in
the United Kingdom and textile mills in India are good examples);

• the state to take initiatives to accelerate the growth rate of the economy and
to change the direction of development as required by the welfare of the
populace at large;

7
Public Enterprise: An • the state to control the entity and activities of the multinationals as these
Overview were found to affect domestic economic interests;

• the state to take on the task of achieving some urgent social and socio-
economic objectives such as creating new employment opportunities, securing
balanced regional or segmental development, reducing economic inequalities
and mobilising scarce resources, such as capital and foreign exchange.

The Indian case provides a good illustration of the rationale or the raison d’etre
of the public sector. More so, with the private sector not having the wherewithal
and the will to build infrastructure – roads, railways, ports, capital intensive
industry with long gestation period involving massive investments and generating
poor returns at least in the initial stages. Massive investments could therefore,
come only through state intervention, indeed, participation.

In this context, the public ownership and control (leading to ‘commanding heights
of the economy’ with planned investments, creation of large scale capital-
intensive basic goods sector, establishment of infrastructural facilities and
prevention of the outflow of foreign exchange), was considered necessary and
desirable on economic and social considerations. It led to the establishment of
public enterprises in steel, heavy engineering, basic chemicals, oil and gas
exploration and oil refining, fertilizers and petrochemicals, energy generation and
transport and communications. These sectors were to forge strong interlinkages
with the development of other sectors of the economy including the small scale
sector.

The rationale of public enterprise thus assumed a wide spectrum of activity. It

became a powerful instrument of economic development. Social services like
health and education were also promoted by the state although not distinctly in
the form of the public sector.
The public sector in India, evolved itself through three basic modes :
• the government initiative in setting up new industries and other undertakings;
• support to existing enterprises in the domain of private initiative as
supplementary or complementary efforts;
• limited nationalisation with a focused objective - such as protection of
employment.
Nonetheless, the main thrust of the public sector was to accelerate the core,
basic and strategic industries, such as coal, power, steel, oil exploration and
refining, fertilizers, minerals. Economic security and national self-reliance were
the other underlying principles. Greater socio-economic equality and the building
up of a countervailing power against the power of private individuals and groups
were the other considerations for government to be in business.

Infact, the rationale for the establishment of public enterprises are many and
varied. A catalogue compiled by an Expert Group of United Nations Industrial
Development Organisation (UNIDO) (UNIDO, 1979) provides a comprehensive -
although not an exhaustive - inventory of developmental objectives of the public
sector:

• to adopt a socialistic model of development;

• to control strategic sectors of the economy;
• to evolve the balanced economic structure;
• to control and manage natural monopolies;
8
• to undertake tasks beyond the capability of private enterprise; Forms of Public Enterprises

• to provide a competitive element to private industry;

• to develop backward areas;
• to stimulate the advancement of weaker sections of the society;
• to increase the availability of essential consumer goods;
• to generate employment;
• to acquire, assimilate and develop technology;
• to generate foreign exchange earnings;
• to stimulate agricultural development;
• to commercialise activities traditionally run as government departments;
• to discourage the wrong use of economic power;
• to utilise economic resources optimally;
• to control the exploitation of unused natural resources;
• to help stabilise prices;
• to take over the management of ailing private sector firms;
• to develop self-reliance;
• to improve income distribution;
• to favour or accomplish structural changes in the economy.
To this tally may be added:
• to prevent or to minimise environment pollution;
• to utilise available skills;
• to forge international agreements and to facilitate international cooperation.
• to promote national brands in international markets.
In promoting the public sector, the government had also got other objectives to
attend to, such as preventing the emergence of private monopolies – as distinct
from natural monopolies, promoting import substitution, enhancing exports to save
and earn foreign exchange so vital for import of capital goods, intermediates, raw
materials and essential goods.

Some of the major objectives in setting up public enterprises, as envisaged

originally in India, could be broadly summed up in the following set:
• to help in rapid industrialization and economic growth of the country;
• to create the necessary infrastructure for economic development;
• to promote balanced regional development;
• to ensure equitable distribution of income and wealth.
• to ensure adequate supplies of essential goods and their equitable distribution;
• to assist the development of small scale and ancillary industries;
• to promote import substitution, and to save and earn foreign exchange;
• to generate resources for development.

9
Public Enterprise: An
Overview 1.4 PUBLIC SECTOR ENTERPRISE: CONCEPT AND
FORM
The term public sector (sampat, 2002) has been used in different contexts by
people of different backgrounds. It has come to mean different things in
different countries. In its widest connotation, the public sector encompasses all
economic activities of a government. It has been used to mean public enterprise
(PE), government controlled enterprise (GCE) (Mazzolini), state-owned enterprise
(SOE) (Working paper, WB), public undertaking (PU) or public sector undertaking
(PSU) or simply state enterprise or undertaking (SE or SU).

Public sector in the Indian context includes, for purposes of planning, all activities
funded out of the government budget. In this sense of the term, the size of
public sector is, indeed, very large. It includes not only the government
companies but also government departments, whether in the central or state
sector, irrigation and power projects, railways, posts and telegraphs, ordnance
factories, and other departmental undertakings, banking, insurance, financial and
other services, especially social services (like education, health and medicare,
social insurance and social security). Accordingly, public sector is a very
comprehensive term encompassing a vast array of activities undertaken through
public funding from resources raised mainly through fiscal efforts. In that sense,
it does not have a “personality” of its own. On the other hand, public
enterprises which are set up by allocation of state’s resources with a corporate
face or in any other distinctive organisational form, have their own distinct
identity. These, strictly speaking, constitute the public sector.

In many countries, economists, administrators and analysts use the terms ‘public
sector’ and ‘public enterprise’ interchangeably. Useful guidance is provided by
the International Centre of Public Enterprise. It identifies public sector by “any
commercial, financial, agricultural or promotional undertaking owned by public
authority, either wholly or through majority shareholding engaged in sale of goods
and services”.

Public enterprise, obviously, has two facets – public and enterprise. The
ownership and control of government follow public funding and the
entrepreneurial effort. The government investment is through allocated resources
in the nature of (i) equity, that is, shareholding or just capital investment; and (ii)
debt, that is, long term loans secured for the entrepreneurial activity. Ownership
is exercised through majority holding of equity shares (or investment) by the
government. The debt is also often provided by the government.

The public sector takes a number of organisational forms: departmental

enterprises, statutory public corporations, limited liability joint stock companies,
autonomous organisations and non-profit organisations.

To start with, a clear distinction needs to be recognised between a public sector

enterprise which is owned by government, on the one hand, and a public
company registered under the Companies Act, but privately owned (which also
has both equity and debt components), on the other. A public company -
privately owned - also has a corporate form, with both cost and profit centres,
set up under the provisions of corporate law, which is applicable both to public
sector enterprises and public companies in the private sector. A primary
distinction is that a private company owes its origin to the efforts of individual
promoters with the ownership of a sizable chunk of shares to exercise both
ownership and management control. Shareholding may, however, be widely
dispersed in a private sector company through public offerings. On the other
10
hand, a public sector enterprise is owned dominantly by the state and comes Forms of Public Enterprises
under the control of government as a major shareholder. Both, however, prepare
for purposes of accounting, a profit and loss or income and expenditure account
and a balance sheet, which reflect their financial operations and position, to be
presented annually. The accounts are subject to statutory audit and need to be
placed before the general body of the shareholders, who have the power to
approve and adopt them.

Ownership and Management

The patterns of ownership and management of public enterprises vary from

country to country. In several countries, the forms of ownership and management
have evolved over time. These varied also with the sector of activities in which
these were located.

Management is an extension of the ownership pattern. With the involvement of

the resources of the state, the public sector represents the extension of state
power. It imposes certain discipline on the management of these enterprises.

Generally, the public ownership implies that at least 50 per cent of capital is held
by the state itself or by any national, regional or local authority. The management
ownership then falls within the domain of the state. In the Indian context, larger
than 50 per cent shareholding in an enterprise by the state determines the
characteristic of public ownership, (Article 12 of the Constitution of India).

However, the state ownership does not mean that the subject enterprise has to
be run by government on day-to-day basis. Since it is created by the
investments from the funds provided by the public exchequer, the enterprises are,
subjected to public accountability. In a democratic state, legislative supervision is
the essential ingredient of accountability. At the same time, operational autonomy
of public enterprises is also needed as the enterprise functions, especially in a
mixed economy, competing with private enterprises and operating in the same
environment.

In the management of public enterprises, the crucial aspect is of coordination and

control. It needs striking a balance between accountability to public and business
principles. Also there is a continuous conflict and quest to strike a balance
between autonomy and accountability. Given a corporate form, public enterprise is
managed by a board of directors. Ownership provides the authority to the
government to decide who should constitute the board and, as a corollary, the
board is answerable to the government. Some of the important issues confronted
are: what are the powers which should be vested with the owners? How much
authority should be delegated by the owners to the management of enterprises
(such as in regard to capital expenditure, or in branching out to new activities or
diversification)?

While spelling out the characteristics of the corporate form of public enterprise or
public company, it is interesting to comprehend the Trusteeship concept
propounded by Mahatma Gandhi. It relies on the innate goodness of human
beings and gives a call to all possessors of wealth to regard themselves as
trustees of the people. Gandhian Trusteeship does not contemplate any change in
the structure of the society as does Socialism. It is recognised that the very
nature of acquisitiveness (and possessiveness) inherent in capitalism cannot
transform the system into benevolence or trusteeship. A lofty moral value is
attached to the theory of Trusteeship which is almost impossible to translate into
practice. While, private profit is an anathema to the socialist philosophy, the
emerging rules of corporate governance is a pointer to Gandhiji’s concept of
Trusteeship and, if followed in letter and spirit, it can achieve a great deal of the
11
Public Enterprise: An desired goal. This will, in fact, reduce substantially the cleavage between a
Overview public enterprise and a private public company.

Germany provides examples of a variant of public trust, in major enterprises such

as Salzgitter, VEBA, VW, which are integrated with market economy and
operated on commercial principles. Federal government’s participation is of a
varying kind. Public – private partnership in the trust is a noteworthy feature.
These trusts promote research and development in the field of technology in
order to meet competition, both national and international, while building on
strengths for the future.

Policy Dimension

Governments, in general, adopt different policies whether to take over existing

enterprises or to establish new enterprises. Policies are determined by socio-
economic and political factors which trigger the policies, which could be grouped
as:
• Socio-political;
• Natural resource exploitation;
• Self-reliance;
• Employment generation;
• Income distribution;
• Mobilisation or saving of foreign exchange;
• Acceleration of industrial growth;
• Control of private sector, domestic and foreign;
• Removal of regional desparties.
All these motivations get translated into national policies. One or more of these -
usually more - dominated the policy thrusts in different countries such as
Botswana, Brazil, China, India, Malaysia, Mexico, Nigeria, Pakistan, Sri Lanka,
Zambia and others.

Public sector policies basically have two dimensions – exogenous and

endogenous. Each one is significant. In economic sense, market structure and
supply constraints determine macro level public policies. The other aspects are
socio-political imperatives.
Public policy determinants cover issues such as :
• What are the economic objectives to be subserved by public enterprises?
• What should be the role of social objectives?
• What are the industries or activities which need to be developed exclusively
in the public sector?
• What are the areas in which both can exist together?
• What are new areas to be explored?
• What are the new technologies needed? And what shall be their sources?
• How much of self-reliance can be achieved?
• What shall be the form or forms of organisation?
• What shall be the precise role of the government (and the legislature) in their
control?

12 • What shall be the mechanism for making policy decisions?

These are all exogenous or macro-level questions of public enterprise policies. Forms of Public Enterprises

Endogenous policies at micro level fall within the jurisdiction of enterprise

management. These reflect the day-to-day operating level. Most of these are
common with private enterprise with the distinction that the public enterprises
have to follow the policies and procedures laid down by the government and
accountable for promoting public interest. With the operationalisation of corporate
governance, much of the distinction between public and private enterprises will
diminish. Real value creation – as distinct from the value creation for the
shareholder – will be the rendezvous of both sectors.

Activity
a) List some of the major objectives in setting up public enterprises.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
b) Think of more such objectives and list them.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................

1.5 SUMMARY
Societal differences have created a large economic disparity resulting in economic
inequalities. Public sector emerged in the 20th century as a formal concept but
soon declined due to non-proportionate economic power. Since then the role of
public sector in economic development has not found a proper place. This unit
specifically touches upon this aspect and also takes a short tour to the different
models of economic growth. The rationale of public sector has also been
discussed in brief alongwith the developmental objectives of the public sector. It
has been tried to cover the major aspects of concept and form of public sector
enterprises as a whole.

1.6 SELF ASSESSMENT QUESTIONS

1. Discuss the two facets - public and enterprises of a public enterprise.
2. Briefly discuss the role of public enterprise in economic development.
3. Discuss the concept of socialism with reference to public enterprise.
4. ‘India's approach to economic development was compromise between a
centrally planed economy and a market economy’, discuss.

1.7 REFERENCES
Burns Edward Arthur, Neal C. Aflred and Watson, D.S. (1948). Modern
Economics.
ibid p,35
Smith Adam, Wealth of Nations, Cannon edition, p.508,
13
Public Enterprise: An
th
18 Century Revolution in France led to elimination of aristrocracy by public
Overview guillotine.
Dutt, R.C., Socialism of Jawaharlal Nehru, p.4
Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto.
Das Kapital. (1867), Vol. I.
Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research.
UNIDO Meeting of Role of Public Sector in Industrialisation, (1979). Vienna.
Public Sector, Legal & Regulatory Framework & Interfaces – Sampat, R.
(March 2002). World Bank paper, CPAR Study Phase-II CPSUS.
Mazzolini Ronalto, Government Controlled Enterprises – International Strategic
and Policy Decisions, John Wiley & Sons.
Managing State-owned Enterprises, World Bank Staff Working Paper No.577

1.8 FURTHER READINGS

Smith Adam, Wealth of Nations, Cannon edition, p.508,
Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto.
Das Kapital. (1867), Vol. I.
Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research.
Mazzolini Ronalto, Government Controlled Enterprises – International Strategic
and Policy Decisions, John Wiley & Sons.

14
 Forms of Public Enterprises
UNIT 2 PUBLIC ENTERPRISE SCENARIO:
NATIONAL AND INTERNATIONAL
Objectives
After going through this unit, you should be able to understand:
• The public sector emergence in its independent form;
• The public, sector as the global concept;
• The public sector as the rational concept.
Structure
2.1 International Scenario- Post 1980s
2.2 The Indian Scenario
2.3 The Impact of Economic Reforms
2.4 Objectives in the Indian Context
2.5 Summary
2.6 Self Assessment Questions
2.7 References and Further Readings

2.1 INTERNATIONAL SCENARIO - POST 1980s

The emergence of public sector, even in its independent enterprise form, has
been a widespread phenomenon worldwide. It covers both, the developing and
developed countries. It may be recapitulated that some of the countries where
the institution of the public sector was used after the Great Depression in the
1930s include France, South Korea, the U.K., Italy, Germany, and after obtaining
independence by countries like Sri Lanka, Bangladesh, Malaysia and India. This is
besides the whole host of the command economies of Eastern Europe including
the Soviet Union and China.

The post-1980 period, however, witnessed dismantling of the public sector in

countries which shifted to the market economy model with a growing emphasis
on private enterprise and free competition. Despite the dismantling, several
countries like Russia, France, China and India have a strong prevalence of the
public sector. Privatisation of state enterprises have not made deep inroads in
these and several other countries.

Selected Country Cases

A brief overview of selected countries, representative of different models, would

demonstrate the overall environment for the public sector and its rapid
transformation through privatisation into private enterprises.

France

France provides the earliest example of growth of public sector having adopted
nationalisation as a strategy. In 1936-37, under the then popular government,
railways and a part of the armaments industry – with a total employment of
over 500,000 – were nationalized. In 1946, the coal mining industry was
nationalised and came to the public enterprise fold. Five main banks, thirty four
insurance companies, privately-owned enterprises in the energy sector, airlines and
two major industrial companies were taken over by the government.

1
Public Enterprise: An Controls over the public enterprises were fairly rigid in France. The controls
Overview were three dimensional: (a) governmental, (b) parliamentary, and (c) judicial.
NORA Report of 1968 advocated dismantling of many control structures.

The share of public sector was dominant in sectors such as energy (94%),
transport and telecommunication (59.8%) and financial services (43.5%). Its role
was also significant in the manufacturing sector which included automobiles, ship
building, armaments and aircraft manufacture.

The developments in the public sector upto early 1980s showed that in sectors
where it was already well-established, it played a significant role without making
inroads into large areas of economy covered by other industries. France continues
even now to have a very strong public sector in the national economy and
presents a picture of mixed economy model, despite being a major Western
industrialised country.

Federal Republic of Germany

th
In the early years of the 20 Century, the government developed a national
network and established post and telegraph services, mostly to aid the war
effort. There was, however, not much of public sector activity until the end of
1920s.

West Germany after World War II (when the nation was divided into two parts)
possessed vibrant private sector industries. The government’s approach was not
to nationalise the existing industries. Even the Social Democratic Party gave up
nationalisation as a strategy as early as 1959. Case-by-case approach was
adopted instead of a sweeping action across the board. Some utility services,
such as supply of gas, water and electricity were entrusted to mixed enterprises,
in which the government, local authorities and private entrepreneurs shared the
responsibilities, including the mobilisation of investment resources. Electricity,
mines, public savings banks, dockyards and ship building industries were examples
of the mixed pattern with both public and private enterprises co-existing.
Pragmatic considerations and not per se ideology dominated the German scene.

Public industrial enterprises, on the whole, played a limited role in the economy of
the Federal Republic. Among the 50 largest industrial entities, only 5 were in
the public sector. A mere 1.6 per cent of the total gross fixed asset
investment in manufacturing industries was accounted for by public enterprises.
The shares of the public sector in basic raw material production in 1997 were:
coal, including lignite 16.9 per cent; iron ore 45.7 per cent; aluminium 49.7 per
cent; cars 40.3 per cent. The government had a concentration of shareholding in
6 enterprises (Salzgitter AG, VIAC, IVG, VEBA AG and VW).

A significant feature of West Germany was that public enterprises were fully
integrated into the market economy. They operated on commercial principles like
private sector enterprises. A contrast is provided by East Germany which adopted
a different model as a part of the Soviet Block. Practically, the entire economy
was under public control engined by centralised planning system

Privatisation measures were adopted in East Germany only after reunification of

West and East Germany. An agency, Treuhandanstalt (THA), was set up by
the government to privatise and restructure. All public enterprises were placed
under this Agency which broke the existing enterprises into small units to
facilitate restructuring and privatisation. Privatisation contracts made provisions for
retraining an agreed number of employees for a specific number of years. A
social safety net for retrenched employees was a part of the package.
2
Italy Forms of Public Enterprises

Italy provides a classic example of another industrial country in which public

enterprises contributed significantly, both quantitatively and qualitatively. They
were concentrated in highly capital intensive sectors – iron and steel,
telephones, hydrocarbons and motorways. The state-owned Institute for Industrial
Restructuring (IRI) established in 1933 became the largest industrial employer in
Europe with half a million employees .

The share of public enterprises as a group accounted for 77.8 per cent of mining,
73.5 per cent of transport and communications and 12.8 per cent of the
manufacturing industry. The share of the public sector in gross output was
significant in metallurgy 40.8 per cent, food 12.8 per cent, chemicals 10.8 per
cent, mechanical engineering 10.5 per cent and construction industries 10.7 per
cent of gross output.

United Kingdom

In the United Kingdom, the world’s first industrial nation, public enterprises played
a dominant role in post World War II period until end-1970s. Nationalized
industries were an integral part of the economy as suppliers and purchasers of
inputs from the rest of the economy. The public sector retained a strong position
in coal, iron and steel, telecommunications , railways, energy, and in automobile
manufacturing. The nationalised steel industry contributed handsomely to
exports.

However, substantial subsidies were needed by the nationalised industries. Over

£1000 million annually was the outgo on account of subsidies to the public
enterprises. British Rail and British Steel accounted for 70 percent of total
subsidies during the period 1976-79. The Economist, May (1983).

In 1979., the public sector accounted for 11.1 per cent of GDP, 8.1 per cent of
total employment and 20 per cent of gross fixed capital formation (CEEP Review,
1981). It accounted for 84 per cent of output in mining and quarrying and 77 per
cent in the energy sector.

Economic recession in the West in the late-1970s was attributed to an excessive

involvement of government. In many countries, large public, as well as private,
firms came to regard government as a ‘last resort’ guarantor of corporate
existence. During the periods of stagnation, unemployment became the focus of
political activism and in such times governments had to rescue the losing firms,
by what is termed as “bail out” and this necessitated increase in the public sector
borrowing requirements.

Dismantling of the state’s ‘industrial empire’ was expected to revitalize the

national economy by reducing the level of monopolist control of the state. The
country took the lead in public sector reforms towards the end of 1970s under
the lead provided by Prime Minister Margarette Thatcher. The Conservative
Government, which took power in 1979, held the philosophy that too much
government control was a major problem of the economy and the market forces
could provide the solution. The Prime Minister advocated the idea that it was
not the business of the government to be in business.

The scope and sweep of the public sector underwent a major change mainly
due to political leadership. Privatisation became a new doctrine leading to
dismantling of the public sector. This led to the transfer of all the nationalized
industries – which before nationalisation were in the private sector – into private
ownership along with the public utilities. The reform process had twin objectives:
3
Public Enterprise: An first, to reduce the burden on the exchequer; and second, to encourage
Overview competition for the benefit of consumers.

A sectoral approach was adopted to carry forward economic reforms. Coal

mines were the first to face the brunt. There was already a decrease in coal
requirement owing to shift from coal to gas-powered power generation. Major
coal consumers preferred to import coal from Australia because of the price
differential. Many coal mines were closed through a gradual process.
Redundancy was tackled by worker-friendly schemes. Retraining and
redeployment of workers was also a part of the package.

The scale of dominance of the public sector was reduced through a series of
privatisations, with the sale of nationalised industries, such as Cable and Wireless
and British Aerospace (1981), British Petroleum (1983); British Telecom (1984),
utilities such as Gas (1986), Water (1989) and Electricity (1990). The privatisation
of British Rail was the most significant act of the Thatcher regime.
Simultaneously, a regulatory mechanism was put in place in the near monopoly
utilities such as gas, telecom and power. The role of the regulator was to help
consumers get lower price and better service.

China

China has had an economic model totally dominated by the public sector since
the 1950s. This included collective ownership in agriculture as well.

A dramatic shift in the economic policy initiated by Deng Xiaping led to reforms.
Many factories were corporatised and converted into companies. Services like
hospitals and schools, which were part of public enterprises, were separated.
By 1998, most of the state-owned enterprises (SOEs) were detached from the
ministries. The State Economic & Trade Commission (SETC) was made the
nodal agency for the SOEs. A Committee for appraisal of Chairmen and Boards
of SOEs and a Supervisory Board for Audit were integral parts of the reform
measures. Writing-off of loans, offer of shares to banks and financial
institutions were other highlights of the reforms process. A recent survey had
shown that the number of sick companies came down from 6000 in 1996 to 3000
in 1999. Contract mechanism was adopted to improve performance.

A significant feature of the Chinese policies has been so far to avoid

privatisation of state assets in contrast with the policies adopted by other
command economy countries of Eastern Europe and some countries of the Third
World.

Malaysia
New Economic Policy adopted by the Malaysian Government in 1970 led to the
creation of public sector enterprises in the country and by 1983 there were 900
such enterprises. The inability of the public sector to promote growth and the
mounting burden on the exchequer led to the formulation of privatisation policy
in 1983. Detailed guidelines on privatisation were issued in 1985, which included
(i) reduction in government’s direct involvement in economic activities; (ii)
allowing private sector to play a leading role in economic development; (iii)
allowing market forces to govern economic activities; and (iv) bringing changes in
the organisation, management and performance of public enterprises.
The Privatisation Master Plan was drawn up in 1991 which identified a total
of 46 entities/activities to be privatised. The process of privatisation is
continuing.

4
Mexico Forms of Public Enterprises

Mexico had over 1000 public enterprises. However, Mexico is considered as one
of the success stories of privatisation policy adopted by many countries. The
programme began in 1983 and in a decade, the number of public enterprises
declined from 1155 to just over 200. A phased programme led to the divestiture
of a large number of small enterprises during the first phase itself ending in 1989.
In the second phase (1989-92), bigger enterprises were put on the chopping
block, mostly for sale. Monopolistic organisations of the telecommunications,
fertilizers, steel and banking sectors were sold.

The success of the programme has been attributed to three factors : (i) clarity in
policy to divest all public enterprises; (ii) setting up of a single authority with total
responsibility for divestiture; and (iii) eliciting cooperation of workers, including
giving stock options and the right of first refusal to workers unions, which
prevented laying off and threat of job losses in cases of closure.

The Global Trends

The public sector had assumed fairly large proportions in countries other than
the foregoing. For example, during the mid-1980s, Jamaica had 640 and Srilanka
200 undertakings accounting for 20 per cent of GDP, in both countries, Malawi
91 undertakings with 25 per cent of GDP, Kenya 150 undertakings with 15 per
cent of GDP.

And then there came a sudden change. The public sector bashing became a
fashion.

The prevailing opinion in early 1980s in many countries, spearheaded by the

policies of the World Bank and the International Monetary Fund, was that the
public sector had become a drain on national economies, which warranted
radical measures. In most countries political leadership leaned on this view in
the context of the collapse of the Soviet system, demotion of the concept of
socialism and the consequent ascendancy of the free market economic model.
Privatisation emerged as a significant element of the economic reform process.
The major objective was reduction of fiscal deficits, subsidies and debt-servicing.
The interests of workers were sought to be protected through safety nets.

In the USSR, the bastion of socialism, and in the erstwhile other Eastern Bloc
countries, the reforms were carried out through a political process. A paradigm
shift was clearly in evidence.

It is widely believed that with the onslaught of globalisation and the opening up
of the economies consequent to the acceptance by most countries the WTO
(World Trade Organisation) regimen, only world-class standards of manufacture
and services can meet the challenges. It required total reconstruction and
professionalisation of the economy. Outsourcing and economies of scale
emerged as the mantras of global competitiveness and survival.

One could also see the emergence of Information Technology as a very strong
driving force. The convergence of computing power and telecommunications
provides a thrust for organisational changes leading to dismantling of the
bureaucratic way of functioning. Only knowledge-based professionalised firms
can survive competition and grow. New management patterns are fast evolving.
Intellectual capital, rather than asset-based capital, will dominate, leading to
more of private initiatives. As a fallout, the government’s role will be more of a
catalyst rather than as an active player. Technological breakthrough, shortening
product cycle and rapidly changing markets will provide the momentum for
5
Public Enterprise: An economic development. A new market environment is emerging, rendering, in
Overview the process, organisations subject to rigid controls of government, unviable.

This, however, is one view. The economic history has ample evidence to show
that it is only a phase.

As in the past, the pendulum could move to the other side. The management
aberrations in private enterprise (Enron, AOL–Time Warner, Merck, Arthur
Anderson) have shaken the American scenario. It is increasingly being recognised
that serious regulatory measures will have to be enforced to protect the interests
of a multitude of stakeholders - shareholders, workers, consumers and the
community at large. And to enforce such measures is not an easy task despite
the best intentions.

2.2 THE INDIAN SCENARIO

When India became independent in 1947, emerging from a colonial rule to a
sovereign state, a new era of political and economic transformation was ushered
in, raising the aspirations of a substantial part – 16 per cent – of the humanity.

Even before the attainment of political independence, there was a growing

realisation that political and economic freedoms were an inseparable phenomena.
The seeds of the mixed economy model, adopted by the country, could be
traced back to the thinking of the then dominant political party articulated clearly
in the Karachi Resolution in 1931 which spelt out, as referred to earlier, in its
Fundamental Rights Resolution, that the state would own or control key
industries and services, mineral resources, railways, waterways, shipping and
other means of transport.

The colossal problems of the Indian socio-economic conditions and deployable

limited resources needed a different approach so as to avoid the extremes of a
‘free economy’ and a ‘command economy’. The principles of democracy and
the freedom of the individual were needed to be injected into the growth
dynamics of development while targeting economic welfare of the masses and
preventing concentration of economic power in a few private hands. Economic
planning was the instrument used to accelerate the pace of development and to
ensure more equitable distribution of incomes and of essential goods and services.

It was realised that the leeway which needed to be made to ameliorate the
economic conditions of the teeming millions and assuring them decent living
standards could not be achieved without the full-scale intervention by the state.
Private enterprise did not possess the financial resource, nor the technological and
management skills, to undertake the stupendous challenges faced by the nation.

The adoption of the Industrial Policy Resolution of April 1948, soon after Indian
independence, is a landmark event, which laid down the path for economic
development. The state assumed the role of an entrepreneur, and not only of a
catalyst, a facilitator and a regulator, allowing the private sector to operate in
areas other than those reserved for the public sector. It was the first formal
green signal to the structure of mixed economy.

The landmark enunciation of the policy observed: “The state shall play a
progressively active role in the development of industries and that, for sometime
to come, the state could contribute more quickly to the increase of national
wealth by expanding its present activities wherever it is already operating and by
concentrating on new units of production in other fields, rather than on acquiring
and running existing units. Meanwhile, private enterprise properly directed and
6 regulated has a valuable role to play.”
Manufacture of arms and ammunition; production and control of atomic energy, Forms of Public Enterprises
and ownership and management of railways became the state monopoly. Six
basic industries, namely, (i) iron and steel, (ii) coal; (iii) aircraft manufacture, (iv)
ship building, (v) mineral oils; and (vi) manufacture of telephones, telegraph and
wireless apparatus were to be developed only by the state. All other areas were
then kept open to private initiatives.

The policy direction was provided by the Constitution of India, which became
effective from January 26, 1950 when the country was declared a Republic.
The Articles 39(b) and 39(c) have a direct bearing on the obligations of the state.
To quote : “The ownership and control of the material resources of the
community are so distributed as best to serve the common good and that the
operation of the economic system does not result in the concentration of wealth
and means of production to the common detriment.”

Immediately after the Constitution was adopted, an institutionalised system of

planning was installed by the setting up of the Planning Commission to undertake
macro level planning for effective mobilisation, allocation and utilisation of the
national resources. The public sector and planned development became
inseparable. The First Five Year Plan which covered the five-year period, 1951-
52 to 1955-56, made a specific reference to the role of state in the following
words: “Whether one thinks of the problem of capital formation or of the
introduction of new techniques or of the extension of the social services or of the
overall realignment of the productive forces and class relationship within the
society, one comes inevitably to the conclusion that a rapid expansion of the
economic and social responsibilities of the state will alone be capable of satisfying
the legitimate expectations”.

It followed that the state had to assume greater social and economic
responsibilities to meet the aspirations of the people without resorting to
nationalisation of the existing means of production or eliminating the private
sector.

The national ruling party (Indian National Congress) adopted a Resolution – Avadi
Resolution in 1954 - to usher in what it called Socialist Pattern of Society as a
national goal and this provided the trigger for spelling out the policy parameters
by the government through the second Industry Policy Resolution adopted by the
Parliament. The statement in April 1956 provided the direction for the state to
assume a dominant role in the years to come. A new orientation was given to
the mixed economy concept enlarging the scope and coverage of state
intervention. At the same time, the Second Plan (1955-56 to 1960-61)
contemplated increased emphasis on heavy industry (steel, capital goods).

The Policy Resolution laid increased emphasis on state intervention by spelling out
industries of basic and strategic importance or public utility services which were
intended to be in the public sector. It also said that other industries which were
considered essential and required investment on a scale which only the state
could provide, also had to be undertaken by the public sector. Accordingly, the
industries were classified into three, groups:

1) Seventeen industries reserved exclusively for development by the state,

namely, arms and ammunition, iron and steel, heavy castings and forgings,
heavy plant and machinery required for iron and steel production and mining,
heavy electrical equipment, coal and lignite, zinc, copper, lead, aircraft, ship
building and telecommunication equipment.

2) Twelve industries which would be progressively state-owned and in which the

state will, therefore, generally take the initiative in establishing new
7
Public Enterprise: An undertakings, but in which private enterprise will also be expected to
Overview supplement the effort of the state. These included – aluminium, fertilizers,
other minerals, machine tools, ferro alloys and tools, basic and intermediate
products required by chemical industries, antibiotics and other essential drugs,
synthetic rubber, carbonisation of coal, chemical pulp, road transport and sea
transport.

3) The remaining all industries were left open to private initiatives.

The state assumed a “commanding role” by virtue of the parliamentary approval

of the Industrial Policy and whatever was undertaken in regard to the national
development stemmed from this policy direction. It opened up the possibilities of
national investment over a wider area. A multiplicity of objectives motivated the
policy, such as:
• to strive for reduction of regional imbalances;
• to augment the revenues of the state and providing resources for further
development in fresh fields by public enterprises;
• to improve the living and working conditions of the workers.
The successive Five Year Plans adopted by the National Development Council
(with the Prime Minister as the Chairman and the Chief Ministers of different
states constituting the body), emphasized the importance of the public sector in
the national economy.

Three major developments are noteworthy in the development of public

enterprises in India:
1) In 1955-56, some two hundred and odd life insurance companies were
nationalised merging their business into a larger entity, Life Insurance
Corporation of India, which operated as a monopoly organisation until
insurance business was opened up to private enterprise as a part of the
economic reforms programme. Later ( in 1972) all companies doing general
insurance business were also nationalised and formed into four companies
headed by a fifth holding company (General Insurance Corporation of India).
2) In 1969, as a seemingly political move, 14 major private banks were
nationalised. More were added later. Their identities were retained and there
function independently even now.
3) As a matter of public policy, some 120 private textile mills were nationalised.
These mills were those either closed down, while some had gone bankrupt.
Many more companies outside the textile sector also received a similar
dispensation.
These moves were milestones in the journey of public enterprise in India towards
attaining commanding heights or at least in establishing an ambience in favour of
public enterprise.

In 1977, a policy statement placed before the Parliament by a newly elected

government declared : “There will be an expanding role for the public sector in
several fields. Not only will it be a producer of important strategic goods of
basic nature, but it will also be used effectively as a stabilising force for
manufacturing essential supplies for the country.” A new dimension thus got
added with a focus on market stabilisation and production of essential goods,
through state intervention.

Again, with the change in the Government at the Centre in July 1980, a fresh
statement of industrial policy was made before the Parliament. This statement,
8
while reiterating the socio-economic objectives of the earlier industrial policy, Forms of Public Enterprises
emphasized on the efficiency in the utilisation of the resources deployed. The
goals set for the public sector were :
a) to utilise optimally the installed capacity;
b) to achieve higher productivity;
c) to strive for higher employment generation;
d) to correct regional imbalances;
e) to strengthen the agricultural base through agro-based industries;
f) to promote export-oriented industries;
g) to promote equitable spread of investment and dispersal of returns; and
h) to protect the consumer against high prices and poor product quality.
While there was a continuance of the role of the state, the emphasis got shifted
to efficiency and effectiveness of investments as it was realised that the public
investments were not resource-efficient in the given context.

2.3 THE IMPACT OF ECONOMIC REFORMS

There was, however, a major change after the launch of the economic reforms in
1991. The predilection for the public sector was waning in the context of global
economic changes and the economic (foreign exchange) crisis encountered by the
country. The restructuring and disinvestment of the public sector became a
significant component of the economic reforms programme. A roll-back of the
state and reliance on market forces became the dominant theme. The concept
of mixed economy was redefined with a shift for a greater role to the private
sector. Reservation list of industries in the exclusive domain of the public sector
got abridged. Presently, there are only 4 industries which are in the exclusive
list. These are :
a) Manufacture of arms and ammunition
b) Atomic Energy
c) Atomic Minerals
d) Railways
No other industry stands reserved for the public sector. Large areas were
thrown open to the private sector. Even the industrial licensing system which
regulated setting up of industries with precise capacity stipulations was dismantled
(except with regard to a few industries). Some of the significant policy
measures bearing on the public sector are :
a) a review of portfolio of public sector investments to focus on strategic
industries,
b) emphasis on high-tech and essential infrastructure;
c) reference of the chronically sick industries to the Board for Industrial &
Financial Reconstruction for revival/rehabilitation;
d) disinvestment of shares in public sector enterprises to enable wider
participation;
e) bringing about greater degree of professionalisation in the public enterprises;
f) thrust on performance improvement through a system of performance
contracting called, Memorandum of Understanding (MoU), under which 9
Public Enterprise: An targets are set annually for achievement and evaluation, through agreements
Overview signed by the chairman of the public enterprise and secretary of the
administrative ministry controlling the enterprise.

2.4 OBJECTIVES IN THE INDIAN CONTEXT

A fairly large spectrum of activities is covered by the public sector. The
objectives of these enterprises may be classified as (a) economic, (b) strategic,
(c) service promotion, (d) social, (e) promotional, and (f) financial.

A large number of enterprises have economic-orientation focusing on building

infrastructure. These help in industrialisation and development of the economy
with multiplier effect. These include Steel Authority of India, Coal India, National
Thermal Power Corporation, Oil and Natural Gas Commission, Indian Oil
Corporation, Bharat Heavy Electricals. The strategic objectives can be identified
in a number of undertakings – both departmental and non-departmental – which
meet the defence needs and include ordnance factories, Hindustan Aeronautics,
Bharat Dynamics, Bharat Electronics.

The social role has two facets – first, the supportive function to other activities,
(such as providing housing, education and medical facilities to employees) and
second reservation of posts for weaker sections of the society, Scheduled Castes
and Tribes or setting up undertakings exclusively for their benefit, such as
National Scheduled Castes & Tribes Financial Corporation. This latter
phenomenon is witnessed more in states, (Tamilnadu Backward Classes
Development Corporation, Haryana Harijan Kalyan Nigam Ltd., Punjab Women
& Children Development Corporation).

The promotional objectives have been served by setting up corporations, such as

the National Research Development Corporation, Indian Dairy Corporation. In
States, there are enterprises for development of specific industries such as
leather, livestock, fisheries, poultry, agro-industries.

Financial objectives are in the nature of providing loans – basically long term –
for economic and industrial development, (such as the Industrial Development
Bank of India, Industrial Finance Corporation of India, Small Scale Industries
Development Bank, Power Finance Corporation).

Other objectives sought to be achieved through the instrumentality of the public

sector include self-reliance, import substitution, providing infrastructural support to
the economy, development of backward regions, supply of basic materials and
capital goods, prevention of concentration of economic power, stabilisation of
market forces, development of technology, employment generation, generation of
resources for future development.

State Level Public Undertakings

India is a Union of 28 states and 7 centrally administered territories. India’s

public sector operates at the central, state and local self-government levels. The
foregoing covers mainly the Central public sector.

Every state is endowed with resources of one kind or the other. The exploitation
of such resources falls primarily within the domain and responsibility of the
concerned states. There are some 900 to 1000 autonomous independent
enterprises for development of leather, meat, livestock, fisheries, poultry,
sugarcane, brassware, handicrafts, minerals, textiles, films, theatres and other
services. There are also development corporations, such as for housing and
10
tourism. Most of these are promotional in nature. Agro-industries corporations Forms of Public Enterprises
are also functioning in many states, set up for promoting food processing industry
and industries for the manufacture of machinery, equipments and accessories
needed for industries in rural areas.

Significant activities of state public undertakings in the statutory or corporate form

are electricity generation, transmission and distribution, road, transport, besides
manufacturing. Several of the state government public enterprises are mostly
promotional in nature. Illustrations:
• Agro-Industries Corporations
• Fisheries Development Corporations
• Forestry Development Corporations
• Mining & Minerals Development Corporations
• Small Industries Corporations
• Road Transport Corporations
• Warehousing Corporations
• Housing Finance Corporations
• Industrial Investment and Financing Corporations
Of identified tally of about 840 SLPEs, Kerala has the maximum number (109)
followed by West Bengal (82), Karnataka (76), Orissa (68) and so on.

A significant feature of state level public enterprises is that the state government
control on their functioning is more pervasive and they are in a sense an
extension of the respective departments of the state governments. The top
executive functionaries are drawn from the civil services.

The state level enterprises have been plagued by political ramifications of a

divergent kind. While some of the state enterprises are doing exceedingly well,
most others have performed badly. A large number are closed down any way. As
a group, these provide a contrast to Central public enterprises – in their size,
structure, functioning and performance.

At the end of March 2000, according to one estimate, 222 state level
enterprises were slated for disinvestment/winding up/restructuring.

2.5 SUMMARY
The Indian case of public enterprise is, perhaps, a unique case. Considering the
problems of a developing economy, the central public sector in particular has
made rich contributions to the development process. Its share in several sectors
is significant. Subject to the following three conditions, it has performed well:
a) it was loaded with closed and bankrupt private undertakings to protect
employment;
b) it had to bear with administered prices (both for inputs and outputs);
c) most of the state level enterprises could not perform well because of political
and bureaucratic interference.
A review of the performance of the Central public sector was made by a study
carried out of the Centre for Industrial & Economic Research and commissioned
by the Standing Conference of Public Enterprise (apex body of the central
public sector) (Mohnot, 2000). It came to the following interesting conclusions:
11
Public Enterprise: An Given the exogenous contraints, the public sector in India has performed the task
Overview assigned to it reasonably well, constraints notwithstanding. There are aberrations,
but all are not of its making. The acquisition and operations of bankrupt private
sector companies was, for example, a result of decision imposed on it.

The public sector’s main objective was socially-focused, in many cases by

the conception of enterprises and in others by their mechanisms. The
administered prices were not commercially viable, which implied subsidies.
Commercial enterprises could not provide large subsidies and at the same time
generate high level of profits.

Empirically, the performance of the public sector, seen in its total perspective, is
comparable to that of the private sector, although the former’s perceived sub-
standard performance has received recurrent and critical acttention. On a
rationally comparable basis, the profitability of the public enterprises more than
matches with that of the total private sector.

Performance of the public sector in terms of financial parameters has been

improving markedly since the onset of the economic reforms programme, while a
number of analysts had predicted its doom.

The government had recovered in the form of dividends, interest and taxes
during the three years ending March 2002, more than the total invested capital.

Large non-performing assets damaging the results of financial institutions and

banks are indicative of the losses incurred and defaults made by the private
enterprise entities. So are the large number of sick units. The overall dividend
record of private corporates has been abysmally poor. More than half the number
of the listed companies do not pay any dividends.

A large number of sick units in the public sector are a legacy of the private
sector. The takenover enterprises acquired at the direction of the government
from time to time and not adequately supported by the government have badly
damaged the image of the public sector.

It is universally admitted that there has been very little autonomy in public
enterprises. Vital clearances for decisions – from conception to commissioning to
current operations – have often been delayed for months, years and even
decades. Many turnaround programmes remain non-starters. Apart from the
dilatory clearances, there has been marked positive interference.

Despite the bureaucratic procedures, which the public sector undertakings have
had to follow, a high degree of professionalism has been in evidence with far
more focused and efficient HRD interventions and R & D development.

The public sector has established management and training institutes of which any
industrial or service organisation can be proud of.

PSUs have attended to the welfare and social dimension of the work force in
particular and the community in general in a much more effective manner.

Undeterred by the changing and highly destabilising pronouncements including

those on privatisation and disinvestment, which have created uncertainties and
demoralisation, the public sector has produced enough evidence that it marches
on to meet the challenges of the global competition. The public enterprises are
working on a new agenda of global competitiveness and have envisioned – even
launched – expansion, diversification, modernisation and restructuring
programmes. They have also entered into strategic alliances and joint ventures
12
within the public sector and between the public sector, on the one hand, and Forms of Public Enterprises
domestic and foreign enterprises, on the other.

Although continuing to be owned by the government, budgetary support,

sometimes critical, has been denied to the public sector enterprises. PSUs are not
basing their ambitious plans of expansion, diversification and technology
upgradation on fiscal support. They are confident of generating surpluses and of
mobilising the resources by accessing the market on their own.

Since the onset of the economic reforms programme, even the government has
taken some positive steps declaring selected CPEs as navaratna and mini-
ratnas with some doses of autonomy. The structure, vision, goals and systems of
the public sector have gone through a whole reformation.

Assured of the freedom to operate under new standards of corporate

governance now advocated by professional dispensation, the public sector
appears confident to be globally competitive.

Activity
a) List any five housing finance corporations owned by the State Government
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
b) List any five state government owned industrial investment and financing
corporations.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................

2.6 SELF ASSESSMENT QUESTIONS

1. Discuss the impact of economic reforms in the state of public enterprises
2. Discuss the role of public enterprises in any two sectors in the Indian
context.
3. List any two public enterprises having economic orientation with main focus
on building infrastructure and briefly discuss their role in present context.

2.7 REFERENCES AND FURTHER READINGS

The Economist, (May 14,1983), p.31.
Public Enterprises (1981), in the European Economic Community-CEEP Review
pp. 116-117.
Mohnot, S. R.(2000), Performance of Public and Private Sectors, Centre for
Industrial and Economic Research (CIER), New Delhi.

13
 Forms of Public Enterprises
UNIT 3 NATURE AND SCOPE OF PUBLIC
ENTERPRISE
Objectives
After studing this unit you should be able to:
• Understand the nature of public enterprise;
• Know the growth process of public enterprise;
• Understand the role of administrative ministries.
Structure
3.1 Extent and Scope
3.2 Growth of Public Enterprise
3.3 Role of Department of Public Enterprises
3.4 Summary
3.5 Self Assessment Questions
3.6 References and Further Readings

3.1 EXTENT AND SCOPE

The nature and scope of public sector flows from the strategies and policies
governing economic development and the structure of the economic system of
a country. In developing countries, it has been targeted at acceleration of
economic development with social justice. In industrialised countries like France,
Italy and the UK, it was intended primarily to ensure supply of essential goods
and services at reasonable prices and to augment country’s competitive
capabilities in selected areas.

In countries like India, massive investments were made in the public enterprises
as an economic strategy adopted for accelerated and equitable economic
development. With every successive National Plan commencing from start of
the First Plan (1951-56) to the end of Ninth Plan (1997-2002), progressively large
investments were made in the public sector. The strategy led to defining and
redefining the role of the state in national development.

Economic planning served as a tool for launching relatively massive programmes

and projects for economic and social development. These led to large
investments by the state in different sectors of the economy – primary, secondary
and tertiary. The public sector investments were not limited to enterprises which
assumed autonomous forms of organisations – in the manufacturing and service
sectors of the economy - but also extended to departmental undertakings such as
the railways, financing and other service-providing or promotional organisations.
Besides, fairly large investments were channelled into state level undertakings.

India is a country of continental dimensions, with a land mass covering over 3.29
mn sqkm, and a population exceeding 1000 million, with density variance ranging
from a high of 655 persons per sqkm in one state to as low as 8 persons per
sqkm in another. The level of economic and human development also varies very
widely from one state to another. Inequalities are marked in all economic
parameters and development coefficient are low. As a result, the public sector
engaged in the task of accelerated economic development involving one-sixth of
the human race, took on multiple roles, multiple forms and multiple strategies of
operation.
1
Public
A wide Enterprise:
spectrumAnof activities covered by the Central Government alone included
Overview
many areas of production and services, as listed below:
A. Manufacturing
• Producing of steel and non-ferrous metals and products;
• Mining and beneficiating coal and a host of other minerals;
• Exploring, extracting and processing crude oil;
• Refining crude oil and marketing petroleum products;
• Casting and forging metals;
• Producing and marketing petrochemicals, fertilizers and other chemicals;
• Producing and marketing drugs and pharmaceuticals;
• Manufacturing and marketing heavy machine building plants and equipments;
• Manufacturing and marketing capital goods including heavy electrical
equipments;
• Manufacturing defence-oriented products;
• Manufacturing transport equipment including ships, passenger cars and
aircraft; and
• Producing and marketing of consumer goods like textiles, watches.
B . Services
• Developing and operating infrastructure facilities, such as railways, road
transport, shipping, ports and telecommunications, airlines;
• Development of small scale industries;
• Providing services like technical consultancy, trading and marketing,
contracting and construction;
• Organising social services like development of backward regions, upliftment
of backward classes of society and skill upgradation;
• Promoting tourism;
• Promoting Research & Development;
• Providing institutional finance for development and exports and commercial
banking services; and
• Promotion of life and general insurance

The scope of public sector gets wider when the state level public sector is
included. Besides service and promotional activities, the states widened the area
of manufacture and services. Nevertheless there is a qualitative and dimensional
difference between the enterprises run by the Central Government and those by
the State Governments. While the former were established mainly to achieve
industrialisation and economic development of the country as a whole, the latter,
other than the State Electricity Boards and Transport Corporation, were smaller in
scale (though larger in number about 1000) and were supplementary in character.
These were intended more to utilise natural resource available in the respective
states or to develop skills and provide employment. Several of these were
established with social orientation; others for political reasons. These may be
grouped under the following dispensations:
2
• Forms(forests,
to maintain control over the natural resources of the state of Publicminerals,
Enterprises
fisheries);
• to address regional imbalances within the state;
• to promote industrial development of the state;
• to provide certain services not adequately provided by the private sector, or
if provided, at high prices; and
• to satisfy political pressure groups.
The state level enterprises, which have taken corporate form, include a variety
of areas:
• Manufacturing and industrial development
• Small industries promotion
• Agro industries development
• Forestry and forest development
• Fisheries and marine life development
• Mining and mineral development
• Road transport
• Corp support and warehousing Corporation
• Financing and financial services
• Housing assistance and financing
• Scheduled castes and tribes development
• Backward classes upliftment
• Women’s development
• Land mortgage banks
• Electricity Boards – statutory bodies, now in the process of
corporatisation in many states.

The number of enterprises for which returns were filed at the end 2002 was
840. In terms of number of enterprises Kerala led with 109 undertakings,
followed by West Bengal 82, Karnataka 76, Orissa 68, Maharashtra 65. The
states with 50 to 60 undertakings were Gujarat, Punjab, Tamil Nadu and with 20
to 50 undertakings Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Madhya
Pradesh and Rajasthan. Other states had less than 20 public sector undertakings.

3.2 GROWTH OF PUBLIC ENTERPRISE

The development of the public sector in India should be divided into three phases:
A. Formative Years – 1951 to 1975
B. Maturity phase – 1976 to 1990
C. Disinvestment and competitive mould – 1991
The maximum growth was witnessed during the expansion period. In a span of
13 years (1972-85), employment level tripled from 0.7 mn to 2.1 million.
3
Public Enterprise:
The number An
of Central public enterprises had grown from 5 in 1951 to 244 in
Overview
1990 with the investment expanding from a mere Rs 0.29 billion to Rs 993 bn.
While the number remained practically same in post 1991-era (vacillating
practically within a narrow band), the investment expanded from about Rs 1000
billion to Rs 3246 bn. (See Table 1.1)

The composition of the Central public sector corporations shows wide variations
in terms of investment and turnover. The manufacturing organisations (149)
reported a total investment of Rs 1974 bn in 2001-02 against Rs 1169 billion by
service and trading organisations (81). The respective turnover was of the order
of Rs 3715 bn for the former and Rs 1072 for the latter (See Table 2.2). The
total tunrover constituted over 22 per cent of gross domestic product (GDP) of
India in 2001-02.

The total investment of Rs. 3246.32 billion has two components : equity and
loan. A break-up of the investment shows multiple sources from which the funds
are drawn. (See Table 3.3).

Out of a total equity of Rs. 1017 billion, the share of the Central Government
was of the order of Rs. 864 billion or 85 per cent. This reflects the dominant
stake of the Central Government.

Of the total turnover of Rs. 4787 billion, the top 10 enterprises accounted for Rs.
3308 billion, a share of 69 per cent. Enterprises with the high turnover were :
1) Indian Oil Corporation Ltd.
2) Hindustan Petroleum Corporation Ltd.
3) Bharat Petroleum Corporation Ltd.
4) Food Corporation of India
5) Bharat Sanchar Nigam Ltd
6) Oil & Natural Gas Corporation Ltd
7) National Thermal Power Corporation Ltd
8) Steel Authority of India Ltd
9) Gas Authority of India Ltd
10) IBP Co. Ltd (now a subsidiary of Indian Oil Corporation)

The contribution of the Central public sector in the total national production of
key sectors has been impressive. In some areas like coal, lignite, crude oil,
natural gas, lead and zinc, it had exceeded 80 per cent (See Table 3.4).
Spatial Spread of Investments and Employment
The spread of capital assets and employment of the Central public enterprises in
different states and union territories followed no specific economic rationale (See
Table 3.5). While there was a preferential treatment assigned to less developed
states, in practice, it all depended on the nature of projects and programmes,
local and political pressures, availability of natural resources and the nature of
developmental activity.

Some examples of the investments undertaken with added emphasis on

development of backward regions are:
• Nagaland Pulp & Paper Mills (Nagaland)
4
• Cement Plant in Bokajan (Assam) Forms of Public Enterprises

• Cement Plant in Rajbans (Himachal Pradesh)

• Bhilai Steel Plant (Madhya Pradesh, now Chattisgarh)
• Bharat Pumps & Compressors at Naine (Uttar Pradesh)
Out of about 1.8 million total manpower strength of public enterprises in the
Central public enterprises, in 2001-02, some 50 per cent was accounted for by
sick units takenover from private ownership.

Product Profile

The annual capacities created in the country through investments in Central public
enterprises have been the major drivers of economic growth in the country. (See
Table 3.6). The products cover a wide spectrum from different electronic goods,
cables, foundry forge items, steel products, machine tools, compressors, diesel
engines, transmission line towers, conveyers, railway wagons, locomotives and
coaches, X-ray films, contraceptives, watches, lubricants, tea, drugs and
pharmaceuticals, petrochemicals, phenol, DDT, LPG, propane, ethylene,
polypropylene, textiles.

Financial Services

Public sector has played a catalytic role in promotion of industry by offering

credit and other facilities for development of industries in the private sector.
Some significant activities in this area may be recapitulated.

Industrial Development Bank of India (IDBI) is one of the financial institutions

set up by Government of India empowered by an Act of Parliament to finance
all types of industrial concerns engaged in or to be engaged in the manufacture,
processing or preservation of goods, mining, shipping, transport, hotel industry,
informatics, medical and health services, leasing and ancillary activities for small
entrepreneurs, generation and distribution of power, fishing or providing shore
facilities for fishing, maintenance, repairs, testing services of machinery or
vehicles. The Bank also assists industrial concerns engaged in the research and
development of any process or product or in providing special and technical
knowledge or other services for promotion of industrial growth. Tourism
development and related facilities have been recognised as industrial activity
which could be financed by IDBI. Three subsidiaries – IDBI Bank, IDBI Capital
Market Services and IDBI Intech – offer a vast range of services to corporate
and other business segments. The services offered by IDBI include project
loans, in rupee as well as foreign currency, equity financing, corporate finance
(including short term/working capital loans, venture capital, equipment leasing,
refinancing of industrial loans as well as fee based services).

The total assistance sanctioned under all schemes for the year 2001-02
amounted to Rs. 160 billion (for one year) and disbursals amounted to Rs. 112
billion for the same year and the total assistance including assets given on lease
at the end of March 2002 stood at over Rs. 620 billion . Loans and advances
to industrial concerns at end-March 2002 was Rs. 450 billion. The significant
financial support rendered for industrial development can be gauged from the
scale of assistance.

Another development banking institution which is rendering financial services is

Small Industries Development Bank of India (SIDBI). It is also a statutory body.
It was set up in April 1990 under an Act of Parliament, as a financial institution
for the promotion, financing and development of industry in the small scale sector.
SIDBI has two subsidiaries – SIDBI Venture Capital Fund, and SIDBI Trustee
5
Public
CompanyEnterprise:
Ltd – Anand two associate organisations, namely, Credit Guarantee Fund
Overview
for Small Industries and Technology Bureau for Small Enterprises.

The scope of financial assistance of SIDBI covers the entire spectrum of Small
industry sector, including tiny, village and cottage industries and assistance is
rendered through suitable schemes for setting up of new projects, expansion,
diversification, and modernisation of existing units. Financial services rendered by
SIDBI include refinance assistance, equity assistance, project related financing,
promotion and development assistance. Over the last 12 years of existence,
SIDBI sanctioned Rs. 752 billion and disbursed Rs. 523 billion of assistance.

Apart from the Industrial Finance Corporation of India, there are 8 other financial
services enterprises, which have taken the corporate form and are in the business
of assistance in the respective areas of operations:
• Balmer Lawrie Investments Ltd.
• Export Credit Guarantee Corporation Ltd.
• Housing & Urban Development Corporation Ltd.
• Indian Railway Finance Corporation Ltd.
• Indian Renewable Energy Development Agency Ltd.
• National Film Development Corporation Ltd.
• Power Finance Corporation Ltd.
• Rural Electrification Corporation Ltd.
Insurance Sector

Life Insurance Corporation of India (LIC) and General Insurance Corporation

along with four subsidiaries (GIC) were set up by Acts of Parliament as statutory
corporations, the former for life insurance activities and the latter for carrying out
the general insurance business in and outside the country. These were created
out of the nationalised private companies operating in the respective fields.

Both life insurance and general insurance businesses are now thrown open to the
private sector. The presence of the public as well as the private insurance
companies is expected to ensure a very healthy competition in the market in the
coming years.

Infrastructural Sector

The major segments of infrastructure are railways, civil aviation, power, roads,
ports and telecommunications, in which the government has been participating
actively. Excepting for railways, which is still in the Reserved List, holding a
monopoly status, the rest have shifted to a competitive mould, open to initiatives
of both, the public and private sectors, some in a collaborative or partnering
framework.

The Indian Railways, a public utility service organisation, is the second largest
railway systems in the world, exclusively operated as a departmental undertaking.
It has an extensive network, spread over 63,000 route kilometers of which 25
per cent is electrified.

A new innovation is a special purpose vehicle (SPV) with equity participation of

the Ministry of Railways and Gujarat Pipav Port Ltd., formed to provide broad
)
gauge connectivity to the Port of Pipav. SPV is a firm which embodies a
financial contract. It has no management and no employees, but is a legal
6
person, which is governed by contractual obligations. Forms of Public Enterprises

Another innovative form is the partnership between the railways and state
governments and users for funding of projects. Illustratively, an MoU was signed
between the Government of Jharkhand and the Ministry of Railways for
execution of six projects at an estimated cost of about Rs. 20 billion; two-thirds
of which would be borne by the state government and one-third by the Ministry
of Railways. The projects are to be completed in a time-frame of 5 years.

Public-private sector partnering is a new innovation in sectors like civil aviation.

New international airports planned at Bangalore, Hyderabad and Goa are to be
set up with private sector participation. These airports are to be set up as joint
ventures where the private sector partners will hold 74 per cent of equity and
state governments and Airports Authority of India (a Central Government
undertaking) will together hold the balance 26 per cent.

An important project, the National Highway Development Project (NHDP),

entails expansion of the existing 2-lane highways to 4-6 lanes and the
strengthening of existing lanes on nearly 13000 kms. The project is one of the
largest single highway projects in the world and comprises 5846 kms of Golden
Quadrilateral (GQ) connecting 4 metros of Delhi, Mumbai, corridors connecting
Srinagar-Kanyakumari and Silchar-Porbander. The implementing agency for the
project is a statutory body, the National Highways Authority of India (NHAI) set
up under an Act of Parliament. The NHDP is estimated to cost Rs. 540 billion
of which Rs. 303 billion would be spent on Golden Quadrilateral link.

Multiple financing pattern is involved in regard to NHDP, some of which are on

BOT (Build, Operate and Transfer) principle. Work on BOT projects worth over
Rs. 26 billion is in progress. Over 20 projects costing Rs. 68 billion are under
implementation under the BOT plan.

3.3 ROLE OF DEPARTMENT OF PUBLIC

ENTERPRISES
The Government of India had constituted a separate department under the title,
Department of Public Enterprises (DPE). Presently, it is a part of the Ministry of
Heavy Industries and Public Enterprise. The DPE was earlier known as the
Bureau of Public Enterprises. The DPE does not control the working of
enterprises, which function is exercised by the Ministry to which each enterprise
is distinctly assigned. It provides the guidelines and coordinates the activities of
the Central public enterprises.

DPE serves as a nodal agency for the public enterprises and assists in policy
formulation pertaining to the role of such enterprises in the economy. It lays
down policy guidelines on performance improvement and evaluation, financial
accounting, personnel management and related areas. DPE also provides an
interface between the public enterprises and other official organs such as the
parliamentary committees. It is also concerned with all matters relating to MOUs
between public enterprises and the administrative ministries/departments; overall
policy matters relating to composition of board of directors, categorisation of
posts, delegation of powers to board of directors, and broad parameters
regarding pay structure and perks of top executives.

DPE compiles regularly the Annual Survey of Public Enterprises and presents
an analysis of the data. It constitutes the principal source of information on
Central public enterprises.
7
Public Enterprise:a An
DPE provides forum in regard to settlement of commercial (except taxation)
Overview
disputes between two or more enterprises and between the enterprises and
external agencies, such as port trusts.

Role of Administrative Ministries

Central public enterprises function as separate entities but under the over all
control of different administrative ministries or departments to which each
enterprise is attached. These number some 35 to 40 ministries and departments.
The administrative ministries and departments are accountable to the Cabinet and
the Parliament.

The respective administrative ministry processes the cases of appointment of

Chairman-cum-Managing Director and board level directors through the Public
Enterprises Selection Board (PESB) and secures the approval of the
Appointments Committee of the Cabinet. The budgetary support to any loss
making enterprise and the capital expenditure beyond the limits delegated to the
enterprises are processed by the ministry for getting approval of the competent
authority such as the Planning Commission or the Ministry of Finance. The
administrative ministry has the prerogative of issuing directives to the enterprises
under their administrative control.

Autonomy and Accountability

The term ‘public enterprises’ represents, to reiterate two dimensions ‘public’ and
‘enterprise’. The public has reference to ownership, control and objectives of an
enterprise. It is commonly recognised that the public sector is intended for public
good. The enterprise dimension is reflective of the commercial character of the
activity, again for the stated objective. Germane to this is the concept of
freedom to operate in a competitive environment.

The dilemmas of the public enterprise system are the dichotomies of public
accountability and commercial freedom, on the one hand, and social
responsibility and profit maximisation, on the other. One has to carve out
balancing modes of accountability, with autonomy and social responsibility with
profitability which are inherent in the very concept of public enterprise.

However, it is in the act of balancing the two binary concepts, that there is a
constant quest, discussion and debate. Where the accountability should end and
autonomy begin or how to intermesh these two opposing stands is the million
dollar question. So is the balancing trick between the other two seemingly
opposite phenomena. The quest is universal but equally daunting.

The Administrative Reforms Commission of India observed as early as 1967 that

since the public enterprises are financed from public funds, it is imperative that
these operate within the confines of public accountability. The essential feature
of this accountability in a democracy is the supervision and control exercised by
the Parliament (or legislature, by whatever name called). The need for such
supervision and control is all the greater in a country like India which is
committed to a developing and equitable society.

On the relationship of public enterprises with the government, the Commission

had observed that excessive external control inevitably has a frustrating effect on
the management; it weakens its initiative and restrains it from taking quick
decisions on the spot. At the same time, government must have the power to
issue policy directives, exercise strategic control and make the necessary
coordination keeping in view its responsibility for the effective implementation of
the socio-economic programmes of the country. It is, therefore, necessary to
8
provide for a proper system of coordination and control of Forms of Public
the public Enterprises
undertakings
while adequately safeguarding their operational autonomy.

Several other expert bodies have covered the subject of interface between the
government and public enterprises like Krishna Menon Committee, Arjun
Sengupta Committee, Economic Administrative Reforms Commissions. The
Krishna Menon Committee had observed, among other things, that :

“There obviously have to be limits to autonomy. At the same time, delegation of

authority and freedom for initiative must be left to those who have to produce
results.”

On the question of accountability, the Committee had this to say : “The Minister
……. is accountable under the general law and practice of the country for
anything that Parliament chooses to ask him to account. The normal practice of
making such accountability real is provided for by the many usual methods of
expression of public opinion. These include questions, debates on any issue under
normal Parliamentary procedures at the discretion of the Speaker, motions of
adjournment, censure, confidence, etc.”

Paul Appleby, who in the mid-1950s, examined the Indian administrative system
with special reference to administration of government’s industrial and commercial
enterprises (Appleby, 1956), pointed out that in a democratic framework, it is
inevitable that Government retains powers of control to intervene, while granting
delegation of authority consistent with accountability.

The subject of accountability was one of the main themes in a seminar organised
by the Bureau of the Public Enterprises in 1979 (Seminar, 1979). The seminar
discussed inter alia three dimensions of accountability, namely, ‘to whom’, ‘for
what’ and ‘how’ it is to be ensured. It was recognised that public enterprises
are accountable to the public at large because it is the public money which is
invested in those enterprises, which boils down to the representatives of the
people, in the state legislatures or in the Parliament, as the case may be. The
rationale is the assumption that the accountability to Parliament or the state
legislature can ensure that the investments are optimally used for achieving the
objectives of the undertaking. To achieve this, it was recognised that suitable
information system from the enterprise to the government and through
government to the Parliament was a pre-requisite. Accountability ‘for what’
underlines the need for clear cut objectives to be given for each public
undertaking. Unless the objectives are well-defined, it would be difficult to hold
the management of the enterprise accountable. In order to ensure accountability,
the control system has to be so devised that both the Parliament and the
government are enabled to oversee the working of the enterprises without
interfering in the day-to-day administration of the undertakings.

In a report, the Economic Administration Reforms Commission observed that

what had taken place in the name of ‘accountability’ were certain distortions. It
said:

“There can be no accountability if there is no perception of what is to be done

and in what time frame……..what we have today (in the governmental system)
is essentially accountability for error and wrong-doing and not for non-
achievement and inefficiency”.

From the foregoing discussion, it appears that in a parliamentary democracy,

ministerial control cannot be dispensed with in public enterprises. Autonomy of an
enterprise has necessarily to be tempered with by a system of checks and
balances. What is required is a clear set of objectives for these enterprises and
9
Public
wider Enterprise: An of the control system to ensure fulfilment of those objectives.
understanding
Overview
The equilibrium between autonomy and control can be maintained provided the
public enterprises, the government and legislature play their part being fully
conscious of the boundaries of each. Authority delegated to the enterprises
needs to be exercised fully without reference to any external authority. Where
the authority vests with outside agency, it is imperative on the enterprise to seek
approval from appropriate agency. The legislature on their part should not
concern itself with the day-to-day running of an organisation. A certain amount
of self-discipline is essential, which is at the core of autonomy. It is, nonetheless,
difficult for the political and bureaucratic system to resist the temptation where
some door is open for intervention and, therefore, for the exercise of authority.
The business world is, however, changing in the global context. Even the private
enterprise is learning new rules of the game. The concern for different
stakeholders and not merely of the shareholders is emerging as a new goal.
Corporate governance is making the impact. The public sector has to transform
itself for survival.

While the theoretical framework is obvious, certain practices and tendencies tend
to become eroding factors. This phenomenon is often termed as ‘back seat
driving’ or ‘calling the tune’. Informal and covert relationships subsist between
the public enterprise management and the executive arm of the government.
Such interference is not open and, therefore, not susceptible for any easy
identification; nor could it be easily tackled. It prevails in the matter of
recruitment which falls within the delegated sphere of authority of public
enterprise management or in the award of contracts or in spheres of activities
within the domain of an enterprise, such as expenditure on advertisement,
entertainment, foreign travel. Here, the judgement of public enterprise
management is superimposed by an external authority. While some negative
features have crept in, it is important to recognise that some healthy conventions
and formalised procedures have been established with regard to central public
enterprises over time. These need to be taken note of:

1) Questions and interpellations of the concerned Minister in Parliament are

governed by certain conventions. Questions relating to day-to-day
administration of public enterprises or questions which tend to throw work of
the ministries and the public enterprises incommensurate with the results to
be obtained therefrom and questions which seek to obtain information which
the Member may obtain directly by addressing the management of public
enterprises, are not admitted.

2) The scope and functions of the Parliamentary Committees on Public

Undertakings consisting of 15 Members from Lok Sabha and 7 Members
from the Rajya Sabha, are well defined . The Committee inter alia is to
‘examine, in the context of autonomy and efficiency of the public
undertakings, whether the affairs of the public undertakings are managed in
accordance with sound business principles and commercial practice.

3) The areas of responsibilities of the government and the public enterprises are
defined more clearly. Certain powers have been reserved for the
government in regard to appointment of top executives at board-level; for the
rest, the public enterprises themselves have been given more authority and
responsibility with regard to the affairs of those enterprises. Capital
expenditure upto specified limits could be incurred by public enterprises under
the system of delegated authority. Unless deficit is anticipated, revenue
budget need not be placed for approval to the government.

10
4) In order to ensure accountability, the reporting systemForms of Public Enterprises
of enterprises to the
government has been streamlined and formalised. As part of the system,
Quarterly Performance Reviews are conducted in the administrative ministries
with the participation of chief executives of public enterprises and
representatives of Planning Commission and the Department of Public
Enterprises. The system of MOU also serves as a tool for accountability.
The question that seriously needs to be addressed along with autonomy is the one
of accountability. In the name of accountability there are many players in the
field.
Public enterprises are owned by the state. As these enterprises are created by
investments from the funds of the exchequer, they become accountable. It is not
easy to define the precise degree of control that accountability involves. Equally,
it is difficult to strike a balance between the requirements of accountability
consistent with autonomy.
There are two types of control in the name of accountability, direct and indirect.
Direct controls are exercised by the administrative ministry. Questions by
members of Parliament, debates in the House and interpellations of the minister
serve as instruments of control.

The indirect control is exercised through multiple agencies including the

Comptroller & Auditor General of India and Central Vigilance Commission,
which are statutorily empowered to keep a watch.

The Performance Contracting

An important recommendation stemming from the Report of Arjun Sengupta

Committee is the concept of Memorandum of Understanding (MOU) – a system
which was conceived in early 1988 on the South Korean model of performance
contracting. It was intended to give greater autonomy to PEs and at the same
time to ensure their greater accountability.

The 1991 Industrial Policy of the Government of India envisaged that the MOU
system needs to be extended to all public enterprises, excepting those which
being sick needed to be referred to the Board for Industrial and Financial
Reconstruction (BFIR). One could see the reasons for the latter exclusion, but it
is these enterprises which needed planning and commitment even more unless
these were those which were non-revivable despite reasonable turnaround
strategies.
The main objectives to be achieved through the MOU System are:
• fostering of a contractual relationship between government and Public
enterprises;
• providing an objective evaluation mechanism on agreed criterion and the
actual performance of the public enterprise annually;
• achieving performance improvement through recognition of outstanding
performance through an assessment by a group of experts associated with
the MOU System (mostly retired chief executives, senior level professionals
and retired civil servants, who were associated with public sector
management. Some outside professionals were also included).
The thrust of the MOU system is to specify measurable goals and to assess the
achievements related to targets. The system takes cognisance of the measures
accepted both by the government and the public enterprise management.
Parameters were set to measure the achievements in a 1 to 5 scale with the
grading of Excellent, Very Good, Good, Fair and Poor ratings - computed from
11
Public Enterprise:
the actual An
performance against the targets related to the various facets of
Overview
working of the enterprise, such as financial and fiscal achievements, inventory
management, customer satisfaction and project management.

A High-Power Committee (HPC) is supposed to guide and oversee the

operations of the MOU system and to evaluate the performance based on actuals
at the end of the year against ‘the understandings’ arrived at the beginning of
the year. It operates- under the chairmanship of the Cabinet Secretary. The
members include Finance Secretary, Expenditure Secretary, Planning Secretary,
Secretary, Programme Implementation, Chairman, Public Enterprises Selection
Board and Chief Economic Adviser. The Secretary, Department of Public
Enterprises is the Member-Secretary.

The HPC is assisted by an actively engaged Ad Hoc Task Force of Experts and
the Department of Public Enterprises, serves as Secretariat for the MOU system.
This system included granting of Awards, called “MOU Awards” for outstanding
performance. However, it did not incorporate the much needed reward-
punishment package which could provide the incentive for better performance.

The MOU system is to be viewed as a contract between the management of

public enterprise and the government with the latter represented by the secretary
in the concerned administrative ministry. It is an annual exercise. A significant
aspect of the system is evaluation of managerial performance through objective
criteria – both quantitative and qualitative. This system is in operation for a
decade-and-a-half with refinements introduced from time to time. About 100 to
108 enterprises are covered by the MOU system from year to year. While a
system like the MoU is a sine qua non for the public sector to ensure autonomy
and accountability, the system has not achieved the desired results. Among others,
the reasons are insistence on soft targets, non-fulfilment of conditions promised
by the government and the continuing frequent interface between the government
and the public enterprises, and sometime frequent change of the Directors.

To sum up, the scale and dimensions of investment in the public sector make
large claims on scarce national resources. The public enterprises could not,
therefore, be left entirely free of control and accountability. The argument is not
about whether the control is necessary but only over the degree of control and,
more importantly, how it is exercised. A clear distinction between policy issues,
on the one hand, and day-to-day administration, on the other, would help in
balancing the two opposing concepts of autonomy and accountability. Public
enterprises have no escape from the dual role expected of them. While, they
have to take care of public interest, these must operate as efficient commercial
entities, creating value for all stakeholders. While the grant of navratna/
miniratna status to selected enterprises and the system of MOU in operation
over a decade are attempts to address the issue of autonomy consistent with
accountability in the public sector, these need to be streamlined and reinforced
with commitment from both sides, the government and the management of the
public enterprises.

The Audit Function

Public enterprises in the corporate mode operate under the provisions of the
Indian Companies Act. Their accounts are to be certified by the statutory
auditors appointed by the government. The appointment of auditors, who are
accredited members of the Institution of Chartered Accountants, are always made
on the advice of the Comptroller & Auditor General of India (CAG). The
accounts certified by the Chartered Accountants are subjected to supplementary
or
12 test audit by officers of CAG. The Companies Act also empowers CAG to
 Forms ofthe
issue directions to the statutory auditors on the manner in which Public
auditEnterprises
is to
be conducted.

In respect of the enterprises set up under the specific Acts, like Airports
Authority of India, Food Corporation of India, the accounts are also required to
be audited by CAG, under the provisions of the relevant Acts. CAG presents its
reports to Parliament in three modes:

Report 1. Review of accounts (giving a critique of overall performance).

Report 2. Comments on accounts of the companies audited.
Report 3. Transaction audit observations on individual topics of interest.

An Audit Board is set up by CAG, with a chairman of the rank of Deputy.

Controller & Audit General, two whole time members of CAG’s office and two
part-time experts from outside the government. The reports of Audit Board
based on ‘efficiency audit’ are given as a separate report, called Reviews of
Some of the Activities of Selected Public Undertakings. Report 3 brings out
individual cases of gross irregularities through audit paras. The audit paras are
examined by the Parliamentary Committee on Public Undertakings for suitable
direction.

A question that is often raised is whether the public enterprises are not being
subjected to double audit leading to excessive control on their transactions, in
comparison to companies in the private sector which are also set up under the
provisions of the Indian Companies Act. The latter are audited by the Chartered
Accountants only. This view is countered by CAG, that as massive investments
are made with public money in the public enterprises and as it is the
constitutional authority set up under the Constitution of India as a statutory body,
CAG is the best judge to decide on the system of audit.

Vigilance Machinery

Another form of indirect control is exercised on the working of public enterprises

by the Central Vigilance Commission (CVC), a statutory authority set up with the
approval of the Parliament. CVC exercises superintendence over the vigilance
administration of the various ministries or the corporations established by or under
any Central Act and government companies. CVC has jurisdiction over the
Central Bureau of Investigation (CBI), an investigative wing with discretionary
powers of scrutiny and filing of charge sheets against various functionaries.

Vigilance angle is generally perceived as prevention and control of illegal

gratification, possession of disproportionate assets, forgery, cheating, abuse of
official position with a view to obtaining monetary gain for self or any other
person, lapses, such as flagrant violation of systems and procedures. It is the
sweep of vigilance machinery which leads to a fear psychosis in public
enterprises, which are expected to function on commercial basis with the
intention of earning maximum financial returns. The existence of multiple checks,
financial and others, does affect the freedom of action which is demanded of a
vibrant global organisation. While there are issues of public morality and interest,
it is an issue which has plagued the working of the public sector. Article 12 of
the Constitution of India considers a government owned (51 per cent or more of
equity) undertaking as a part of the state and these controls cannot be dispensed
with unless the government equity stake is reduced below 51 per cent.

13
Public Enterprise: An
Activity
Overview
Name any two public enterprises covering the following activities.
a) Production of steel and non-ferrous metals and products.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
b) Promoting tourism.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................

3.4 SUMMARY
Public sector includes the enterprises owned by centre as well as the state. The
scope of public enterprises cannot be limited to the centre alone as the state
owned enterprises also play an important role in the economy of the nation. This
unit tries to cover the extent and scope of the public enterprises at both, the
central level as well as state level. The growth of public enterprises in different
sectors have been discussed in brief to give a fair idea of the progress of the
public enterprises. It also highlights the role of different departments to monitor
the activities of public enterprises. In short, this unit covers the nature and scope
of public enterprises.

3.5 SELF ASSESSMENT QUESTIONS

1. Discuss the scope of public enterprises in the service sector taking into
account the financial services.
2. Discuss the terms 'autonomy' and 'accountability' with reference to public
enterprises.
3. What are the main objectives, which are to be achieved through MOU with
reference to the performance contracting.

3.6 REFERENCES AND FURTHER READINGS

Administrative Reforms Commission Report of public sector undertakings,
(October 1967), p.26.
Appleby Paul, Re-examination of India’s Administrative System with special
reference to Administration of Government’s Industrial & Commercial Enterprises,
1956, Government of India, p 4, Cabinet Secretariat, O&M Division.
Seminar on Profitability, Accountability and Social Responsibility of Public
Enterprises, (August, 1979).

14
Table 3.1 : Growth of Central Public Enterprises Forms of Public Enterprises

Periods Enterprises Total Investment

No. Rs. bn
At the start of

First Plan 1950-51 5 0.29

Second Plan 1955-56 21 0.81
Third Plan 1960-61 47 9.48

Fourth Plan 1969-70 84 38.97

Fifth Plan 1974-75 122 62.37

Sixth Plan 1980-81 179 181.50

Seventh Plan 1985-86 215 426.73

Eighth Plan 1992-93 246 1354.45

Ninth Plan 1997-98 240 2310.24

Tenth Plan 2002-03 240 3246.32

Source: Public Enterprises Survey 2001-02, Department of Public Enterprises, Ministry of

Heavy Industries And Public Enterprises, Govt. of India.

Table 3.2: Investment and Turnover of Central Public Enterprises

Enterprises Investment (b) Turnover
No. Rs.bn Rs. bn
1. Manufacturing organisation 149

Steel 235 212

Minerals & Metals 57 69

Coal & Lignite 273 220

Power 460 240

Petroleum 367 2598

Fertilizers 181 74

Chemicals & Pharmaceuticals 60 64

Heavy Engineering 417 79

Medium & Light Engineering 50 78

Transportation Equipment 30 61

Consumer Goods 32 12

Agro-based Industries 1 1

Textiles 187 8

Total 1974 3715

2. Service and Trading

15
Public organisations
Enterprise: An 81
Overview
Trading & Marketing 27 447

Transportation Services 69 160

Contracts & Construction Services 66 23

Industrial Dev. & Consultancy

Services 148 49

Tourist Services 2 3

Financial Services 578 84

Telecommunications & IT Services 265 304

Section 25 Companies 14 2

1169 1072

a
Total 240 3246 4787

* Includes 10 enterprises under construction b) 2001-02

Source : ibid
Table 3.3 : Sources of Investments in Central Public Sector
End 2001-02
Rs. billion
Equity Borrowings Total
Central government 864.67 567.38 1432.05
State governments 14.68 0.26 14.94
Holding companies 103.28 160.05 263.33
Foreign parties 5.75 62.69 68.44
Financial institutions and banks 24.31 1396.16 1420.47
Total 1012.69 2186.54 3246.32
Source: ibid
Table 3.4 : Central Public Sector Production in Selected Areas
2001-02
Item Unit Public sector Share of national
production Production
Lignite mn MT 23.50 100
Nuclear energy MW 2620 100
Lead th MT 37.8 99
Coal mn MT 312.53 95
Crude oil mn MT 27.89 87
Natural gas mn MT 25.66 86
Zinc th MT 176.3 86
Refinery crude mn MT 72.13 67
Finished steel mn MT 9.95 33
16
 Forms of Public Enterprises
Aluminium th MT 231.67 36
Nitrogenous fertilizers mn MT 2880 27
Phosphoric fertilizers mn MT 479 12

Source: ibid
Table 3.5 : Investments and Employment Generated by Central Public Enterprises by States
Gross Block Employment
Rs. in thousands

1. Andaman & Nicobar Islands 1.62 2

2. Andhra Pradesh 381.72 111
3. Arunachal 17.60 1
4. Assam 211.92 60
5. Bihar 88.23 24
6. Chandigarh 1.59 4
7. Chattisgarh 110.58 112
8. Dadra Nagar Haveli 0.62 0
9. Delhi 250.35 88
10. Goa 3.15 3
11. Gujarat 344.18 63
12. Haryana 96.18 21
13. Himachal Pradesh 123.26 10
14. Jammu & Kashmir 97.05 9
15. Jharkhand 214.13 281
16. Karnataka 180.42 94
17. Kerala 135.04 49
18. Madhya Pradesh 219.92 125
19. Maharashtra 812.77 243
20. Manipur 2.25 1
21. Meghalaya 8.02 5
22. Mizoram 1.40 0
23. Nagaland 13.85 6
24. Orissa 271.31 75
25. Pondicherry 0.74 3
26. Punjab 73.54 28
27. Rajasthan 131.67 40
28. Sikkim 9.41 1
29, Tamilnadu 339.56 110
30. Tripura 13.17 2
31. Uttar Pradesh 338.52 107
32. Uttaranchal 80.74 24
33. West Bengal 267.13 285
34. Others (Unallocated) 63.54 4
17
Public Enterprise: An
Source : ibid
Overview
Table 3.6 : Annual Production Capacities in The Central Public Sector
Product/Service Unit Annual Capacity

Steel mn MT 12.8
Copper (wire rod) MT 60,000
Zinc (ingot) MT 169,000
Atomic minerals (ilmenite) MT 465,000
Iron Ore mn MT 22.2
Aluminium th MT 230
Coal mn MT 225
Lignite mn MT 18
Power (thermal, hydel, nuclear) Mn 23,674
Petroleum crude mn MT 30
Petroleum refining mn MT 78
LPG (Propone & Ethylene) mn MT 1.17
Fertilizers (nitrogen) mn MT 28.8
Heavy electricals th MT 1.65
Heavy vessels MT 24,000
Cranes MT 7,000
Conveyors MT 7,890
Mining equipment MT 5,000
Material handling equipment MT 4,000
Structurals MT 13,600
Earth moving equipment nos 1,010

18
 Forms
companies, the court decided that since the two corporations, of Public
namely, Enterprises
Hindustan
Petroleum Corporation and Bharat Petroleum Corporation, were established by
Acts of Parliament, the government cannot privatise them without the clearance
of the Parliament.
Government Joint Stock Company
The limited liability company in corporate mode is the most common form of
public sector undertakings in several countries. The setting up of such companies
does not require the consent of the law making authority, that is, the legislature.
By executive decision and subject to the general compliance with the provisions
of the Companies Act, these government companies can be incorporated. These
are simple joint stock, limited liability companies with a majority stake of the
government. This form of organisation makes it convenient to operate, expand,
diversify, merge, sell, transfer (ownership or management) more easily. These
companies function like any other private company except that the major or the
dominant shareholder, the government, exercises substantive control over its
management.

According to the definition given in the Indian Companies Act, 1956 (as amended
from time to time), a government company is “any Company in which not less
than 51% of the paid-up share capital is held by the Central Government or by
any State Government or Governments, or partly by one or more State
Governments, and includes a Company which is a subsidiary of Government
Company thus defined.”

At the end of March 2002, there were 240 (Central) public sector companies.
(For distribution see Table 3.1, Unit III).

The state-owned banks in India are a separate category by themselves. These

are also incorporated as limited liability companies since these are erstwhile
private banks which were nationalised. The public sector banking system
comprises The State Bank of India (the largest commercial bank) and its 7
subsidiaries, 14 major commercial banks nationalised in July 1969; another 6
banks nationalised with effect from April 15, 1980 and the Regional Rural Banks
established later. These banks play a catalytic role in helping mobilisation of
savings of the people and to utilise them for productive purposes, in accordance
with the national plans and priorities. They operate as normal banks but their
operations are regulated by the government and the Central bank of the country,
namely, the Reserve Bank of India.
Co-operative Society
A few public enterprises in India have taken the cooperative form. The co-
operatives get registered and operate under the Cooperative Societies Act, but
function basically as a corporate entity. A large part of the total capital is held
by government and the rest is dispersed among cooperative federations or
individual cooperative societies. Some examples from the Indian public enterprise
domain are: Indian Farmers & Fertilisers Co-operative Ltd.(IFFCO) and Krishak
Bharati Cooperative Ltd. (KRIBCO), both engaged in fertilizer manufacture and
owning and operating large fertiliser and chemical plants.
Holding Company
The holding company concept is only a two-tiered corporate form. Some of the
companies falling in a cognate group are woven in a network of companies with
the entire or dominant shareholding held by the ‘parent’ or an investment
company.

1
Public Enterprise:
The concept An
of holding company in the Indian context can be traced back to the
Overview
reform measures suggested by the Administrative Reforms Commission in the
1960s. In 1967, the Commission in its Report on Management of Public
Sector recommended that the industrial and manufacturing concerns in the sector
should be grouped into 12 sectoral corporations. The Commission drew its
inspiration from the Italian experience of ENI (petroleum complex) and IRI
(Institute for Reconstruction of Industry), which are statutory corporations in that
country. The Commission recommended setting up sectoral corporations in which
units constituting them did not have a separate entity of their own except for
accounting purposes and decentralisation of functioning. The objective of setting
up of sectoral corporation is to avoid fragmentation of industrial effort and to
help in maintaining an arm’s length relationship between the government and the
sectoral corporation. The government did not accept this recommendation but
decided that under certain conditions there could be an advantage of having a
sectoral corporation, depending on the merits of each case.

In 1971, the then Minister for Steel proposed a new model for the management
of iron and steel industry by combining the concept of sectoral corporation and
the holding company. All the public sector steel plants, as also other related
public enterprises, were converted into subsidiary companies under the umbrella
of one holding company known as Steel Authority of India Ltd (SAIL). It was
registered under the Indian Companies Act and continues to function as such. A
departure was made to combine the functions of the Secretary of the Ministry
of Steel as Chairman of SAIL with a few other secretaries to government as
members of its board. The whole objective of arm’s length relationship of
government and the public enterprises got totally eroded. The degree of
autonomy envisaged by providing a buffer in the nature of a sectoral corporation
to allow operational distance between the public sector from the secretariat
control got lost. The SAIL experiment was not pursued and in later years, SAIL
was restructured as a steel conglomerate and activities not directly related to
steel production (such as iron ore mining), were kept outside its purview and the
subsidiaries became independent companies.

The government set up in 1984 an Expert Committee under the Chairmanship of

Arjun Sengupta, to recommend, inter alia an appropriate organisational structure
for public enterprises. In relation to holding companies, the Committee observed:
“The Committee attaches considerable importance to devising a proper
organisational structure for public enterprise in the belief that certain forms of
organisations, rather than others, can be more conducive to the efficient
functioning of public enterprises through a proper division of authority and
responsibility between the government and the public enterprise management.
Given this division, the system should run by established rules and not by exercise
of discretion.
In our approach, the government should be primarily concerned with overall
strategic planning and policy rather than with day-to-day functioning of the public
enterprises.”
The Committee clarified that the government’s responsibility is to ensure that
public money invested in those enterprises earns an appropriate rate of return,
and the functioning of these enterprises is consistent with the plan objectives,
including those related to employment, fair pricing, regional dispersal of industries
and efficient use of scarce resources. Once the goals have been mutually
agreed to, the enterprises should be allowed to operate without further
intervention by the government in day-to-day functioning. The enterprises
should, however, be held strictly accountable for their performance in relation to
the goals set and there should be an appropriate mechanism for evaluation of
their
2 performance.
 Forms of Public Enterprises
The Committee discussed, at length, alternative models of organisational structure
for public enterprises, under which there is to be a clear division of responsibility
between the government, as represented by the concerned ministry or
department, and the management of these enterprises, as represented by the
board of directors or the chief executives. In short, the ministry should be
responsible for the implementation of that policy and the interaction with the
enterprises should be such as to facilitate the exercise of overall government
supervision, without impairing the efficiency of operation of the enterprise. In
their view such an organisational structure should keep the operations of an
enterprise at arm’s length from the government and promote decentralised
decision making.

The Committee was guided by the practices in many European countries where
the holding company model was adopted to introduce an intermediate level of
management between government and the individual public enterprises (constituted
as subsidiaries) so that the government’s interface is only with the parent
company which coordinates the activities of its constituents. In other words, the
government’s interface is with the holding company, more or less on the basis
suggested by the Administrative Reforms Commission in 1967, excepting that
these holding companies will not have a statutory status, but will be companies
under the company law.

While recognising that a uniform structure for all public enterprises may not be
desirable, the Committee felt that the holding companies provided a reasonable
framework for organisational structure. It is useful to recognise that the
subsidiaries also have a corporate status and, therefore, there is a need for
decentralization of decision-making between the board of directors of the holding
company and the boards of subsidiaries. The present practice is to have the
Chairmen & Managing Directors of the subsidiary companies as members of
the board of the holding company, as in the case of companies like Coal India
Ltd.

The recommendations of the Committee led to the formation of two holding

companies, namely, Bharat Udyog Nigam Ltd. (BUNL) and Bharat Yantra Nigam
Ltd. (BYNL). These were set up in 1986-87 under the administrative control of
the Department of Heavy Industry.

No independent and incisive assessment, however, has been made so far on the
impact of this organisational form on operational efficiency of the enterprises.
One could not, therefore, say whether this is an efficient - if not the optimal -
organisational form.

4.2 TRANSFORMATION OF PUBLIC TO PRIVATE

SECTOR
The changeover from public to private sector has taken a number of forms, The
Industrial Policy Statement of 24 July 1991 envisaged not only increasing
involvement of the private sector in hitherto shut-out (or reserved) areas but also
spelt out the policy in regard to disinvestment of government shareholding in
public enterprises.

Disinvestment as a policy could be traced to the Memorandum on Economic

Policies (1991-92 and 1992-93) sent by the then Finance Ministry in August 1991
as a component of “Structural Adjustment Programme” to the then Managing
Director of International Monetary Fund, acknowledging that the public sector
had not generated adequate internal surpluses and because of the limited
3
Public Enterprise:
exposure An
to competition, had led to high-cost structure. In order to address these
Overview
issues, a new approach would be adopted in regard to the reform of the public
sector. The key elements of that approach were:
a) existing portfolio of public investments would be reviewed, to avoid areas
where social considerations are not predominant and where the private sector
would be more efficient;
b) a greater degree of managerial autonomy would be provided to enterprises
where public sector involvement is appropriate;
c) budgetary support to public enterprises would be progressively reduced;
d) market discipline would be injected to public enterprises by encouraging
competition from the private sector; and
e) chronically sick public enterprises would not be allowed to continue incurring
heavy losses.

The new strategy was based on reform and restructuring through a number of
measures: upto 20% of government equity in selected public enterprises would be
disinvested through mutual funds.

A copy of the above Memorandum of Economic Policies was also placed on the
Table of the Parliament in December 1991 from which it was evident that public
enterprises reforms and disinvestment would form part of the structural
adjustment programme.

The disinvestment policy has evolved over the last decade, by the Budget
Speeches of the Finance Ministers and later outlined in a manual prepared by the
Ministry of Disinvestment. The implementation for the policy started in 1991.

The mode of disinvestment recommended by the Disinvestment Commission (set

up in 1996) in its reports indicated a shift from public offerings to strategic/trade
sales along with transfer of management. The modes spelt out by the
Disinvestment Commission in respect of cases referred to it may be summed up
as follows:
Enterprises (no)
A. Involving change in ownership / management
1. Strategic sale 31
2. Trade sale 08
3. Employee buyout/strategic sale 02
B. Involving no change in ownership/management
Offer of shares 05
C. No change
No disinvestment 08
D. Closure /sale of assets 04
Total 58
The term of First Disinvestment Commission expired in 1999 and a new
Commission was in place from July 2001. A three-tier mechanism is in place for
decision making and implementation of the policy on disinvestment:
- Cabinet Committee on Disinvestment (CCD)
4- Core Group of Secretaries on Disinvestment (CGD)
- Inter-Ministerial Group (IMG) Forms of Public Enterprises

The disinvestment of government equity in Central public enterprises began in

1991-92 and until 1999-2000, it was carried out mainly through sale of minority
shares in small lots. Including some small amounts from strategic sale, about
Rs. 300 billion were realised through disinvestment processes from 1991-92 to
2002-2003 - against the total budgetary targets of over Rs 600 billion. Despite the
shortfall, the budgetary targets were kept high.

The present trend is to resort to strategic sale, which means sale of shares to a
private group or company along with transfer of management. The objective to
the best value for the shares, protecting the stipulated minimum or reserve
price.

The strategic sale route was adopted by selling substantial stakes and
management control to private sector companies which include Modern Foods
Ltd, Bharat Aluminium Co. Ltd, Indian Petrochemicals Corporation Ltd, CMC
Ltd, Hindustan Teleprinters, Lagan Jute Machinery, Paradeep Phosphates.
ITDC hotels in 8 different locations and 2 hotels of the Hotel Corporation of
India were sold through as assets.

Three other companies – IBP, Cochin Refineries and Chennai Petroleum – were
sold to public sector companies.

The disinvestment policy has come in for a great deal of criticism - apart from
the opposition from political quarters and trade unions. There is no clear road-
map. The initiatives are ad hoc. There is an undue emphasis on big ticket
privatisation and not on participation by the public. The sale of shares of Maruti
Udyog Limited have proved that given a good preparatory work and right timing,
public sale of shares could be an attractive route.

The Indian case of public sector is a unique case. The public sector has
penetrated fairly deeply into the economic framework. Several public sector
organisations are performing well. There are others like technical and consultancy
service companies for which there is no case for privatisation. Some of these
companies have performed very well and there is nothing to be gained by selling
coveted human capital.

What is even more significant, some of these companies could give good
competition to the private companies. These are economically strategic companies
and have a significant role to play.

There is, nevertheless, a good case for privatisation of companies which are
losing and which have no future. The exchequer can prevent a big drain if these
are privatised at market prices. There is no point in keeping the dead-wood.
Even the private enterprise gets rid of companies or assets which are not
performing and which have no future.

The much-needed redirection to the policy of privatisation based on a well

articulated plan is the need of the hour.

4.3 NAVARATNA DISPENSATION

It may be recalled that the professionalisation of boards of public enterprises and
greater empowerment emerged as a new thrust of India’s new Industrial Policy
of July 1991 enunciated as a part of the economic reforms programme. A major
step taken by the government was to grant more operational freedom to public
enterprise managements by classifying enterprises as Navaratna (symbolising
nine jewels) and Miniratnas (symbolising semi-precious jewels). 5
Public Enterprise:
The basic An was to give the boards of directors enhanced powers and
approach
Overview
operational freedom, such as to incur capital expenditure; purchase new assets or
for replacement without any monetary ceiling; raising capital from domestic and
international markets, creation and winding up of posts below the board level.
The enhanced powers also include authority to establish joint ventures and
wholly-owned subsidiaries in India or abroad, with appropriate monetary limits.
However, it was also decided that these enterprises shall not depend upon
budgetary support or government guarantees.

While granting more autonomy to public enterprises leading to accountability is a

continuous process, the number of original navratna enterprises was increased
from 9 to 11. It came back to 9 after two companies, Videsh Sanchar Nigam
Ltd. and Indian Petrochemicals Corporation Ltd., were privatised.

About 45 to 50 Central public enterprises, which have continuous record of profit

during the preceding 3 years are given the Miniratna status, split up into 2
categories based on quantum of profit earned. Category I enterprises are
permitted to incur capital expenditure on new projects, modernisation and
purchase of equipments without government approval upto Rs. 3 billion or equal
to their net worth (reserves capital and retained profits), whichever is lower.
Category II enterprises are permitted to incur similar expenditure without
government approval upto Rs. 1.5 billion or upto 50% of their networth,
whichever is lower. These enterprises have also been permitted to establish joint
ventures, subsidiaries and overseas offices subject to specified monetary limits on
equity investment. The enterprises in both categories can enter into strategic
alliances and obtain technology and know-how by purchase or other arrangements
subject to government guidelines.

The continuance of the status of navratna or miniratna is subject to review by

the government from time to time.

4.4 MANAGEMENT STRUCTURE

The structure of the working of the public enterprise, or for that matter, any
enterprise, determines how it is organised and managed. The organisation and
management of public enterprises, as distinct from control exercised by the
government as owners, present a varying pattern.

In this context and considering the forms of organisations, seven distinct types of
organisations exist in the public sector:
a) A set of companies in one type of activity bound together by a holding
company (eg, Coal India Ltd. with eight subsidiaries and the General
Insurance Corporation with its four subsidiaries);
b) Integrated multi-product, multi-unit enterprises (eg, Steel Authority of India
Ltd., with its units – Bokaro, Durgapur, Rourkela, Bhilai and others);
c) Single product enterprises (eg, National Aluminium Corporation);
d) Multi-product single enterprises like Hindustan Machine Tool Ltd., producing
machines tools, watches, tractors;
e) Service organisations providing a specific service or other related services
(eg, National Thermal Power Corporation or Engineers India Ltd.);
f) Independent governmental organisations (eg, State Electricity Boards and Port
Trusts);
g)
6 Cooperatives (such as Indian Farmers’ Fertiliser Cooperative).
 Forms of Publicor
A common feature in all the enterprises, whether in the manufacturing Enterprises
the
service sector, is the existence of a board of directors, appointed by the
government as the owners of the enterprise or as prescribed by law as in the
case of statutory corporations.

In India, Central public enterprises are classified into 4 categories with regard to
pay and perks of top management – Schedules A, B, C and D. The
Categorisation is based on a number of elements: investment, net fixed assets,
working capital, turnover, profit, employee strength, level of technology adopted
and competition from other sectors. The image of the enterprise (such as share
price), MOU ratings, ISO certification, productivity in terms of efficiency in
utilisation of capital assets, value addition per employee are also the factors
reckoned with.

The responsibility for overall management of public enterprise rests with the
board of directors appointed by the government. The strength of the board
varies from 5 to 15. Some large multi-unit enterprises like BHEL has, as a
second tier, a Management Committee to assist the board.

A usual pattern in Indian Central public enterprises is the combination of the two
posts of Chairman and Managing Director into a single functionary (Chairman-
cum-Managing Director), assisted by functional directors such as of Finance,
Personnel or Human Relations Management, Marketing, Technical, Operations.
The existence of number of functional directors depends on the scale and sweep
of the organisation. The combination of the two positions has its own pros and
cons and has been a debatable issue. In some cases, the two positions are, in
fact, separated from each other. The Chairman and Managing Director is
supported by Executive Directors and General Managers down the line. Some
have cross-functional roles.

In the Indian Central public enterprise, no Minister or Member of Parliament is

appointed on the board of directors. However, secretaries and joint secretaries to
the government are nominated as members of the boards, for limited periods as
the chairman.
The Memorandum of Association and Articles of Association of the enterprises in
the corporate form spell out objects, capital structure, composition of the board
and the tenure of the directors. An over-riding power vests with the government,
such as in matters of appointment on the board including Chairman & Managing
Director, functional directors. Their terms and conditions, remuneration and tenure
is determined by government – usually adopting a uniform pattern depending on
the classification of enterprises (under A,B,C and D schedules) and also have the
powers to fill in vacancies caused by removal, resignation, death or otherwise of
the members of the board.
An important, although controversial power, which vests with the government is
the issue of directives or instructions as considered necessary in regard to the
conduct of the business and affairs of the public enterprise or its directors and to
annul and vary any such directive. These directives have to be complied with.
As indicated earlier, the new Economic Policy laid emphasis on the
professionalisation of the boards of public enterprises. The guidelines issued in
this regard provide that
• every board shall have full-time functional directors, the maximum strength
restricted to 50% but relaxable;
• the number of government directors on a board should not exceed 2; and
• the share of non-official part-time directors should be at least one-third of the
7
total strength.
Public Enterprise: An
4.5
Overview ENTERPRISE MODELS
In the foregoing context and the ownership and management perspectives, the
public sector’s positioning may be identified from a matrix as presented in
Exhibit 1 (Mohnot, 2003).

Models A and B are principally public sector enterprises in which all or majority
of ownership is held by the state. The state’s ownership could be supported by
public financial institutions which also function under the broad umbrella of the
state. A minority of ownership could remain in the hands of employees or private
investors – individuals or corporates. There could also be participation, in voting
equity, of special institutions, foreign investors or strategic alliance partners.

In the case of Model A, the management control remains wholly with the state
while there could be an alliance for specific functions or activities with an outside
partner. This is the conventional public sector model. Under Model B, while the
control remains with the state, the management – total or partial – is leased out
for a specific period to private management. It is a variant of partial privatisation.

Another variation of Model B could be Model C where the state relinquishes its
majority stake and hands over the management to a private group while retaining
a substantial (not majority) share of ownership. Indian privatisation moves have
followed this pattern.

Under Model D, the state or any other party does not hold a majority. It,
therefore, ceases (like Model C) to be an organisation subject to the purview of
Article 12 of the Constitution of India. However, the management control is
retained by the government. The proposal to reduce the government stake to
33% but to retain the government control in Indian banks illustrates this case.
While this will not be a model subject to Article 12, the parliamentary surveillance
will continue since the control is retained by the government.
Model E represents what in India has been termed as a joint sector. There are
a large number of undertakings at the state level which took this form. The state
(or state controlled organisations) and private partner together own 51% of the
controlling interest. At the Central level in India, Mangalore Refinery, until its
takeover in 2002, illustrates this model. Theoretically, the management was joint
but, in practice, it was controlled by the private partner. The chairman of the
board and a minority of directors are nominated by the state while the managing
director (or CEO) is nominated by the private partner or the Board.
Model F (a variation of E) is a case of real-time equal partnership between the
state and a private party. Maruti Udyog in India until privatised represented this
case. The voting stake is shared equally while a small percentage could remain
with odd shareholders, such as the financial institutions or the employees.
Nominees of the state and of the private partner share alternately the positions
of the chairman and the managing director.
Model G represents a wholly private enterprise model where a major – not
necessarily a majority owner (along with his friends and associates and
invariably other controlled enterprises euphemistically styled as promoters) control
the strings of management. In developing countries, like India, the state may
provide equity participation as a matter of financial assistance.
A variant of this model is a corporate in which the principal and his associates
and nominee companies (also nominated investment companies) hold a majority of
the stake. In these cases, the one-man – not only one group – control is
complete. While this last model is a variant of Model G, the deviation basically is
8peripheral.
 Forms of Public Enterprises
Exhibit 1 : Taxonomy of Enterprise Models
Ownership Enterprise Models Management
Majority
State
State
with or without
(with or
without PFIs A Functional
Alliance
Minority Public Sector
Private
State
(Employees
Foreign) B with Strategic
Alliance
Public Sector (Diluted)
Partial or Total

Majority
Private C Management
Leasing
Substantial Partially Privatised or Transfer to
State Sector Private

Basically D
equal State
State and Public Sector (Managed)
private
Groups
Primarily
E Private
marginal
Dominant
Joint Sector sharing
Private
with State
with
public
participation
F Joint
Partnering

G Private

Private Sector

No
dominant
Structure
H Professional

Professional sector

Term ‘state’ is used to distinguish government from public at large. Term ‘private’ is
used to denote individuals, business firms, business houses or corporates.

Model H in the matrix is the professional model. In this enterprise model, there is
no dominant stakeholder and the management is truly shared among the
professionals. Close to the model envisaged, there do exist some robust, well
managed and performing companies in the Indian economy - such as Larsen &
Toubro or Housing Development Finance Corporation, or until recently BSES, a
power company. These have performed well over long time spans. These could
provide the right direction which robust economically strategic public sector could
take. A review of their significant elements would provide the basis for evolving
a truly professional enterprise model.

9
PublicProfessional
The Enterprise: An Model
Overview
Given the growing demands of corporate governance in all enterprises including
those in the private sector and of global competitiveness, the public sector has to
- in fact - is moving towards a professional sector.

What then is a professional enterprise model (styled acronymically as PrEM)

which imbibes the distinctive and essential elements of a professional
organisation?. Optimally, a professionally strategic enterprise model is an
organisation which is professionally promoted, professionally structured,
professionally manned and professionally managed. Translated into an
operational mode, it takes on a form which possesses a configuration having
four distinctive dimensions of its own:
• Ownership and control,
• Corporate governance,
• Management system,
• Mobilisation and allocation of resources.
Ownership and Control

The critical premise of a PrEM undertaking is that the government should, in

principle and eventually, cease to be a stake-owner in all commercially-oriented
enterprises. It is obvious in a country like India that the government holdings
cannot be sold in a short span of time. A way out is that the government
holdings are transferred to a specially constituted public investment fund (PIF) or
trust (PIT) – by whatever name called. The government as such will not hold
any shares except in the transitional period. Further, the government associated
agencies, apart from PIF, will collectively not hold more than 26% equity in a
PrEM undertaking. Anywhere up to 50% of the equity capital – preferably
much less – in any one PrEM undertaking may be held aggregatively by
independent financial institutions, mutual funds. FIIs (foreign financial institutions)
may participate to the extent permissible under public regulations but not
exceeding 26%. Participation of small and medium-sized investors could be
encouraged, which could assume very large proportions.

The balance of the equity will be distributed among the employees and other
private non-substantial shareholders, individuals or others.

Strategic alliances may be forged as and when necessary to make the

enterprises globally competitive. Strategic partners could be domestic (including
other PrEM undertakings) and foreign organisations. This could provide for equity
stake of strategic partners.
Corporate Governance
The PrEM model, in order to conform to the professional structure and
dynamics, will call for a board-managed corporate entity. This means, in essence,
that all business decisions shall be taken by the board, subject, where necessary,
to the approval by the shareholders in a general meeting (annual or extraordinary,
as the case may be). The governmental clearances and approvals will be
applicable only as per the laws and regulations in force and not because the
PrEM undertaking possesses state or state-related stakes. This is an imperative
for ensuring freedom for the commercially-oriented enterprises in their decision-
making processes.

For the period of transition, the Chairman and Directors, including non-wholetime
Directors, could be chosen from a panel to be maintained by a Public
10
 Forms The
Professional Accreditation Agency – by whatever name called. of Public Enterprises
shareholders, however, shall be entitled to nominate individuals for
election as Directors from outside the panel, but such elected members will be
subject to clearance by the Agency within a period of six months from their
election.

All guidelines of corporate governance as developed and enforced will be

scrupulously followed. In accordance with the guidelines related to corporate
governance, the board will constitute, among others, what are termed as audit
and remuneration committees. The appellation of the audit committee should be
changed to management audit committee. The Management Audit Committee
should go beyond the functions of a normal accounts and audit committee and
should be proactive in evaluating important management decisions of the board.

Management Systems

The board will carve out the corporate mission with the full involvement of the
entire workforce and set a vision for the undertaking. The long term vision of the
PrEM undertaking could get reflected through a long-term Corporate Plan. It will
review periodically whether it is moving in that direction and whether any change
is needed. The entire organisation shall accept it as a matter of faith that it has
a mission – mission to serve all stakeholders, namely, investors, working people,
customers, lenders, suppliers and last, but not the least, the society at large.

Since the transformed PrEM undertaking is to be a board-managed institution, no

outside directives will be issued to the board to take – or refrain from taking –
certain decisions. Nonetheless, certain policy guidelines in the form of Code of
Conduct could be issued as a part of a broad governmental policy or consensus
developed by PIF.

All corporates will develop their own management systems. The undertakings
will follow best management practices. The managements will develop a quality
management policy based on TQM (Total Quality Management) or any other
equivalent model in all operations.

The contemporary private sector has developed enhancement of shareholder

value as an index of performance. It will be the endeavour of the PrEM
undertaking not to be too much obsessed by the index of shareholder value – and
certainly not by market capitalisation. The latter is a highly volatile indicator and
is impacted by a whole pack of factors, some completely extraneous to the
functioning of the undertaking.

Strategic planning will be the key to performance, which will include corporate
architectural restructuring, policy redirection and financial reform. The undertaking
will not hesitate to lose its identity by merger, amalgamation, even closure,
when the situation calls for it. The exigencies of global competition demand that
it does not have to exist in the same form in perpetuity.

The undertaking will be free to forge or withdraw from strategic alliances –

partial or total – and to acquire other organisations with a synergy which
conforms to its vision. For such action it seems appropriate to seek shareholders’
approval – but not government clearance, unless the latter is a part of common
law and regulations and is applicable to other similar organisations in whatever
sector.

The PrEM undertaking will establish from its very inception a safety net for its
workforce (covering upto the lowest) so that it is not constrained by flab. It
ensures that any employee committed to it for whatever period is not
11
Public Enterprise:
handicapped An the worst of circumstances – even when he has to make the
under
Overview
exit.

Communication will be taken as an instrument of management sharing and

monitoring. Transparency will be a guiding principle. The legitimate right to
information will be guaranteed to all involved.

Mobilisation and Allocation of Resources

Resource planning will be done in conformity with medium term corporate plans
and annual budgets.

The PrEM undertaking will take it as a basic premise that no budgetary support
will be available from government unless the government decides as an
independent decision with or without the concurrence of the Planning Commission
or any other statutory or constitutional body that the state desires the investment
(in the form of equity or lending) to be made in a specific project.

The Board will determine the size, form, sourcing and timing of external
resources mobilisation, where necessary in consultation with PIF.

In the dynamic world of global economy, nobody is or can be self-sufficient.

Networking is an essential ingredient with each unit contributing its best. Even
outsourcing is often both necessary and unavoidable, if the costs have to be
minimised. An independent organisation must be free to forge strategic alliances if
it has to remain globally competitive. In the last few years, such alliances have
been multiplying in all private, public and professional sectors. These need to be
encouraged to the maximum. These alliances help to upgrade technology, human
resource, marketing and management systems and to slash costs. These help to
widen market horizons as well.

The role of a forward-looking corporate citizen goes far beyond rewarding merely
the shareholder. All stakeholders must be serviced. No corporate which overlooks
the societal values can be considered to be performing well whatsoever high its
financial and economic indicators be.

4.6 SUMMARY
Once the public sector enterprise is geared to the design outlined here, it
would function on its own. It will not involve the state. While, on the one hand, it
will ensure adequate returns of and on the investments already made by the
government, it will, on the other, and absolve the government from making
financial commitments and insulate it against the oscillations of financial returns.
The model will conform to new dictates and demands of corporate governance
and make the professionally-geared public enterprises really global in their vision
and globally competitive in their techno-economic strengths.

This model should be satisfying even to private enterprise since it tends to

transform the public sector enterprises into a model which is akin to a reformed
– repeat reformed – private sector corporate model. While it will free private
enterprise from transferring huge capital resources to the government from its
resources for acquiring public enterprises, good and performing private sector,
under corporate governance, will move towards that model.
Activity
List ten public enterprises which have been disinvested in the past five years.
.............................................................................................................................
12
 Forms of Public Enterprises
4.7 SELF ASSESSMENT QUESTIONS
1. What do you understand by Navratna Dispensation? Discuss in brief.
2. Write short note on the professional model.

4.8 REFERENCES
Fernandes P.J. (1975), Coordination of Public Enterprises Country Study for India,
Paper prepared for the Asian Centre for Development Administration, Kuala
Lumpur, Malaysia, for discussion in an Expert Group Meeting.

Report of UN Seminar on Management of Public Enterprises in the ECAFE

Region, New Delhi, paper No. 81, p.7.

Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of Indian

Administrative System with Special Reference to Administration of Government’s
Industrial & Commercial Enterprises, Government of India, Cabinet Secretariat,
O&M Division.

Robson, W.A, (1960), Nationalised Industry and Public Ownership, p.28, Allen &
Unwin London.

Report of the Study Team on Public Sector Undertakings of the Administrative

Reforms Commission, Government of India, 1967.

Mohnot, S.R, (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research, Rajiv Gandhi Foundation for Contemporary Studies, New
Delhi.

4.9 FURTHER READINGS

Report of UN Seminar on Management of Public Enterprises in the ECAFE
Region, New Delhi, paper No. 81, p.7.

Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of Indian

Administrative System with Special Reference to Administration of Government’s
Industrial & Commercial Enterprises, Government of India, Cabinet Secretariat,
O&M Division.

Robson, W.A, (1960), Nationalised Industry and Public Ownership, p.28, Allen &
Unwin London.

Mohnot, S.R, (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research, Rajiv Gandhi Foundation for Contemporary Studies, New
Delhi.

13