Unit 1
An Overview of Public Sector Enterprises
Evolution-
Prior to Independence, there were few ‘Public Sector’ Enterprises in the country. These included the Railways, the Posts and Telegraphs, the Port Trusts, the Ordinance Factories, All India Radio, few enterprises like the Government Salt Factories, Quinine Factories, etc. which were departmentally managed.
Independent India adopted planned economic development policies in a democratic, federal polity. The country was facing problems like inequalities in income and low levels of employment, regional imbalances in economic development and lack of trained manpower. India at that time was predominantly an agrarian economy with a weak industrial base, low level of savings, inadequate investments and infrastructure facilities. In view of this type of socio-economic set up, our visionary leaders drew up a roadmap for the development of Public Sector as an instrument for self-reliant economic growth. This guiding factor led to the passage of Industrial Policy Resolution of 1948 and followed by Industrial Policy Resolution of 1956. The 1948 Resolution envisaged development of core sectors through the public enterprises. Public Sector would correct the regional imbalances and create employment. Industrial Policy Resolution of 1948 laid emphasis on the expansion of production, both agricultural and industrial; and in particular on the production of capital equipment and goods satisfying the basic needs of the people, and of commodities the export of which would increase earnings of foreign exchange.
In early years of independence, capital was scarce and the base of entrepreneurship was also not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the State which was directly responsible for industrial development. Consequently, the planning process (5-year Plans) was initiated taking into account the needs of the country. The new strategies for the public sector were later outlined in the policy statements in the years 1973, 1977, 1980 and 1991. The year 1991 can be termed as the watershed year, heralding liberalisation of the Indian economy.
The public sector provided the required thrust to the economy and developed and nurtured the human resources, the vital ingredient for success of any enterprise; public or private.
Growth-
The public sector undertaking is growing at a rapid rate after independence. At present in our country, there are 750 State public sector enterprises and 225 central public sector enterprises approximately employing nearly about 1,00,000 managers.
During 7th Five-year plan, on an average 50,000 crore of rupees were invested at the beginning in public sector enterprises which brought a remarkable contribution in the field of economic development Needless to mention here that these public sector enterprises covered all economy sector.
However, as per Standing Conference of Public enterprise, public sector enterprises are divided into the following nine categories, viz.:
(i) Public sector enterprises must supply essential infrastructure for economic development which are known as primary public utilities which include the following: Airlines, Shipping, Railways, Power Generation, Telecommunication etc.;
(ii) Public sector enterprises also to have control of the “commanding heights of the economy” e.g., Defence, Banks, Coalmines, Oil, Steel etc.
(iii) They are to play an entrepreneurial role which is, in other words, called capital intensive industries: e.g., Iron ore, Petro-Chemicals, Fertilizer, Mining, Ship- Building. Heavy Engineering etc.
(iv) Public sector enterprises under Government monopoly which includes: Telecommunication equipment. Defence production. Railways, Rolling Stock etc.
(v) Public sector enterprises which are exclusively meant for High Technology industries, e.g.: atomic energy.
(vi) Consumer oriented public sector undertakings, viz.:
Drug. Paper, Hotels etc.
(vii) Public Sector enterprise which is set up in order to take over the sick private units, e.g.: Textile, Engineering etc.
(viii)Public sector enterprises which are set up as Trade Corporation, e.g.: FCI, CCI, STC etc
(ix) Public sector enterprises which serves as a consultancy and engineering service etc. e.g., MECON.
It becomes crystal clear from the above nine categories of public sector enterprises that public sector enterprises vary from industry to industry relating to its investment pattern, the nature of operation, the number of workers, its market both in national and international, locational factors, availability of raw materials, power, transportation, financial facilities, national and international collaboration, the nature of product, i.e., whether wealth it is monopolistic or competitive one.
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.
Controls over the public enterprises were fairly rigid in France. The controls 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 up to 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
In the early years of the 20th 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 engine 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.
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:
First, to reduce the burden on the exchequer; and second, to encourage 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 corporatized 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.
Mexico
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 Sri Lanka 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 economy’s 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 economic development. A new market environment is emerging, rendering, in 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.
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 phenomenon. 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 some time 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 regulated has a valuable role to play.”
Manufacture of arms and ammunition; production and control of atomic energy, 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. 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 undertakings, but in which private enterprise will also be expected to 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.
Departmental Undertakings-
Departmental undertakings are the oldest among the public enterprises. A departmental undertaking is organised, managed and financed by the Government. It is controlled by a specific department of the government. Each such department is headed by a minister. All policy matters and other important decisions are taken by the controlling ministry. The Parliament lays down the general policy for such undertakings.
The main features of departmental undertakings are as follows:
(a) It is established by the government and its overall control rests with the minister.
(b) It is a part of the government and is managed like any other government department.
(c) It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to the legislature.
The following are the merits of departmental undertakings:
(a) Fulfilment of Social Objectives: The government has total control over these undertakings. As such it can fulfil its social and economic objectives. For example, opening of post offices in far off places, broadcasting and telecasting programmes, which may lead to the social, economic and intellectual development of the people are the social objectives that the departmental undertakings try to fulfil.
(b) Responsible to Legislature: Questions may be asked about the working of departmental undertaking in the parliament and the concerned minister has to satisfy the public with his replies. As such they cannot take any step, which may harm the interest of any particular group of public. These undertakings are responsible to the public through the parliament.
(c) Control Over Economic Activities: It helps the government to exercise control over the specialised economic activities and can act as instrument of making social and economic policy.
(d) Contribution to Government Revenue: The surplus, if any, of the departmental undertakings belong to the government. This leads to increase in government income. Similarly, if there is deficiency, it is to be met by the government.
(e) Little Scope for Misuse of Funds: Since such undertakings are subject to budgetary accounting and audit control, the possibilities of misuse of their funds are considerably reduced.
Departmental undertakings suffer from the following limitations:
(a) The Influence of Bureaucracy: On account of government control, a departmental undertaking suffers from all the ills of bureaucratic functioning. For instance, government permission is required for each expenditure, observance of government decisions regarding appointment and promotion of the employees and so on. Because of these reasons important decisions get delayed, employees cannot be given instant promotion or punishment. On account of these reasons some difficulties come in the way of working of departmental undertakings.
(b) Excessive Parliamentary Control: On account of the Parliamentary control difficulties come in the way of day-to-day administration. This is also because questions are repeatedly asked in the parliament about the working of the undertaking.
(c) Lack of Professional Expertise: The administrative officers who manage the affairs of the departmental undertakings do not generally have the business experience as well as expertise. Hence, these undertakings are not managed in a professional manner and suffer from deficiency leading to excessive drainage of public funds.
(d) Lack of Flexibility: Flexibility is necessary for a successful business so that the demand of the changing times may be fulfilled. But departmental undertakings lack flexibility because its policies cannot be changed instantly.
(e) Inefficient Functioning: Such organisations suffer from inefficiency on account of incompetent staff and lack of adequate incentives to improve efficiency of the employees.
Statutory Corporatons-
The Statutory Corporation (or Public Corporation) refers to such organisations which are incorporated under the special Acts of the Parliament/State Legislative Assemblies. Its management pattern, its powers and functions, the area of activity, rules and regulations for its employees and its relationship with government departments, etc. are specified in the concerned Act. Examples of statutory corporations are State Bank of India, Life Insurance Corporation of India, Industrial Finance Corporation of India, etc. It may be noted that more than one corporation can also be established under the same Act. State Electricity Boards and State Financial Corporation fall in this category.
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
(b) It is an autonomous body and is free from government control in respect of its internal management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are trained and experienced in business management. The members of the board of Directors are nominated by the government.
(e) It is supposed to be self-sufficient in financial matters. However, in case of necessity it may take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by following the terms and conditions of recruitment decided by the Board.
Statutory Corporation as a form of organisation for public enterprises has certain advantages that can be summarised as follows:
(a) Expert Management: It has the advantages of both the departmental and private undertakings. These enterprises are run on business principles under the guidance of expert and experienced Directors.
(b) Internal Autonomy: Government has no direct interference in the day-to-day management of these corporations. Decisions can be taken promptly without any hindrance.
(c) Responsible to Parliament: Statutory organisations are responsible to Parliament. Their activities are watched by the press and the public. As such they have to maintain a high level of efficiency and accountability.
(d) Flexibility: As these are independent in matters of management and finance, they enjoy adequate flexibility in their operation. This helps in ensuring good performance and operational results.
(e)Promotion of National Interests: Statutory Corporations protect and promote national interests. The government is authorised to give policy directions to the statutory corporations under the provisions of the Acts governing them.
(f) Easy to Raise Funds: Being government owned statutory bodies, they can easily get the required funds by issuing bonds etc.
The following limitations are observed in statutory corporations.
(a) Government Interference: It is true that the greatest advantage of statutory corporation is its independence and flexibility, but it is found only on paper. In reality, there is excessive government interference in most of the matters.
(b) Rigidity: The amendments to their activities and rights can be made only by the Parliament. This results in several impediments in business of the corporations to respond to the changing conditions and take bold decisions.
(c) Ignoring Commercial Approach: The statutory corporations usually face little competition and lack motivation for good performance. Hence, they suffer from ignorance of commercial principles in managing their affairs.
Government Company-
As per the provisions of the Companies Act, a company in which 51% or more of its capital is held by central and/or state government is regarded as a Government Company. These companies are registered under Companies Act, 1956 and follow all those rules and regulations as are applicable to any other registered company. The Government of India has organised and registered a number of its undertakings as government companies for ensuring managerial autonomy, operational efficiency and provide competition to private sector.
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its own name.
(c) The annual reports of the government companies are required to be presented in parliament.
(d) The capital is wholly or partially provided by the government. In case of partially owned company the capital is provided both by the government and private investors. But in such a case the central or state government must own at least 51% shares of the company.
(e) It is managed by the Board of Directors. All the Directors or the majority of Directors are appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its auditors are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to its articles of associations.
The merits of government company form of organising a public enterprise are as follows:
(a) Simple Procedure of Establishment: A government company, as compared to other public enterprises, can be easily formed as there is no need to get a bill passed by the parliament or state legislature. It can be formed simply by following the procedure laid down by the Companies Act.
(b) Efficient Working on Business Lines: The government company can be run on business principles. It is fully independent in financial and administrative matters. Its Board of Directors usually consists of some professionals and independent persons of repute.
(c) Efficient Management: As the Annual Report of the government company is placed before both the houses of Parliament for discussion, its management is cautious in carrying out its activities and ensures efficiency in managing the business.
(d) Healthy Competition: These companies usually offer a healthy competition to private sector and thus, ensure availability of goods and services at reasonable prices without compromising on the quality.
The government companies suffer from the following limitations:
(a) Lack of Initiative: The management of government companies always have the fear of public accountability. As a result, they lack initiative in taking right decisions at the right time. Moreover, some directors may not take real interest in business for fear of public criticism.
(b) Lack of Business Experience: In practice, the management of these companies is generally put into the hands of administrative service officers who often lack experience in managing the business organisation on professional lines. So, in most cases, they fail to achieve the required efficiency levels.
(c) Change in Policies and Management: The policies and management of these companies generally keep on changing with the change of government. Frequent change of rules, policies and procedures leads to an unhealthy situation of the business enterprises.
The word “privatization” entered popular usage only recently, and certainly the activity with which privatization has become most closely associated the sale of public sector assets is a distinct phenomenon of the 1980s. However, like the word itself, the various activities that have been described as privatization can claim a longer history. Policies designed to stimulate the substitution of private for public provision of various goods and services are not a recent innovation. But the wide range of public sector activities that are now being considered for privatization, the various methods being suggested to achieve this objective, and the enthusiasm with which privatization policy is in some cases being pursued distinguishes current privatization efforts from previous ones.
The growing appeal of privatization, especially in industrial countries, can in part be traced back to economic developments in the mid-1970s. Rapid public sector expansion in the 1960s and early 1970s was, at the time, seen as a major contributor not only to economic growth but also to social and political stability. The expanding role of the public sector in the economy was rarely challenged. But the situation changed drastically in the mid-1970s, when the inability of economies to adjust to external price shocks in particular, the first round of oil price increases led to a marked deterioration in macroeconomic performance. Subsequent recovery was slow, and part of the blame was levelled at large public sectors, which, it was argued, robbed the economy of the flexibility it needed to achieve the necessary adjustment. At the same time, both the efficiency and effectiveness of public sector activities began to be questioned seriously. In a number of countries, most notably the United Kingdom and the United States, the backlash against the public sector was given additional impetus by the election of governments pledged to reducing the size and scope of government. To varying degrees, and in all its forms, privatization was expected to play a significant role in achieving such a reduction.
Privatization has also been frequently recommended for developing countries, where the industrial sector and, occasionally, key elements in the commercial sector, are heavily dominated by public enterprises. Loss-making enterprises have, for many years, been a drain on government resources in these countries. Such enterprises have required direct budgetary transfers or have relied on government-guaranteed borrowing to finance their cash operating losses. Recently, the wider macroeconomic problems that have afflicted developing countries have forced them to reconsider their strategies for dealing with public enterprises. In particular, many of the countries that have adopted Fund-supported adjustment programs have been trying to address the problems that give rise to the need for financial support of public enterprises, and privatization has, in a number of cases, been considered as a way of relieving governments of their heavy involvement in industry and commerce.
Privatization can play within a wider strategy designed to overcome the problems associated with public enterprises. For this purpose, privatization is defined as a transfer of ownership and control from the public to the private sector, with particular reference to asset sales. It is therefore equated with total or partial denationalization. Section II briefly reviews the arguments used to support public production and nationalization, discusses the performance of public enterprises, and identifies the problems to which privatization can be seen as a direct response. These problems include the tendency for politicians to interfere in public enterprise operations; the inability of politicians and civil servants to monitor enterprise managers effectively; inappropriate managerial incentives; and the availability of financial support from the government with only limited constraints. As a consequence, public enterprises are often inefficient and incur losses. Advocates of privatization claim that it will lead to improved economic performance as the scope for political interference is limited, the discipline of the private capital market is imposed, and managerial incentives are improved. It is also claimed that privatization will reduce the budgetary cost associated with inefficiency; in addition, any sale proceeds will directly benefit public finances. Section III outlines these and other arguments used in support of privatization, while also focusing on techniques of privatization and problems of implementation, in particular, asset valuation, marketing, and financing. These problems are illustrated with country experiences, especially the ambitious program of asset sales under way in the United Kingdom and France.
Sections IV and V examine, in analytical terms, the likely impact of privatization. While changes in ownership can lead to increases in productive efficiency (that is, to lower production costs), the paper points to the possibility that such increases may be only modest. Significant gains in efficiency are most likely to result from the privatization of some of the major public monopolies, but only if this results in their being exposed to competition. The transfer of a public monopoly to the private sector, with its monopoly power left intact, may achieve only limited increases in productive efficiency. Moreover, it is unlikely to increase allocative efficiency that is, to lead to a structure of output more highly valued by consumers given social costs of production. If the opportunity to secure economic efficiency that is both productive efficiency and allocative efficiency is to be fully exploited, privatization should be accompanied by liberalization, to foster competition, and by regulation, to prevent anticompetitive practices.
In economic terms, the scope for effective privatization in the public enterprise sector depends upon a number of considerations: whether private sector managers have a greater incentive than public sector managers to seek out opportunities to improve efficiency; the number of public enterprises facing national or international competition; the extent to which public monopolies should be regarded as “natural”; and the importance of social and other non-commercial (such as macroeconomic) objectives. In view of such considerations, privatization is not likely to be extensive relative to the size of public enterprise sectors in either industrial or developing countries. As a result, the improvement of incentive mechanisms and statutory and administrative procedures currently employed to secure economic and financial control of public enterprises, as well as the search for alternatives to privatization, will need to be given a high priority. Regarding public finances, it is argued that changes in ownership alone offer few lasting budgetary benefits unless privatization is associated with increased efficiency.
Section VI discusses the implications for adjustment policies arising from the principal conclusions of this paper. Privatization should be encouraged to the extent that it fosters more active competition and improves existing incentive and control mechanisms for public enterprises. It should be noted, however, that if privatization involves no more than a transfer of activities from the public to the private sector, it may yield only limited gains.
Disinvestment of shares of public sector enterprises is one of the landmark decisions of Government of India in the area of public sector reforms. Divestment refers to sale or transfer of whole or part of the capital held by the government out of its total holdings of shares at a fair and reasonable price. In other words, a wider participation of general public in the ownership of public enterprises is initiated with the transfer of shares held by the government to the public at large. It is decided that shares of profit-making public-sector undertakings would be allotted to the public which can meet the twin objectives of garnering financial resources for the government to meet its finances as well as giving a new dimension to the management efficiency of these enterprises. The disinvestment process in public sector is justified on the reasons –
a) the requirement of financial resources for the government to reduce its budget deficit,
b) the resources needed to make investment in infrastructure and social sectors, and
c) to make the enterprises competitive. Disinvestment can ensure that functioning of the public sector enterprises is governed by professional mangers instead of being administered by bureaucrats.
The term disinvestment means the sale of shares of public sector undertakings to the public investors. Since public sector undertakings are owned by government, it is the government that resorts to disinvestment by selling shares to the public. (Santosh and Jayadeb, 2014). It is the process of diluting the stake of the government in a public enterprise. In this connection, the authors tried to distinguish the term disinvestment and privatization, as diluting the stake of government to the extent of above 51 per cent constitute privatization and less than 50 per cent constitutes disinvestment. Only when disinvestment goes beyond 51 per cent, privatization takes place. Disinvestment is a process whereby the Government withdraws a portion of the total of its equity in Public Sector Enterprises.
The Government has announced that the main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public enterprises. The new economic policy initiated in July 1991 indicated that public sector undertakings had shown negative rates of return on capital employed. Inefficient PSUs were continuing to be a drag on the government ‘s resources turning to be more of liabilities to the government than it contributing to the government and society. The factors responsible for low efficiency of PSUs are price policy of PSUs, under-utilization of capacity, problems related to planning and construction of projects, problems of labour management and lack of autonomy. The disinvestment of the government ‘s equity in central public sector enterprises (CPSEs) in India started in 1991-92 when minority shareholding of the central government in 30 individual CPSEs was sold to select financial institutions - LIC, GIC and UTI. The Rangarajan Committee in April 1993 recommended that disinvestment could be up to 49 per cent for industries explicitly reserved for public sector. In the case of public sector industries that had a dominant market share or a separate entity had to be maintained for strategic reasons, the disinvestment can be kept at 26 per cent. The Disinvestment Commission was constituted in the year 1996-97 to advise the government on disinvestment issues. On 16th March 1999, for the purposes of disinvestment, public sector enterprises were divided into two areas – strategic and non-strategic. Strategic public sector enterprises are in the areas of arms and ammunitions, defence equipment, defence aircrafts and war ships, atomic energy, and railway transport. All other public sector enterprises were to be considered non-strategic. For non-strategic public sector enterprises, government stake would be diluted to 26 per cent on case-to-case basis. Currently NITI AYOG has been vested with the powers to recommend disinvestment in PSUs. Under the roadmap drawn by NITI AYOG two sets of issues have been dealt with one pertains to decisions regarding sick firms which have been making losses and the other one strategic sale wherein government wants to dilute its stake in PSUs. The government could mobilise a sum of Rs 51,573 crores by way of disinvestment of PSUs during the period 1991-92 to 2007-08.
Mergers and Acquisitions in India-
M&A’s have played an important role in the transformation of the industrial sector of India since the Second World War period. The economic and political conditions during the Second World War and post–war periods (including several years after independence) gave rise to a spate of M&As. The inflationary situation during the wartime enabled many Indian businessmen to amass income by way of high profits and dividends and black money (Kothari 1967). This led to “wholesale infiltration of businessmen in industry during war period giving rise to hectic activity in stock exchanges. There was a craze to acquire control over industrial units in spite of swollen prices of shares. The practice of cornering shares in the open market and trafficking of managing agency rights with a view to acquiring control over the management of established and reputed companies had come prominently to light. The net effect of these two practices, viz of acquiring control over ownership of companies and of acquiring control over managing agencies, was that large number of concerns passed into the hands of prominent industrial houses of the country (Kothari, 1967). As it became clear that India would be gaining independence, British managing agency houses gradually liquidated their holdings at fabulous prices offered by Indian Business community. Besides, the transfer of managing agencies, there were a large number of cases of transfer of interests in individual industrial units from British to Indian hands. Further at that time, it used to be the fashion to obtain control of insurance companies for the purpose of utilising their funds to acquire substantial holdings in other companies. The big industrialists also floated banks and investment companies for furtherance of the objective of acquiring control over established concerns.
The post-war period is regarded as an era of M&As. Large number of M&As occurred in industries like jute, cotton textiles, sugar, insurance, banking, electricity and tea plantation. It has been found that, although there were a large number of M&As in the early post-independence period, the anti-big government policies and regulations of the 1960s and 1970s seriously deterred M&As. This does not, of course, mean that M&As were uncommon during the controlled regime. The deterrent was mostly to horizontal combinations which, result in concentration of economic power to the common detriment. However, there were many conglomerate combinations. In some cases, even the Government encouraged M&As; especially for sick units. Further, the formation of the Life Insurance Corporation and nationalization of the life insurance business in 1956 resulted in the takeover of 243 insurance companies. There was a similar development in the general insurance business. The national textiles corporation (NTC) took over a large number of sick textiles units (Kar 2004).
Recent Development in Mergers and Acquisitions-
The functional importance of M&As is undergoing a sea change since liberalisation in India. The MRTP Act and other legislations have been amended paving way for large business groups and foreign companies to resort to the M&A route for growth. Further The SEBI (Substantial Acquisition of Shares and Take over) Regulations, 1994 and 1997, have been notified. The decision of the Government to allow companies to buy back their shares through the promulgation of buy back ordinance, all these developments, have influenced the market for corporate control in India. M&As as a strategy employed by several corporate groups like R.P. Goenka, Vijay Mallya and Manu Chhabria for growth and expansion of the empire in India in the eighties. Some of the companies taken over by RPG group included Dunlop, Ceat, Philips Carbon Black, Gramaphone India. Mallya‟s United Breweries (UB) group was straddled mostly by M&As. Further, in the post liberalization period, the giant Hindustan Lever Limited has employed M&A as an important growth strategy. The Ajay Piramal group has almost entirely been built up by M&As. The south based; Murugappa group built an empire by employing M&A as a strategy. Some of the companies acquired by Murugappa group includes, EID Parry, Coromondol Fertilizers, Bharat Pulverising Mills, Sterling Abrasives, Cut Fast Abrasives etc. Other companies and groups whose growth has been contributed by M&As include Ranbaxy Laboratories Limited and Sun Pharmaceuticals Industries particularly during the latter half of the 1990s. During this decade, there has been plethora of M&As happening in every sector of Indian industry. Even, the known and big industrial houses of India, like Reliance Group, Tata Group and Birla group have engaged in several big deals.
References:
- Sahai, Baldeo. (1989). Public Sector in India – Historical Perspective in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai.
- Laha, Chandra, Prakash. (1989). Public Sector: The Socio – Economic and Political Environment in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai.
- Nigam, K. Raj: Indian Public Sector at the Cross Roads.
- Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai. New Standing conference on Public Enterprises, New Delhi.
- Rao, S.L. Ownership, Control and Management of Public Enterprises.
