MS-92 Management of Public Enterprises

1. MS-92 Management of Public Enterprises | | <document classification>

2. SESSION-1 Block – 01Public Enterprises: An Overview | | <document classification>

3. Unit – 01 Public Enterprises : Concept and Policy | | <document classification>

4. GROWTH OF CENTRAL PE • The economy of India at the time of Independence in 1947 was an agrarian economy. Development of economy needed a planned and systematic approach. There were various problems faced by the Indian economy at this stage. Some of them are as follows: • a weak industrial base; • low level of savings; • inadequate investment; • lack of infrastructural facilities; • widespread poverty; • inequality in income and levels of employment; • regional imbalances in economic attainments; • lack of trained manpower. | | <document classification>

5. Introduction Societal differences have created a large economic disparity resulting in economicinequalities. 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 along with the developmental objectives of the public sector. | | <document classification>

6. Model of Economic Growth • Capitalism-Capitalismhas been defined broadly as a system based on private ownership of means of production regulated by market forces, in which each producer seeks to maximize 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. | | <document classification>

7. Model of Economic Growth Laissez Faire ‘ let alone’ style of administration It represent the maximum degree of freedom or the individual in economic activities, perhaps regulated only when serious concerns of national security arose. It was dominant in Britain in 19th and early 20th century. | | <document classification>

8. Model of Economic Growth The Socialism- As the capitalist model of economic development was associated with the exploitation of both workers and consumers from the very inception of theIndustrial Revolution in the 18th Century, the consequent economic and political pressures led to a new philosophy of social organization. rationale of the socialist doctrine rests on three premises: • 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 largesegment of the population. These could be ameliorated through the Government ownership of the means of production and distribution | | <document classification>

9. Model of Economic Growth Fabian Socialism – A moderate variant of socialism is the Fabian variety. 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 | | <document classification>

10. Model of Economic Growth 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 centuries drew inspiration from the Marxist thesis. | | <document classification>

11. 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 not acceptable to the Indian ethos and culture. Peace and tolerance are deeply embedded in the Indian philosophy (of different denominations). • 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. | | <document classification>

12. The Rational of Public Sector • 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. • 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 nationalization with a focused objective - such as protection of • Employment. | | <document classification>

13. The Rational of Public Sector 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 adequate supplies of essential goods and their equitable distribution; • to ensure equitable distribution of income and wealth. • 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. | | <document classification>

14. PSE: Concept & Forms • The term, public sector has been used in different context by the 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). | | <document classification>

15. PSE: Concept & Forms • 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 government also often provides the debt. | | <document classification>

16. PSE: Concept & Forms • Policy Dimension • Governments, in general, adopt different policies whether to take over existing enterprises or to establish new enterprises. Policies are determined by socioeconomic and political factors which trigger the policies, which could be grouped as: • Socio-political; • Natural resource exploitation; • Self-reliance; • Employment generation; • Income distribution; • Mobilization or saving of foreign exchange; • Acceleration of industrial growth; • Control of private sector, domestic and foreign; • Removal of regional disparities. | | <document classification>

17. PSE: Concept & Forms • All these motivations get translated into national policies. One or more of these usually more - dominated the policy thrusts in different countries | | <document classification>

18. Unit-2 Public Enterprises Scenario: National & International | | <document classification>

19. International Scenario – Post 1980 • 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. Privatization of state enterprises have not made deep in roads in these and several other countries. • 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 percent of GDP. | | <document classification>

20. International Scenario – Post 1980 • 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. Privatization 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. | | <document classification>

21. Indian Scenario 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. | | <document classification>

22. Indian Scenario • 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.” | | <document classification>

23. Indian Scenario • 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. | | <document classification>

24. Indian Scenario • 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 nationalized merging their business into a larger entity, Life Insurance Corporation of India, which operated as a monopoly organization 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 nationalized and formed into four companies headed by a fifth holding company (General Insurance Corporation of India). | | <document classification>

25. Indian Scenario • 2) In 1969, as a seemingly political move, 14 major private banks were nationalized. 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 nationalized. These mills were those either closed down, while some had gone bankrupt. Many more companies outside the textile sector also received a similar dispensation | | <document classification>

26. The Impact of Economic Reforms • 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 Mineralsd) Railways | | <document classification>

27. The Impact of Economic Reforms 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 targets are set annually for achievement and evaluation, through agreements signed by the chairman of the public enterprise and secretary of the administrative ministry controlling the enterprise. | | <document classification>

28. Unit 3 Nature and Scope of Public Enterprise | | <document classification>

29. Nature and Scope • Public Enterprise: An • Overview • A wide spectrum of activities covered by the Central Government alone included 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; etc B. Services • Developing and operating infrastructure facilities, such as railways, roadtransport, shipping, ports and telecommunications, airlines; • Development of small scale industries; • Providing services like technical consultancy, trading and marketing, contracting and construction; etc | | <document classification>

30. Nature and Scope In 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. | | <document classification>

31. Nature and Scope 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 etc. | | <document classification>

32. Growth of Pubic Enterprises • 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.The number of Central public enterprises had grown from 5 in 1951 to 244 in 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. | | <document classification>

33. Growth of Pubic Enterprises • 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 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 ofdevelopmental activity. Some examples of the investments undertaken with added emphasis ondevelopment of backward regions are: • Nagaland Pulp & Paper Mills (Nagaland) • Cement Plant in Bokajan (Assam) • Cement Plant in Rajbans (Himachal Pradesh) • Bhilai Steel Plant (Madhya Pradesh, now Chattisgarh) • Bharat Pumps & Compressors at Naine (Uttar Pradesh) | | <document classification>

34. Role of Department of 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, categorization of posts, delegation of powers to board of directors, and broad parameters regarding pay structure and perks of top executive | | <document classification>

35. Unit- 4 Forms of Public Enterprises | | <document classification>

36. Organizational Forms • Forms of PE Organization- 1- Departmental Undertakings 2- Independent or Autonomous Organizations 3- Limited Liability Joint Stock Companies. The Non Departmental undertaking or independent or autonomous organizations could take any of the following forms:- 1- Statutory Corporation 2- Limited Liability company 3- Corporate Society 4- Autonomous non- profit organization. | | <document classification>

37. Departmental Undertaking • Oldest and traditional form adopted by governments to undertake and perform various economic and social even strategic function. • Example- Indian Railway, Post and telegraph department, Ordnance Factories etc. • They run under the control of concerned ministries. • The Parliament or legislature has the right to scrutinize and investigate any aspect of the administration of the departmental organization. • It is come under criticism on the grounds of its bureaucratic control and inflexibility of operation. | | <document classification>

38. Statutory Corporation • It is established the act of the parliament or legislature. • Example – FCI, Airport Authority of India, etc It is more flexible in its working than the departmental type. So it a government owned statutory corporation is set up for a clearly defined economic or social purposes. | | <document classification>

39. Government Joint Stock Company • 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. • These companies function like any other private company except that the major or the dominant shareholder, the government, exercises substantive control over its management | | <document classification>

40. Co-operative Society • The cooperatives get registered and operate under the Cooperative Societies Act, but function basically as a corporate entity. • Government holds a large part of the total capital 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 fertilizer and chemical plants | | <document classification>

41. 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. | | <document classification>

42. 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 thereto shut-out (or reserved) areas but also spelt out the policy in regard to disinvestment of government shareholding in public enterprises. • 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. | | <document classification>

43. TRANSFORMATION OF PUBLIC TO PRIVATE SECTOR • 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 incurringheavy losses. | | <document classification>

44. NAVARATNA DISPENSATION • A major step taken by the government was to grant more operational freedom to public enterprise managements by classifying enterprises as Navaratna (symbolizing nine jewels) and Miniratnas (symbolizing semi-precious jewels). • Category I enterprises are permitted to incur capital expenditure on new projects, modernization 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 net worth, whichever is lower | | <document classification>

45. MANAGEMENT STRUCTURE • The structure of the working of the public enterprise, or for that matter, any enterprise, determines how it is organized and managed. The organization 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 organizations, seven distinct types of organizations 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); | | <document classification>

46. MANAGEMENT STRUCTURE • b) Integrated multi-product, multi-unit enterprises (e.g., Steel Authority of India Ltd., with its units – Bokaro, Durgapur, Rourkela, Bhilai and others); • c) Single product enterprises (e.g., 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 (e.g., National Thermal Power Corporation or Engineers India Ltd.); • f) Independent governmental organisations (e.g., State Electricity Boards and Port Trusts); • g) Cooperatives (such as Indian Farmers’ Fertiliser Cooperative). | | <document classification>

47. ENTERPRISE MODELS | | <document classification>

48. SESSION-2 Block – 2 Public Enterprises : Accountability and Governance | | <document classification>

49. Unit -5 CONCEPT AND POLICY OF ACCOUNTABILITY AND AUTONOMY | | <document classification>

50. CONCEPT OF ACCOUNTABILITY • The concept of accountability has a wide social significance in the present context. Accountability in short means the governments’ obligation to reveal, explain and justify its policies and action to the legislature, which represents the profit .In accountability, the legislature should be able to perceive and scrutinize the activities of the PEs so that the programmes of PEs are implemented efficiently so as to fulfill the needs and aspirations of the masses. • PE managers often find themselves torn between conflicting claims of “Commercial Profitability” and “Social Profitability”. The former is easier to judge in terms of percentage return on the capital invested or by some other accepted method of measurement. But it is not so with “social Profitability”. | | <document classification>