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re u c ec or Undertakings Drag On Indias

Economy? Col. Pramod Singh 11233Lt. Col. Sanjay Kumar 11243Virendra Pareek 11264Shatmanyu Singh - 11270

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Definition

A government owned corporation is

termed as a Public Sector Undertaking(PSU). It refers to companies in which the

government (either the federal Union Govt or

the State or Territorial Govts or both) own amajority (51% or more) of the company

equity.

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What is the public sector?

Air IndiaSAILBHELBSNLIndian Oil CorporationHindustan Motors

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Need for Public Sector To promote rapid economic developmentthrough creation and expansion of infrastructureTo generate financial resources for developmentTo promote redistribution of income andwealthTo create employment opportunitiesTo promote balanced regional growthTo encourage the development of small-scaleand ancillary industries, andTo promote exports on the one side andimport substitution, on the other.

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Role Of Public Sector

Filling the Gaps in Capital GoodsEmploymentBalanced Regional DevelopmentContribution to Public Exchequer Export Promotion and ForeignExchange EarningsImport SubstitutionResearch and Development

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Performance of Public Sector

Share in GDP rose from 8% in 1960 toover 25% in 1993/94In 94 more than 1000 public sector enterprises, 800 of which owned bystate

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Problems faced by PublicSector

Poor Project PlanningOver-capitalizationExcessive OverheadsOverstaffingFailure to generate adequate profitsLow Capacity UtilisationLack of Professional managementLack of a Proper Price Policy

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To some, a well-performing PSU is anoxymoron. The root cause, it is

argued, lies in their ownershipstructure. The argument goes like this:a private sector owner treats thebusiness as his own. Thus, the privatesector is efficient and performs well.Therefore, the panacea to all thattroubles the public sector isprivatisation.

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The issues are far more complex. First, if theownership structure is the root cause of allinefficiencies, then how do we explain away theperformance of Singapore Airlines and SingTel, whichare in effect PSUs. The second issue: most successfulglobal corporations have dispersed ownership with nodominant owner. Third, there are numerous poor-performing private sector companies. Indeed, some of the PSUs of today were ailing private sector units of yesterday. And last, the recent financial prairie fire in theUS was sparked by the private sector. Ironically, themassive rescue package came from the USgovernment. The notion that the private sector isinnately efficient and the public sector is inherentlyinefficient needs a second look.

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Singapore Airlines is a PSU. It is profitable,efficient and well performing. The largestshareholder in Volkswagen is the state of Lower Saxony in Germany. The case of Pohang Ironand Steel Company (Posco) is even morestartling. The World Bank rejected the loanapplication of the Korean government for settingup a steel plant in Pohang then a fishingvillage. No wonder, Korea neither had deposits of

iron ore nor coking coal. The Korean governmenttook the help of a consortium of Japanesebankers and set up Posco as a State OwnedEnterprise (SOE). It is now the third largestproducer of steel and doubtlessly one of the most

efficient. It was only in 2000 that the companywas fully privatised.

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Many of todays success stories in thedeveloping world began life as SOEs.Even in the developed world France, for instance, Renault, Alcatel,EdF, Thomson and Elf were SOEs for

a long time, as were Rolls Royce andBritish Aerospace in the UK.

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There is little difference betweenSingapore Airlines and Air-India intheir ownership structures. Thedifference lies in the governance, styleof management, empowerment,

attitude to customer service andresults produced by its leadershipteams.

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Red tapes, bureaucracy, risk aversion,administered pricing systems,

ineffective governance structures,inability to hire the best talent becauseof poor compensation, politicalinterference, absence of objectivity inappointments of managers andcorruption are among the manyreasons that cause PSUs to under-perform.

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To sum it all up, we can say thatbureaucracy is the real drag on Indiaseconomy and not PSUs. As shown by

the previous example, they have thecapability to outshine everyone else,they just need some good leaders at

the top/

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Thank you.