MS-92 Management of Public Enterprises

PowerPoint Presentation© Copyright PCTI Group 2009
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;
regional imbalances in economic attainments;
lack of trained manpower.
© Copyright PCTI Group 2009
Introduction
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 along with the developmental objectives of the public sector.
Model of Economic Growth
Capitalism- Capitalism 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 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.
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.
The Socialism- As the capitalist model of economic development was associated with the 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 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 large segment of the population.
These could be ameliorated through the Government ownership of the means of production and distribution
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
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.
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.
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.
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.
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),
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 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.
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;
Acceleration of industrial growth;
Removal of regional disparities.
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
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.
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.
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.
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.”
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.
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).
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
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
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.
Overview
A wide spectrum of activities covered by the Central Government alone included many areas of production and services, as listed below:
A. Manufacturing
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
Development of small scale industries;
Providing services like technical consultancy, trading and marketing,
contracting and construction; etc
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.
Nature and Scope
The state level enterprises, which have taken corporate form, include a variety of areas:
Manufacturing and industrial development
Mining and mineral development
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.
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 of developmental activity. Some examples of the investments undertaken with added emphasis on development 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)
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
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
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.
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.
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
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
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.
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.
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 incurring heavy losses.
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
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);
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).
AUTONOMY
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”.
METHODS OF SECURING ACCOUNTABILITY
Formal channels of accountability are specified in parliamentary procedures and in documents of incorporation of PEs. These generally cover, among others, audit by a public body and preparation of the annual report, both of which are submitted to the legislature.
Accountability is also secured when PEs on their own answer public criticism in the press, and keep the public informed through speeches, publications, and other publicity material. Accountability to the Government is also a part of public accountability because the Government is responsible to the legislature for performance of PEs
METHODS OF SECURING ACCOUNTABILITY
As the public seeks to secure an unusually high level of accountability from PEs, the problem is of balancing it with the need for autonomy necessary to operate a business enterprise. Various measures have been suggested to effect a proper balance between autonomy and accountability, but nothing near a final or satisfactory solution has been obtained.
One serious difficulty in striking the proper balance is that as the ministers are responsible to Parliament for the performance of their PEs, the concerned ministers often get too much and too easily involved in the working of their PEs, resulting in serious dilution of autonomy
Elements of Autonomy for Public Enterprises
i) Freedom from annual appropriation process, at least for operating expenses;
ii) Freedom to receive and retain operating revenues;
iii) Freedom to apply operating revenue to operating expenses;
iv) Freedom from general government restrictions particularly in the field of
expenditure; appropriated
vi) Freedom from normal government audit of operation; and
vii) Other related freedoms like freedom to borrow money, to hire and fire, the pay
salaries at the discretion of the enterprise and to control its long-term planning;
India has two kinds of autonomous PEs viz a viz:
a) statutory or public corporation
b) Government companies
In practice, both the forms are similar as Government of India has not laid down a
well defined set of criteria to differentiate between the two.
Autonomy is important but the judgment of its importance is based on the contribution it makes to good and efficient management. In PEs the concept of autonomy is different from those of its private counterparts. Here, the funds come from the pool
The main objectives of accountability can be stated as follows:
i) Promoting efficiency;
v) Fulfillment of generative ends and national importance;
vi) Minimizing concentration of powers;
vii) Ensuring ministerial accountability to parliament.
FACTORS AFFECTING GOVERNEMENT –
PUBLIC ENTERPRISE INTERFACE
The Government PE relationship is affected by many factors taken together, of which the personality of the chief executive of the enterprise and his equation with the concerned minister, and the secretary of his ministry is perhaps the most crucial. It has been noted again and again that within the same environment some PEs have been able to secure greater autonomy to operate commercially, mainly based on the personality of their chief executives.
The second factor affecting the relationship is the profits earned by an enterprise. The Government somehow gets more concerned with the loss-making enterprise, though the profit or loss may not always be due to the efficiency or inefficiency of the enterprise.
An enterprise can make profits due to its monopoly position or may incur losses because the government may not allow it to increase the price for its products or charges for its services.
NATURE OF INTERFACE
i) Formal : The Parameters of formal relationship and the way it would operate are laid down in the Articles of Association of a Government Company, and in the Acts of Parliament for the statutory corporations.
ii) Informal :This is exercised through personal communications, through Government directors on the Board, and through written communications suggesting a course of action for the consideration of the enterprise. Obviously, in case of informal influence, the responsibility for the decision and for its consequence is of the enterprise and not of the Government.
three dimensions of Government – PE Interface, which are as follows
The Government as Owner : The government interacts with a PE in three capacities. First, as owner for most PEs, the government supplies the whole or majority of the capital, and is therefore interested in getting an adequate return on its investment and also for the safety of its funds.
Government as Government : Secondly as regulator of the economy, the Government would like PEs to follow various policies, rules and regulations as in case of private enterprises, for example, policy regarding foreign collaboration, location of unit, price control, import substitution, etc. similarly, laws of the land including labour laws are applicable to both the sectors.
Government as Lender of Funds : Thirdly, as lender of funds, the Government as a banker evaluates capital investment proposals and working capital needs of PEs, and oversees effective utilization of funds.
EXERCISED
Power to Appoint the Board of Directors : The Government as the sole or majority owner of PEs appoints their Board of Directors. However, the exercise of this power has often not been in the best interest of PEs. The main problems have been :
i) Delays in filing Board level vacancies;
ii) Presence of too many officials on the Board who tend to bureaucratize decision-making;
iii) Inadequate part-time professional experts on the Board.
EXERCISED
Some of the important matters for which prior approval of the government is generally required are given below :
(1) Capital expenditure beyond the limits laid down from time to time. For example, most of the PE, can take an investment decision up to Rs. 20 crores at a time but have to get the government’s approval beyond it.
ii) Formation of a subsidiary company by the enterprise.
iii) Making of rules governing the conditions of service of the employees’ provident funds and to create reserves and special funds.
iv) Giving employees a commission on the profits of the business of the enterprise.
v) The plans of the development and capital budget of the enterprise and also the revenue , budget, if there is an element of deficit in it, which is proposed to be met by the government
EXERCISED
Report and Returns Obtained from PEs: The Government has statutory right to call for such returns and other information in respect of an enterprise. Detailed formats have been prescribed for this purpose.
REASONS FOR EXCESSIVE GOVERNMENT
CONTROL
The main reasons why the government has not been able to maintain the required distance from its enterprise are :
i) PEs are often canters of large power and authority;
ii) The socio-political content of their operations are high in many cases.
iii) PEs are important and useful instruments of public policy. The Government therefore finds it difficult to keep away from PEs. PEs however greatly suffer in the process and get damned when they fail to show result in competition with private enterprise.
ACCOUNTABILITY TO PARLIAMENT
The legislature ensures that the financial and managerial policies followed by the PEs are sound and effective. Therefore, legislature control becomes one of the most important and effective method of enforcing accountability, especially in the Indian context.
METHODS OF PARLIAMENTARY CONTROL
By and large, PEs come in for parliamentary control in the following ways :
Legislative Questions;
Legislative Debates;
Legislative Committees.
Legislative Questions
In a democratic set-up, the parliamentary questions is the most immediate and convenient way to open to MPs to obtain information about public matters. It broadly serves the following purposes
i) It enables the MPs to ventilate grievances against the working of PEs or obtain information which may not be available in the published documents and reports;
ii) It is an effective way to keeping the minister on his toes as regards his formal interventions as well as his informal contact with a PE, for which his responsibility is not apparent;
iii) It can have a desirable moral influence on PE managers;
iv) It gives the Member of Parliament a quick opportunity to direct the government in the policy implementation.
Some occasions on which debates concerning pubic enterprises are held :
Half-an hour discussion
Annual reports
Discussion on matters of urgent public importance for short discussion
Calling attention to matters of urgent public importance.
LEGISLATIVE COMMITTEES
Legislative committees are one of the weapons to enforce the desired legislative accountability and control over public enterprises. Here, we are going to discuss the following three committees in brief :
i) Public Accounts Committee (PAC)
ii) Estimates Committee
Public Accounts Committee (PAC)
Public accounts committee as the name suggest plays an important role in enforcing accountability over PEs. It is the oldest of the three committees and was the first one to raise the question of exercising parliamentary control over the accounts of PEs.
Features of PAC
It was first set up in 1921 but was constituted from 1950;
It functions under the direction and control of the speaker of the Lok Sabha;
The chairman of PAC is monitored by the speaker and with secretarial assistance
is provided by the Lok Sabha Secretariat.
Estimates Committee
It was constituted on April 10, 1950 for examination of the estimates and the problems of the government companies. It was the most powerful committee to review the operations of most of the public enterprises before the establishment of CPU.
Functions
As mentioned in Rule 310, the function of the Estimates committee are as follows :
To report what economies, improvements in organisation, efficiency or

Committee on Public Undertakings (CPU)
The most effective and important instrument of parliamentary control is the Standing committee of Parliament, which comprises 22MPs, 15 from the Lok Sabha and 7 from the Rajya Sabha. Functions To examine the reports of accounts of PEs, To examine the report of the comptroller and Auditor General of India on PEs , To examine, in the context of autonomy and efficiency of PEs, whether their affairs are being managed in accordance with sound business principles and prudent commercial practices.
The CPU shall not examine (i) matters of major government policy as distinct from
business or commercial functions of PEs and (ii) matters of day-to-day
administration.
ACCOUNTABILITY THROUGH AUDIT
Parliament has to be satisfied with their performance and the Comptroller and Auditor-General of India (C &AG) assists Parliament in this regard.
The PE audit by the C & AG can be considered under the following heads:
Financial Audit
Efficiency Audit
Proprietary Audit
ACCOUNTABILITY THROUGH COURTS
It has been held by the Supreme Court in many cases that an autonomous PE would be considered as State and the courts can hold PEs responsible to observe fundamental rights through an order of the court called the writ. This has greatly enhanced public accountability of PEs.
CENTRAL VIGILANCE COMMISSION (CVC)
CVC as the name suggests, detects corruption and malpractices and decides the punishments. CVC is not an investigating agency but usually gets the investigation done through agencies like CBI or through the Departmental Chief Vigilance officers and orders investigation into cases of officials of Central Government. In case of PEs, the role of CVC is important as it keeps a check on the officials working in PEs
An ISO 9001:2008 Certified Organization
SESSION-3
Some Definitions
“Corporate Governance is the system by which companies are directed and controlled…”
Cadbury Report (UK), 1992
“…to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.”
Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993
A Canadian Definition
“…the process and structure..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business….”
Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994
An OECD Definition
“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”
Preamble to the OECD Principles of Corporate Governance, 2004
An Indian Definition
“…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.”
SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000
A Gandhian Definition
Trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders’ interests.
leadership for efficiency;
leadership for probity;
- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH
What is Corporate Governance?
Achieving its Objectives
Birla Committee Recommendation
The first formal committee was appointed by Securities and Exchange Board of India (SEBI), under the Chairmanship of Kumara Managalam Birla (known as Birla Committee).
The recommendations were applicable to listed companies; their directors, management, employees and professionals associated with such companies and other bodies corporate.
The major recommendations of Birla committee on corporate governance were:
The board of directors of a company should have an optimum combination of executive and non-executive directors with not less than 50% of the board consisting of non-executive directors.
Board meetings should be held at least four times in a year with a maximum time gap of four months between any two meetings.
The board should set up a remuneration committee to determine the company’s policy on specific remuneration packages for executive directors.
The board should set up a qualified and independent audit committee.
Birla Committee Recommendation
Companies should required to give consolidated accounts in respect of all their subsidiaries. A company having multiple lines of business should be segmental reporting.
A management discussion and analysis report should form part of the annual report to the shareholders covering industry structure, opportunities and threats, segment wise or product wise performance, outlook, and risks.
Companies should arrange to obtain certificates from their auditors regarding compliance of corporate governance provisions and the certificates should be sent to stock exchanges and all the shareholders.
Corporate Governance in PE
Public sector enterprises are ‘generally autonomous bodies’ which are owned and managed by the government and which provide goods or services for a price. The ownership of the government extends to 51 percent, or more, in order to make it a public enterprise/entity.
Public enterprises have been organized in many ways as distinct autonomous units, with varying degrees of legal and operational independence. Where an autonomous legal entity is established by an Act of Parliament or legislature, it is called ‘public corporation’ or ‘statutory corporation’.
Corporate Governance in PE
The Board of Directors is the top management organ, and is responsible for implementing the objectives of an enterprise. The board members are nominated but the shareholders, i.e., government. The functioning of PE boards has been subjected to criticism on various grounds. The various practices followed, it is complained, do not facilitate the emergence of an autonomous enterprise management with initiative and operating effectiveness, and yet be responsible and responsive to the government guidelines and policies. The 40th Report of the Committee on Public Undertaking (73-74) regretted that the performance of public undertakings continues to be judged by a variety of vague objects and considerations.
Obligation to the Public Sector Enterprise
a) The role of the executives is to assist the PSE to achieve its objectives as spelt out in the charter constituting the setting up of the enterprise.
b) It is the obligation of every employee of the public sector administrative ministry to uphold the Rule of Law and respect for human rights solely in the public interest while making recommendations or exercising administrative authority.
c) In relation to the general public, the employees in the PSE and administrative ministries should conduct themselves in such a manner that the public feels that the decisions taken or the recommendations made by them are objective and transparent and are not calculated to promote improper gains for the politicalparty in power or for themselves or for any third party
d) Employees of the PSEs/administrative ministries should not seek to frustrate or undermine the policies, decisions and action taken in the public interest by the management decision.
e) Where an employee of the PSE has reasonable ground to believe that he or she is being required by the superior authority to act in a manner which is illegal or against the prescribed rules and regulations or if any legal infringement comes to his or her notice, he or she should decline to implement the instruction.
Accountability and Responsiveness to the Public
a) Consistent with accountability to the superior officers and the ministers in accordance with provisions governing PSE/administrative ministry, the employees in the public sector should practice accountability to the people in terms of quality of service, timeliness, courtesy, people orientation on readiness to encourage participation of and form partnership with citizen groups, for responsive management.
b) Employees in the PSE/administrative ministry should be consistent, equitable and honest in their treatment of the members of the public, with particular care for the weaker section of society and should not even be or appear to be unfair or discriminatory. Decision in pursuit of discretionary powers should be justifiable on the basis of non arbitrary and objective criteria.
c) Employees in the PSE/administrative ministry should accept the obligation to recognize and enforce customers right for speedy redressal of grievance and commit themselves to provide services of declared quality and standard to customers.
d) Employment in the PSE/administrative ministry should respect the right of public to information on all activities and transactions of the organizations except where they are debarred in the public interest from releasing information by provisions of law or by valid instructions.
What is Social Auditing ?
SA is a management tool and accountability mechanism which can enhance an organization’s capacity to:
Evaluate their impact on stakeholders
Determine how well they are living up to the values they espouse.
Improve their strategic planning process by identifying potential problems before they come up; and
Increase their accountability to the groups they serve and depend on.
What is Social Auditing ?
SA is a management tool and accountability mechanism which can enhance an organization’s capacity to:
Evaluate their impact on stakeholders
Determine how well they are living up to the values they espouse.
Improve their strategic planning process by identifying potential problems before they come up; and
Increase their accountability to the groups they serve and depend on.
SEARR involves accounting for, reporting on, and auditing an organizations policies, procedures and impacts with respect to employees, communities (local and global), suppliers, customers and the environment.
This can involve disclosure regarding, interalia commitments to workplace conditions, fairness and honesty in dealing with suppliers, customer service standards, community and charitable involvement and non-exploitive business practices in developing countries
Multi-perspective
Comparative
Comprehensive
Regular
Verification
Disclosure
Assemble organization and secure agreement and commitment.
Define and prioritize the organization’s objectives and establish the action it intends to perform to meet them.
Identify the organization’s “stakeholders”
Agree upon indicators, information, benchmarks and targets.
Data gathering systems put in place.
Collating, analyzing and interpreting results
External verification process
To permit the “stakeholders” in the enterprise affect its behavior.
To allow enterprise to report on its achievements based on verified evidence rather than on anecdote and unsubstantiated claims.
Permits those who invest in the enterprise and its stakeholders to judge if it is achieving the values which it set out to achieve.
- Pearce (1996)
Know what is happening
Strengthen loyalty / commitment
Potential Issues
SA has excellent promise as a management tool but some potential problems remain:
Reporting organization can deliberately limit audit scope in order to avoid controversies.
Process can be managed internally to the disadvantage of some external stakeholders.
Some significant stakeholders may be omitted.
Organization may use arbitrary or inappropriate indicators to evaluate outcomes.
The standards, independence and honesty of the auditor may be open to question.
Therefore the need for Generally Accepted Assurance Standard (AA1000)
Social Audits: Conclusion
Social auditing is “a process of measuring and reporting, in order to understand and ultimately improve, an organization’s social performance”.
Mission Related
Managerial Issues
Accountability Issues
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;
• regional imbalances in economic attainments;
• lack of trained manpower.
Policy on public sector in India is guided by the Industrial Policy Resolution of 1956 which assigned the public sector a strategic role in the economy. The major objectives of setting up public enterprises in India are:
• to help in rapid economic growth and industrialization;
• to earn return on investment and generate resources for development;
• to promote redistribution of income and wealth;
• to create employment opportunities;
• to assist the development of small-scale and ancillary industries;
• to promote import substitution and save foreign exchange.
According to the announcement in Industrial Policy Statement, 1991, in order to raise resources, encourage wider participation and promote greater accountability, the government equity in selected public enterprises was to be offered to Mutual Funds, Financial Investment Institutions, workers and general public. The main elements of this policy towards Public Sector Enterprises are:
bring down government equity in all non-strategic PSEs to 26 per cent or lower, if necessary;
restructure and review potentially viable PSEs;
fully protect the interest of workers.
The Policy in 2000-01 added the following objective.
To put in place mechanisms to raise resources from the market against the security of PSEs’ assets for providing an adequate safety net to employees.
To emphasize increasingly on strategic sale of identified PSEs.
To use the receipts from disinvestments and privatization for meeting expenditure in social sector, restructuring of CPEs and retiring public debt.
ROLE OF STATE LEVEL PE
The need for setting up SLPEs according to S. D. Sharma are:
a) Development of basic infrastructure such as the construction of roads and bridges, the provision of electricity for the industry and for irrigation for agriculture;
b) Exploitation of local resources and entrepreneurship;
c) Promotion of balanced regional development;
d) Upliftment of weaker sections of society such as the Harijans and Girijan society in general in the form of adequate efficient and economic road transport;
e) Setting up of manufacturing corporations to take over and revive sick industrial units;
f) Improving the health of citizens by the provision of safe potable water;
g) Provision of shelter to the needy;
While formulating the policies and objectives of PEs the following considerations are relevant:
a) They should have a demonstrable link with the socio-economic mission which lead to the creation of the enterprise and / or other officially declared policies of the Government;
b) They should be laid down clearly and communicated to the enterprise by the Government in writing and not unofficially or informally;
c) They should be compatible with the basic socio-economic mission of the enterprise; and
d) If the basic mission of the enterprise is predominantly social and is likely to make the enterprise financially unviable, this should be specifically recognised and provided for and the trade-off between social benefits and financial inviability delimited.
Groups of SLPEs
For the sake of simplicity, the SLPEs categorized into five groups:
1. Manufacturing
i) Novelty of State in Business:
ii) Size of the Enterprises:
iii) Period of Establishment:
vii) Bureaucratic Dominance:
viii) Political Leverage:
xi) Utilization of Local Resources and Distributions of Essential Commodities:
xii) Employment as an Objective:
xiii) Development of Weaker Sections of Society:
Sickness is defined under Law-Sick Industrial Companies (Special Provisions Act, 1985 (SICA). According to this act a company is termed as sick, if;
i) it was registered for at least seven years
ii) it incurred cash losses for the current and the preceding year;
iii) its net worth was eroded.
GROWTH AND MAGNITUDE OF SICKNESS
From the data on magnitude of sickness, one can draw the following conclusions
• The total number of sick units increased more than 10 times in a span of 10 years;
• The increase in sickness of small sector units was very large as compared to large and medium enterprises;
• The outstanding bank credit of large and medium enterprises is higher than small units;
• There has been a decrease in number of small-sector sick units after 2000.
CAUSES OF SICKNESS
The causes of sickness faced by public enterprises are often of the following two types:
• exogenous or external
• endogenous or internal
• Irregular and less supply of power;
• Changes in government policy relating to imports, exports, taxation, licensing etc.
• faulty locational decision leading to lack of infrastructural facilities;
• absence of market analysis before finding out potential of their product;
• an unbalanced capital structure;
• underestimation of project cost;
• increasing operational cost may be due to increase in salary structure without increase in productivity;
* very low productivity level;
• entrepreneurial incompetence;
• no improvement in quality of product;
• lack of inadequate long term strategy.
Types of Sickness
Sickness may be classified into five distinct types. The broad types of sickness based on different causes are:
• Genetic sickness
• Structural sickness
• Operational sickness
• Policy-linked sickness
• Exogenous sickness.
Warning Signals of Sickness:
• Increase in inventories – raw materials and finished goods;
• A firm operates below its break even point – volume of production or salaries not adequate to cover the fixed costs and variable cost;
• Shortage of funds to meet short term obligations like salary to labour, purchase of raw materials, interest on loans, payment of tax etc.;
• Decrease in net profit;
• Unhealthy financial ratio; like debt- equity ratio and ratio of current assets to current liability less than 1:1 by adding section 72A. This section allows for grant of tax benefit to healthy units when they took over the sick units
•Provision of margin money to sick units at soft terms
* Scheme for grant of excise loan not exceeding 50 per cent of excise duty actually paid for 5 years;
Concessions by Banks and Financial Institutions:
Various concessions were announced by banks and FIs for revival of sick enterprises.
• Grant of additional working capital;
• Recovery of interest at reduced rates;
• Freezing of a part of out standing loan;
• Setting of a special cell on sick units in the RBI to monitor the performance of sick unit to suggest corrective measure with regard to rehabilitation;
• Setting of regional monitoring cells by RBI for better coordination between the banks, state government financial institutions;
• Establishment of IRCI – Industrial Reconstruction Corporation of India with functions like – providing financial assistance, managerial and technical assistance, consultancy services etc.
PERFORMANCE EVALUATION OF PSEs –
FACTORS AND AGENCIES
Several factors have to be taken into account while trying to develop models approaches to evaluate the performance of public enterprises. Such as –
Environmental Factors
Operational Factors
• Lack of political and administrative will;
• Lack of objective specification;
• Non-availability of data on actual performance.
• Purpose of evaluation to-learn, control, motivate, indge, identify areas for improvement.
• Evaluation of controllable factors as well as uncontrollable factors.
• Evaluation by an insider or an outsider.
• Evaluation of total performance.
• Mechanics of evaluation – simple or elaborate.
• Comparable basis for evaluation with previous performance, with similar organisation, with set standards.
• Evaluation should lead to rewards or punishments.
SECTOR
The general criteria used for evaluation of performance of the public sector enterprises can be listed as
Return on investment
Total contribution to the state Treasury (Interest + Divided + Taxes + Savings in Foreign Exchange)
Total factor productivity (value-added)
Employment criterion (number employed)
Self – reliance in technology
ORGANISATIONAL STRUCTURE OF PSEs
Organizational structure of the public enterprises had to be designed in a suitable manner, which could enable the public enterprise to perform under the overall guidance and patronage of the government, while at the same time be autonomous enough to carry out activities which would ensure that the economic goals set for it could be achieved successfully.
COMPOSITION OF THE BOARD
Qualification of Board Members
The Indian Companies Act, 1956, does not prescribe any statutory qualification for a director except that he should hold the prescribed number of shares. The Directors of Government companies, however, are exempted from this shareholding qualification also.
The sitting members of state legislatures and parliament are barred from being appointed members of the Board. This disqualification continues for one year even after a person ceases to be a member of the legislature.
Size of Boards
There are no hard and fast rules on the size of the boards. The size of the board will depend on the size of the industry or enterprise and on other factors.
The Estimates Committee had advocated for a Board of 3 to 4 members, one being the chairman. The Krishna Menon Committee also favored a small Board consisting of 5 to 9 members depending upon the size and nature of the enterprise.
Tenure of Board Members
The tenure of board members would depend upon whether the board is that of a Statutory Corporation or of a Government Company.
Statutory Corporation: Statutory Corporation are established under special acts enacted by Parliament or State Legislatures. Members of these boards have fixed tenure which is clearly mentioned in the Act.
Company Form: Whether the enterprise is in a company form and all directors except full-time director retire at the Annual General Meeting. In some companies, tenure of part-time director has now been extended to 3 years
Types of Boards:
There are broadly 3 types of boards in public enterprises. They are:
(i) Policy Board,
(iii) Mixed Board.
Policy Boards consist of part-time members such as executive head of departments, none of whom is responsible for specialized functions.
Functional Boards are composed entirely of full-time members incharge of particular branches of the work in the enterprises such as production, finance, personnel, marketing and such other allied functional activities.
Mixed Board provide for both part-time and full-time directors, the latter having specific responsibility of some of the subjects.
PUBLIC ENTERPRISES SELECTION BOARD
The P.E.S.B has been set up with the objective of evolving a sound managerial policy for the Central Public Sector Enterprises and, in particular, to advise Government on appointments to their top management posts.
Specific functions assigned to the P.E.S.B include the following :
i) To be responsible for the selection and placement of personnel in the posts of Chairman, Managing Director or Chairman-cum-Managing Director (Level-I), and Functional Director (Level-II) in PSEs as well as in posts at any other level as may be specified by the Government;
ii) To advise the Government on matters relating to appointments, confirmation or extension of tenure and termination of services of the personnel of the above mentioned levels;
iii) To advise the Government on the desired structure at the Board level, and, for senior management personnel, for each PSE or group of PSEs;
Functions of P.E.S.B
iv) To advise the Government on a suitable performance appraisal system for both the PSEs and the managerial personnel in such enterprises;
v) To build a data bank containing data relating to the performance of PSEs and its officers;
vi) To advise the Government on formulation and enforcement of a code of conduct and ethics for managerial personnel in PSEs;
vii) To advise the Government on evolving suitable training and development programs for management personnel in PSEs.
DEPARTMENT OF PE, ROLE IN MANAGEMENT OF PUBLIC ENTERPRISES
The Department of Public Enterprises acts as a nodal agency for all central PSEs and assists in policy formulation pertaining to the role of PSEs in the economy as also in laying down policy guidelines on performance improvement and evaluation, financial accounting, personnel management and related areas. It also collects, evaluates and maintains information on several areas in respect of PSEs. DPE also provides an interface between the administrative Ministries and the PSEs.
VOLUNTARY RETIREMENT SCHEME (VRS)
Voluntary Retirement Scheme, Which was initially announced in October, 1988 for the first time was further liberalized and a comprehensive package was notified.
COLLECTIVE BARGAINING
Collective Bargaining is an important tool of negotiation between workers and owners/managers in the industrial sector. Sidney James Webb and his wife Beatrice, eminent English economists and sociologists, are credited with first coining the term ‘collective bargaining’ as an antonym to the term ‘individual bargaining’
collective bargaining is negotiation between the employer or group of employers and a group of work people to reach agreement on working conditions.
Characteristic of collective Bargaining
3) Bilateral Process:
4) Continuous Process:
Project
According to the definition provided by the World Bank, project is an approval for a capital investment to develop facilities to provide goods and services, A project can be anything.
A project has the following as its basic components :
• Objective
• Advantages
• Risky venture
• Unique enterprise
• Dynamic nature
• Limited life span
Stages of Project Managements
Broadly speaking, project work takes place at the following there levels depending on the nature of the project:
• National level
• Sectoral level
• Project (individual) level
Practically, all the three levels are connected to each other and any discrepancy in any of the three levels will affect the other two levels.
Stages of Project Managements
The following are the criteria for selecting a particular project.
• Investment size
• Location
• Technology
• Equipment
• Marketing
Now the question arises that why is it important to identify a project ? The following can be the important reasons for which a project is identified.
• initiates the process of development;
• beneficial considering the strategic (long-term) aspects;
• involve high financial investments;
A good plan should be:
• Specific
• Measurable
• Acceptable
• Achievable
• Time bound
According to Myrdals, “Project formulation is one of the basic techniques through which planning can change from an institutional base to an institutional and rational base.”
Stages in Project Formulation
Five stages are involved in Project Formulation. These stages are in:
• Project identification
• Technical analysis
• Economic analysis
• Financial analysis
• Project appraisal
• Screening the ideas
• Tasks which are dependent on others;
• The time these would take;
• The order in which they should be performed;
• Other resources needed;
TECHNIQUES OF PROJECT MANAGEMENT
• Gantt Charts
• PERT Charts
Gantt Charts:
Henry Gantt, 1977 inverted the chart using a standard bar chart and turned it on its side plotting tasks into a timescale showing start and finish dates. These charts were hence named Gantt Charts.
The characteristics of a Gantt Charts are as follows:
• Gantt chart show clean and quick relationships among several variables;
• Focuses attention on situations needing attention;
• Help in providing information about a project schedule;
• Measures progress against the planned schedules;
• Shows the overall project load month by month alongwith the accumulating backlong work.
Programme Evaluation and Review Technique (PERT)
PERT was introduced on the polaris weapon system in 1958 by a special project office of the US Navy with the aid of a US consulting firm.
The requisites of PERT for using its efficiency are to:
• Identify objectives;
• Develop of project network;
• To monitor and evaluate.
PERT basically consist of three elements, which are as follows .
• Events (represented by circles)
• Activities (represented by arrows)
Critical Path Method (CPM)
CPM is a mathematically ordered system of planning and scheduling for project management, which makes possible a balanced, optimum time cost schedule and assures timeliness and minimum use of resources It is also known as CPA or Critical Path Analysis.
Following are the basic steps involved in CPM :
• The whole project is broken into smaller systems, known as task.
• Each task is then determined by activities and events to be performed;
• Each activity determines the preceding and succeeding activities and also determines the time and resources needed;
• A network plant is drawn depicting the assembly.
Budget Planning
A proper budget makes all the difference between success and failure of a project. For this, it is essential to plan the budget. This involves two basic steps:
• The estimated cost of the project.
• The estimated time to complete the project.
The estimated cost of the project will include all types of costs incurred in the project be it, people, staff, equipment, overhead expenses etc. This is the most technical of all as it requires all minutes intricacies. The main purpose of the budget profile (plan) is to monitor the spend on the project. Therefore, it is essential to know:
• The total actual spend,
• Actual vs. planned spend for individual elements.
If these are done properly, the project is said to be successful.
Risk Analysis
Risk is the measure of uncertainty and every human activity involves risk hence forth, a project also has certain amount of risks involved with it.
Risk associated with a project of any public enterprise may be associated with the following areas :
• Project management
• Project staff
PROJECT IMPLEMENTATION
It is easy to plan but quite difficult to implement the plan. If the plan is implemented efficiently, the project is said to be successful. A successful project requires a thorough control mechanism. Control is the process of monitoring, evaluating and comparing planned results.
PROJECT EVALUATION
Evaluation of the project can be said to be the last stage of project management. Evaluation means examining something in particular and judging its worth. Project evaluation is done to bring all over improvements. It is basically assessing the performance with that of the objectives set in the beginning. , following can be the objectives of project evaluation:
• To identify opportunities
There are also certain prerequisites for achieving the objectives. These can be stated as follows :
• A detailed description of the programme;
• To provide visibility of the interrelationship between different areas of the entire project.
• Defining the objectives in qualitative as well quantitative terms;
• Establishing the standards;
• Selecting control techniques;
• Collecting all information through primary as well as secondary sources.
• To identify problems before they occur
FINANCE OBJECTIVE
Finance objective constitutes the core of overall business objectives. There is a view that PEs need not have any finance objective as they are expected to generate profits since all their losses could be made good by the State. The practice reveals that whereas these enterprises have chosen to explicitly indicate the sub-financial objective, they are faced with the dilemma of evolving full-fledged financial objectives.
SCOPE OF FINANCE FUNCTION
The finance function is saddled with the following responsibilities in PEs:
i) Determining the financial resources required to meet the company’s operating
programme.
ii) Forecasting how much of the requirements would be met by internal generation
of funds by the company and how much would have to be obtained from outside
the firm.
iii) Developing the best plans to obtain the external funds needed.
iv) Establishing and maintaining system of financial control governing the allocation
and use of funds.
relationship.
vi) Analysing the financial results of all operations, reporting the facts to top
management and making recommendations concerning future operations.
vii) Carrying out special studies with a view to reduce cost, improve efficiency and
profitability.
MARKETING CONCEPTS IN PUBLIC ENTERPRISES
The process of marketing is mainly concerned with the exploration, analysis of consumer wants and meeting them. The marketing concept refers tot the basic philosophy of marketing. In order to be a successful enterprise, a PEs marketing philosophy must emphasize
(1) customer needs and desires,
(2) goal achievement,
PRODUCTION MANAGEMENT IN PUBLIC ENTERPRISES
The 67th Report of the Committee on Public Undertaking; (CPU) which was submitted to the Fourth Lok Sabha discussed at length various production-related problems of public undertakings. This report, entitled ‘Production Management in Public Undertakings, pinpoints main problems as
under utilization of capacities,
neglect of preventive maintenance.
Since the resources are invested in public enterprises towards creating productive capacities, it is necessary to ensure optimum utilization of these capacities. Low capacity utilization has been a prominent feature of PEs in the country.
CONCEPT OF PRIVATISATION
Privatization appeared only in the 1980s, as a result of intensive scrutiny of the role of the state-owned enterprises (SOEs) in developed and developing countries.
The market inefficiency of the publicly-owned enterprises, the problems of monitoring them as well as the cost of maintaining them under public ownership lend urgency to change their ownership to the private sector. Some other reasons are
(1) shifting development theory,
(2) ideologies in the face of SOE losses,
(3) collapse of communism in Eastern Europe and former Soviet Union, and
(4) some successes of early privatization such as the experience of UK.
POLICY OF PRIVATISATION
The following are the objectives of privatisation in countries which have so far taken up the privatisation programme:-
a) to promote economic efficiency by fostering well-functioning markets and competition;
b) to redefine the role of the State in order to allow it to concentrate on the essential task of governing and to withdraw from activities which are better suited to private enterprise, where original objectives of a public enterprise are fully achieved or are no longer valid due to technological advancement or to eliminate unfair competition with private enterprises;
c) to reduce the fiscal burden of loss-making public enterprises, in order to help regain fiscal control and macroeconomic stability;
d) to reduce public debt;
POLICY OF PRIVATISATION
e) to release limited State resources for the financing of other demands, for example, in the area of education.
(f) to generate new investment, including foreign investment;
g) to mobilise domestic resources for development, and deepen domestic financial development; and
h) to spread and democratise share ownership by encouraging share ownership by individuals, making employees share-owners and by raising productivity through incentives for holding stock. (UNCTAD, 1995).
DIMENSION OF PRIVATISATION
Privatisation encompasses a broad spectrum of possibilities, between denationalization at one end and market discipline at the other. Broadly, it may consist of disinvestment and non-disinvestment options.
Non-Disinvestment Options
Non-disinvestment options could be viewed as an intermediate step towards ultimate sale of the enterprise by demonstrating the commercial viability of the public enterprises to be sold.
The main types of non-disinvestment options are as follows:
a) Organizational, financial and operational restructuring, together with commercialization and corporatisation;
b) Privatisation of management (management contracts, leases or concessions);
c) Contracting out; and
Restructuring
Restructuring means making changes in the public enterprises allowing it to operate more efficiently and/or rendering it more attractive to potential investors before divestiture takes place. Thus, the purpose of restructuring is to enhance the value of the public enterprise. Broadly, there are three kinds of restructuring:
1) Organisational and Labour Restructuring i.e. the reorganization of the public enterprise into more rational or smaller units and any necessary labour shedding;
2) Financial Restructuring i.e. writing off excessive debts of the public enterprise; and
3) Operational Restructuring: i.e. the infusion of new investment or technology into the public enterprise.
Disinvestment of Government equity in public enterprises could be
a) Up to 49%, in which case Government could retain ownership, management and majority shareholding.
b) Up to 100%, in which ownership and management could be transferred to the purchaser of majority shareholding. In many cases, especially in India, disinvestment has been done up to 74% of the equity, leaving Government with 26% of the equity. Such a disinvestment would leave management and control with the purchaser of 74% equity but it would also enable Government to have a major say in matters such as liquidation of the enterprises etc. Government could also be a majority shareholder in case other shares are widely dispensed.
Disinvestment could take one of the following forms:
1) By public flotation on the stock exchange, either by fixed price or by tender offer with a minimum price;
2) By a management /employee buy-out;
3) By placing with a group of “strategic” investors, or joint venture partners;
4) By a trade or strategic sale, in which a company is sold to a single person or a consortium;
5) By public auctions (usually for small or medium enterprises)
6) Mass or voucher privatisation; and
7) Liquidation, followed by sale of assets (usually for PEs which are not viable).
Mass Privatisation
Mass privatisation is based on the population-wide distribution of vouchers or certificates free of charge or for a nominal fee. Usually, these vouchers are distributed to all adult citizens. The rationale behind this type of privatisation is that, in these countries, ownership of assets of the means of production was considered as belonging to the people as a whole, represented by the State.
PROGRESS OF DISINVESTMENT
The last decade (1993-2003) has shown that divestiture has proceeded with greater vigor, with all governments, whether big or small, industrialized or developing, whether democratic or totalitarian, resorting to disinvestment of major public enterprises, such as telecommunications, airlines, airports, and utilities such as electricity, water etc. Governments have come to believe that divestiture is an essential part of the globalization and liberalization process and that it is necessary to divest if expectations of the people are to be met with any degree of efficiency and promptitude.
STRATEGIC ISSUES IN DISINVESTMENTS
The following have been the main strategies of privatisation employed by countries which succeeded in their privatisation efforts:
1. Extent of Disinvestment
SEQUENCING OF DISINVESTMENT
Competitive enterprises which are small relative to both the product and the product market should be among the first to be sold. These have the dual advantage of not being able to exploit market power and hence could avoid the difficult post-divestiture problems of regulation etc. and being amenable to competitive bidding, thereby avoiding the difficult problems of price-setting, negotiations and are capable of rapid improvements in performance (hence building up of credibility for future sales).
The correct choice of the assets initially to be divested and the order in which others would follow would be crucial to the success of the privatisation programme. Some countries, such as Guinea, made the decision to work on all fronts at once - the industrial, financial, agricultural and service sectors. Others, depending on local circumstances, have been more selective, choosing those enterprises first who absorb the heaviest subsidies or those which are judged to be the most marketable. A few privatisation plans have given priority to the service or agricultural sectors.
1. Preparations for Sale
2. Valuation of Enterprise
a) Transparency
VOLUNTARY RETIREMENT SCHEME
Most privatized enterprises in the world have been over manned. The World Bank in a study made in five countries – Chile, Egypt, Ghana, India and Turkey, has concluded that overstaffing has varied between 20% and 90%.
This scheme provides for monetary compensation to those employees who opt to retire. The amount of compensation has varied from 30 day’s pay & for every year of service rendered or number of years of service left, whichever is less subject to a maximum, fixed at the discretion of the concerned Government.
STRATEGIC ISSUES ARISING OUT OF DISINVESTMENT
Privatization can be a very painful process unless special measures are taken to cushion its negative impact on employment.
Various countries has different employment agreements, how far they are successful depends upon their implementation.
RETRAINING
The State merely provides a safety net and leaves it to the individual to acquire training or skill on his own. The aim in such countries is to make the markets operate more efficiently.
In developing countries where unemployment is already huge, and there is no safety net, the State is bound to intervene more positively in arranging retraining and redeployment of surplus labor.
EMPLOYEE SHAREHOLDING SCHEMES
Allocation of a proportion of shares of privatized enterprises to employees (including distribution of free shares, discounted share prices, has become a standard feature of privatization policy in several countries, notably the United Kingdom.

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MS-92 Management of Public Enterprises

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