please do needful help.
1. Explain the concept of Public Enterprises on the following lines;
1. Features of PE
2. Goals / Objectives of PE
3. Forms of PE with their merits and demerits
2. In a democracy like India, can we eliminate the concept of Public Enterprises and totally give the rights to the Private sector? Elaborate with detailed arguments and suitable examples.
3. What you do you understand by the term ‘Financial Autonomy’ of the PE? Discuss in details, by citing examples, the methods of ensuring Financial Accountability of PE’s,
4. How Corporate Governance is relevant in today’s context? Discuss one successful PE of your choice in details which in your opinion fulfills its obligation of Social Responsibility.
5. Discuss the various criteria for evaluation of PE. What are the various objectives that affect the performance evaluation of PE? Mention 2 broad groups of Agencies that undertake the performance evaluation of PE.
6. Explain the concept of Disinvestment of PE done by Govt of India by taking any example of the recent past. Please mention facts and figures in support of your argument.
7. What are the implications of disinvestment of PE on Labor? Discuss ways and means to tackle such implications. Give suitable examples wherever necessary
8. Having understood the concept of Marketing mix in PE, try and develop a marketing mix strategy for the following;
1. MP Tourism
2. Air India"
Public Enterprises
2 posts • Page 1 of 1
Public Enterprises
by Addison » Wed Feb 25, 2015 1:37 am
- Addison
- Posts: 30
- Joined: Tue Jan 21, 2014 8:55 pm
Public Enterprises
by darik2 » Sun Mar 01, 2015 12:16 pm
nilesh,
HERE IS SOME USEFUL MATERIAL.
SOME ANSWERS ARE HERE .
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PLEASE YOUR QUESTIONS TO MY EMAIL ID
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REGARDS
LEO LINGHAM
1. Explain the concept of Public Enterprises on the following lines;
1. Features of PE
A careful analysis of the above definitions reveals the following characteristics of public enterprises 1. State ownership: A public enterprise is wholly owned by the Central Government or Stat Government(s) or local authority or jointly owned by two or more of them. In case the enterprise is owned both by the Government and private sector, the Stat must have at least 51 percent share in ownership.
2. State control: The ultimate control of a public enterprise lies with the Government which appoints its Board of Directors and the Chief Executive. 3. Government financing: The whole or a major portion of the capital of a public enterprise is provided by the Government.
4. Service motive : The primary aim of a public enterprise is to render service to the society at large. It may have been to incur losses for this purpose. However, public enterprises are expected to generate surplus in course of time. 5. Public accountability: Public enterprises are financed out of public money. Therefore, they are accountable for their results to the elected representatives of he public, i.e, the Parliament and the State Legislature. That is why, the working of pubic enterprises is scrutinized by the Committees of the Parliament or the State Legislature. @@@@@@@@@@@@@@@@@
2. Goals / Objectives of PE
The main objectives of public enterprises are as follows 1. To stimulate economic growth: The basic purpose of setting up public enterprises is to accelerate the pace of economic development in the country. Public enterprises provide the basic infrastructural facilities for rapid industrialization. That is why the Government of India has st up units in various sectors like electricity generation, transportation and communication network, machine building, fertilizers, petro-chemicals, pesticides, river valley projects, etc. These enterprises have filled up critical gaps in the country's industrial structure. 2. To mobilise public savings: A high rate of savings and capital formation is essential for rapid economic growth. The Government has nationalized commercial banks and insurance companies to direct public savings in productive channels. Moreover, several term lending institutions have been set up to provide finance to industries both in private and public sectors.
3. To provide employment: As a welfare State, the Government has assumed the responsibility of providing gainful employment to more and more people. In order to protect employment of a large number of persons, the Government has often taken over sick and mismanaged units in the private sectors. It has set up several undertakings to create larger employment opportunities.
4. To control monopoly: The existence of a large and expanding private sector results in the growth of private monopolists. Therefore, the Government has reserved certain basic and strategic sectors exclusively for public enterprises. In order sectors public enterprises offer competition and theory prevent the emergence of private monopolies. 5. To establish an egalitarian society: An important goal of h public sector is to reduce disparities in the distribution of income and wealth. Such diffusion of economic power helps to establish an egalitarian order in the society. Therefore, the public sector was designed to control the 'commanding heights' of the economy. 6. To conserve national resources : Public enterprises have also been set up to ensure proper utilisation and conservation of natural resources. For example, the coal mines ere nationalized to protect, conserve and promote scientific mining and to prevent indiscriminate slaughter mining. 7. To stimulate research and development: The foundation and tempo of economic development is based upon technology. Technological inventions and innovations require substantial investment of funds and development of scientific talent. Public enterprises alone can afford such investment which do not give direct and immediate monetary gains. The Government has st up several institutions to undertake research an development on a large scale. The foregoing objectives of public enterprises may be divided into three categories, namely(a) economic objectives : to stimulate economic growth, to mobilise public savings, to develop sound industrial base, to ensure balanced regional development, etc;(b) social objectives: to generate employment, to create egalitarian society, to control monopoly, to provide essential commodities; and(c) political objectives : to conserve and develop national resources, to ensure national defense, to safeguard national priorities etc. @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
3. Forms of PE with their merits and demerits The main forms of State enterprises are given below: 1. Department undertaking 2. Government companies
3. Public or statutory corporations
4. Control boards 5. Operating contracts.
1.DEPARTMENTAL UNDERTAKING
Under this form of organisation, a public enterprise is run as a department of the Government. It is organised, financed and controlled like any other Government department. A departmental undertaking is self-contained but it is under the overall control of the departmental head and the ministry concerned.
It has, however, its own management incharge of and responsible for the undertaking. For example, Posts and Telegraphs are a department in the Ministry of Communications. Similarly, the Chittranjan Locomotive Works and the Integral Coach Factory are parts of the Ministry of Railways. The Ordnance Factory the Gun Carriage Factory, the Delhi Milk Scheme, the Tarapur Atomic Energy Plant, All India Radio, Doordarshan, the Government Printing Press and Mint are other examples of departmental undertakings. Where a public enterprise is of national significance in view of its giant size or nationwide operations. It may be organised as a separate fullfledged ministry. For instance, the Indian Railways is managed by the Ministry of Railways through the Railway Board. The Railway Board consisting of a Chairman , three members and a financial commissioner manges the Indian Railways under the overall direction and control of the Railway Minister. The Railway Minister is in turn responsible to the parliament. There is no basic difference between departmental setup and the ministerial set-up and in both the cases, the undertaking operates as a wing of the government with ultimate control and responsibilities vested in the Minister concerned. Salient Features The essential features of departmental organisation are as follows:
1. Line authority: The ultimate responsibility for management lies with the Minister concerned. The Minister in turn delegates his authority downward to the various levels, e.g., the departmental head, the chief executive of each undertaking, etc.
2. Government financing: The undertaking is financed through annual budget appropriations by the parliament or the State Legislature. The revenues of the undertaking are paid into the treasury. 3. Executive decision : A departmental undertaking is set up by an executive decision of the Government without any legislation. 4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting and audit procedures applicable to other government departments. 5. Civil service code: The enterprise is manged by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government. 6. Soverign immunity: Being an integral part of the Government, a departmental undertaking cannot be sued at law without the consent of the government. Merits
The main advantages of departmental organisation are as follows:
1. Accountability : Departmental organisation ensures maximum degree of parliamentary control. In the words of Krishna Men on Committee, “accountability of departmental undertakings to Parliament is complete, their management being under the Ministry concerned”
2. Effective control: The management of the undertaking is under the absolute control of the Minister concerned. Therefore, there is maximum degree of government control on the enterprise. 3. Financial discipline : Tight budgetary, accounting and audit controls ensure that public funds are not misused. There is unified and centralized management and any surplus earned by the undertaking goes to the government treasury. 4. Policy instrument : The Government can realize its social, political and economic objectives through departmental undertakings. Demerits A departmental undertaking suffers from the following drawbacks: 1. Loss of autonomy: Excessive public accountability and Parliamentary control result in loss of freedom which is essential for efficient business operations. Frequent investigations by Parliamentary committees hamper the efficient functioning an growth of departmental undertakings. 2. Political influence: The undertaking is subject to political changes and its fate depends on the balance of power between the ruling party and the opposition. There is lack of continuity in management due to frequent changes in the Cabinet. Political considerations affect the policy matters and long range planning is not possible. 3. Lack of flexibility: Complete centralisation of control and political interference in day-to-day operations lead to lack of flexibility. There is bureaucracy and red-tape in day-to-day administration. As a result decisions get delayed. Rigid adherence to time-consuming procedures an formalities make it difficult to run the undertaking in a business like manner. 4. Lack of professional management: The undertaking is managed by civil servants who do not often possess managerial knowledge and skill. Frequent transfers and seniority based promotions tend to lower their motivation and morale. There is lack of initiative because the civil servants are afraid of breaking new ground due to fear of criticism by the Minister and the Parliament. 5. Inefficiency: Bureaucratic management, undue delays and insensitivity to consumer needs, and cumbersome regulations result in low efficiency of operations. There is a tendency not to take the losses seriously as these are borne by the treasury. Suitability
In general, the structure and working of a departmental undertaking is incompatible with the financial and operational requirements of a business enterprise. Departmental organisation is in many ways the direct negation of the requirements of autonomy and flexibility. A departmental undertaking tends to raise the power of the government tot the maximum and reduce its initiative and flexibility to the minimum. It should, therefore, be “the rare exception, and not the general rule”. The exceptional cases wherein the departmental organisation is suitable are as follows:
1. in defense industries on account of their strategic importance and the need for utmost secrecy
2. for the operation of economic controls like rationing, State trading, etc., which involve exercise of monopoly power and the use of governmental authority
3. for the operation of public utilities
4. for projects not really ripe for technical and financial sanction because they have not been worked out in detail, e.g., control body for river valley projects
5. for projects which have reached the stage of technical or financial sanction of which the requisite financial provision is not assured. A new development concerning departmental undertakings in India has been the setting up of corporations to raise loans from the public through the issue of bonds. For example The Railway finance Corporation has issued railway bonds Mahanagar Telephone Nigam has also issued telephone bonds and it is coordinating the telephone services in the metropolitan cities.
=============================================
2.GOVERNMENT COMPANY
A Government company is a company in which 51 per cent or more of the total paid up capital is held by the Central Government and/or State Governments. Any company which is a subsidiary of such a company is also considered a government company
It is registered under the Companies Act, 1956 either as a wholly-owned company(private company) or public company in which the capita is held jointly by the State and private(Indian or foreign) parties. A government company in which both the private concerns/individuals are shareholders is known as a mixed ownership company. Hindustan Machine Tools(HMT), Hindustan Steel Ltd., Indian Drugs and Pharmaceuticals Ltd., State Trading Corporation of India, Hindustan Aeronautics Ltd., are examples of the government companies in India.
Salient Features
The main features of government company organisation are as follows: 1. Corporate body: A Government company is a body corporate registered under the Companies Act. It has a separate legal entity of it sown. Therefore, it can own property in its own name. It can sue and be sued in its own name. 2. Executive decision: It is created by an executive decision of the Government without seeking the approval of the Parliament or the Stat legislature. 3. Ownership: A Government company may be wholly or part owned by the Government. In case it is partly owned, the Government must hold not less than 51% of the paid up share capital. 4. Regulation: It is created by the provisions of the Companies Act. However, the Central Government may, by notification in the Official Gazette, direct that any of the Provisions of the Act(except Sections 618, 619 and 69A) shall not apply to Government companies. 5. Independent staffing: The employees, except the deputationists, of a Government company are not Government servants. Their methods of recruitment and service conditions may be different from those of Government employees. However, the Chief Executive is generally appointed by the Government. 6. Financing: The whole or major part of the capital is provided by the Governments. But the revenues of the company are not deposited into the treasury. 7. Separate accounting: A government company is not subject to the budgeting, accounting and audit rules applicable to government departments. Merits
The government company form of organisation enjoys the following advantages;
1. Operational autonomy and flexibility. Being a separate legal entity, a government company enjoys operational autonomy an can be run in a business-like manner., It enjoys flexibility of operations due to freedom from bureaucratic control an red-tapism. 2. Professional management. A government company can employ professionally qualified managers because it has its own personnel policies and practices. Availability of managerial talent helps to improve efficiency and profitability. 3. Public accountability. The annual reports and working of government companies are discussed and debated in the Parliament. Therefore, it is accountable to the public and its management has to remain alert. 4. Discipline. The management of a government company is governed by the companies Act. The healthy discipline of the Act helps to keep the management active and efficient. It puts the enterprise at par with a private enterprise. 5. Private participation. Company form of organisation permits foreign collaboration and private participation. The Hindustan Steel Limited ha obtained technical and financial assistance from the U.S. S.R., West Germany and the U.K. For its steel plants located at Bhilai, Rourkela and Durgapur. Similarly, capital and technical knowledge of the private sector can be obtained through a mixed ownership company. 6. Easy to establish and alter. It is very easy to establish government company as no law needs to be passed by the Parliament and State legislature. Similarly, it objectives and powers can be changed simply by altering its Memorandum of Association without seeking the approval of the Parliament.
Demerits Government company organisation suffers from the following drawbacks:
1. Avoids constitutional responsibility: Parliament's approval is not required for the creation and alternation of a government company. Therefore, it may evade its constitutional responsibility to the elected representatives of the public. 2. Ineffective control: Regulations of the companies Act become meaningless because the controlling votes always lie in Government hand. Moreover, the Government can exempt the enterprise form most of the provisions of the Act. Therefore, government company organisation has been criticised as “a fraud on the companies Act and the Constitution.”
3. Doubtful autonomy: The operational autonomy of a government company exists only on paper. In real practice, there is ministerial and bureaucratic interference in its functioning. Since the directors are appointed by the Government they often fail to act independently. 4. Problem of deputation: The key personnel of a government company are often deputed from the government departments. Such deputationists generally lack the necessary expertise an commitment. As a result the efficiency of the enterprise is reduced. 5. Fear of exposure: The annual reports of government companies are placed before the Parliament. Therefore, their working is exposed to the glare of public and press criticism. The strong phobia of public accountability often results in undue publicity and unwarranted criticism of the companies. Therefore, the management is of then demoralized and does not take initiative to enter new areas of activity. This has an adverse effect on the efficiency and profitability of the enterprise. Suitability In spite of its drawbacks, the government company organisation is very useful under the following circumstances:(1) When the State wants regulate a company in the private sector without nationalizing it. Due to an emergency created by a financial or employment crisis, the Government may have to takeover an existing company. Merely by acquiring majority of shares the State can control such an enterprise. Eastern Shipping company, Indian Iron and Steel Co., Swadeshi Cotton Mills, FACT, etc., are examples of such companies in India.(ii) When the State intends to a launch an enterprise with collaboration of private sector. The government company form enables the public sector to avail of the financial resources and technical knowhow of the foreign countries and the private sector. Hindustan Machine Tolls Ltd., Hindustan Steel Ltd., Heavy Engineering Corporation have been set up in this manner.
(iii) when the government wishes to start an enterprise entirely as a public venture in order to put it on sound footing and to transfer it as soon as possible to the private sector.(iv) To promote trade an commerce or to promote a particular field of economic activity. State Trading corporation and the Export Credit an Guarantee Corporation have been st up for this purpose.(v) To enable private enterprise to set up subsidiary operating companies and to acquire interest in them.
3.PUBLIC
A public or statutory Corporation is an autonomous corporate body set up under a special Act of Parliament or State Legislature.
The Act or statute defines its objectives, powers an functions. A public corporation seeks to combine the flexibility of private enterprise with public ownership and accountability. In the words of the late President Roosevelt to U.S.A., “a public Corporation is an organisation that is clothed with the power of the government, but is possessed of th flexibility and initiative of private enterprise.” A public Corporation is thus a combination of public ownership, public accountability and business management for public end. Life Insurance Corporation of India, Reserve Bank of India, Employees State Insurance Corporation, Industrial Development bank of India are examples of public Corporation. It must be remembered that, an enterprise does not become a public corporation simply by using the word 'corporation' in its name. For example, the Stat Trading Corporation of India is a government company and not a public corporation. Features The essential features of a public corporation are as under: 1. Corporate body: It is a body corporate established through a special Act of Parliament or Stat Legislature. The Act defines its powers and privileges and its relationship with government departments and ministries. 2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal. It can acquire an own property in its own name. It can sue an be sued and can enter into contracts in its own name. 3. Government ownership: The public corporation is wholly owned by the Central and/ or State Government(s).
4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings are provided by the government but it is supposed to be self-supporting. It can borrow money from the public an is empowered to plough back its earnings. 5. Accounting system: The corporation s not subject to the budgetary, accounting and audit regulations applicable to government departments. It is generally exempt from the rigid rules applicable to the expenditure of public funds. 6. Management and personnel: A public corporation is manged by a Board of Directors appointed by the Government. However, its employees need not necessarily be civil servants. They can be employed on terms and conditions laid down by the corporation itself. 7. Service motive : The primary motive of the corporation is public service rather than private profits. It is, however, expected to operate in a business-like manner. Merits A Public corporation offers the following advantages; 1. Operational autonomy : A public corporation enjoys internal autonomy as there is no Parliamentary interference in its day-to-day working. Therefore, it can be run in a businesslike manner. There is “a high degree of freedom, boldness and enterprise in the management of undertakings and circumspection which is considered typical of government departments”
2. Flexibility operations: Being relatively free from bureaucratic control, a public corporation enjoys flexibility and initiative in business affairs. It can experiment in new lines of activity and decisions can be taken without undue delay. 3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It can, therefore, maintain continuity of policy and operations. 4. Special privilege: A public copora ton is often granted special privileges. The special law by which by which it is created can be tailor made to meet the specific needs of the particular situation. 5. Availability of managerial talent: A public corporation can employ professional managers by offering them better terms and conditions or service than those available to government servent.
Demerits A public corporation suffers from the following drawbacks:
1. Difficult formation: It is very difficult and time-consuming to set up a public corporation because a special law has to be passed in the Parliament. 2. Inflexibility: It is very difficult to change the objects and powers because the special law has to be amended by the Parliament or the State legislature. 3. Excessive accountability: There are frequent debates and discussions on the reports and working of public corporations. Ministerial and political interference in day-to-day working do not allow internal autonomy in actual practice. 4. Clash of divergent interests: When the Board of Directors is constituted to give representation to divergent interests, a conflict may arise. This will hamper the smooth and efficient functioning of the corporation. Emphasis on service motive and lack of incentive may further reduce the profitability of operations. Suitability Despite its weaknesses, the public corporation is generally considered appropriate for public enterprises of industrial and commercial nature. It represents an appropriate combination of public accountability and operational autonomy. According to Prof. Robson: “It is destined to play as important a part in the field of nationalized industry in the 20the century as the privately-owned corporation played in the realm of capitalist organisation in the 19the century.”
The public corporation is suitable for undertakings requiring monopoly powers,. e.g., public utilities. It is also useful for undertakings which involve exercise of powers to be conferred by legislature and enterprises which may not be self-supporting and have to be financed by regular grants by the State. However, in India, “it would not be wrong to say that for the most part the public corporation has lost the spirit but retained the form.” Bureaucratic management, financial dependence on the government and lack of personal motivation are the main reasons for this state of affairs. 4.CONTROL
In India, a new form of organisation known as 'Control Board' has been evolved to manage certain public enterprises. It is a composite board set up the central Government in association with the State Government concerned to execute and control river valley projects. At present 14 control boards are working in the country. Bhakra Nangal Control Board, Hirakund Control Board, Nagarjunasagar Control Board are some examples of control boards. This form of organisation ensures uniformity of action and unitary control over the particular project. Control Boards enjoy autonomy of day-to-day operations. But in practice the boards are staffed with bureaucrats and politicians. The ex-officio members of the board take little interest and decisions are usually taken through the circulation. A clash arises between nominees of the Central and State Governments. As stated by the Gorwala committee, “composition of the Board should be such as to subserve only one purpose that of good and efficient direction in public int erest. There should be no place on the Board for the representation of interests, nor for display directors.” A control board is created by executive authority and is not a statutory body. It is entrusted with the overall responsibility for the management of the project. On the whole this form of organization has proved to be useful for river valley projects. ==================================
5.OPERATION This form of organisation has been used in the U.S.A. And Europe. Under it, the State centers into a contract with an established private enterprise to entrust to it the management of a public enterprise in consideration of a fixed fee. The private enterprise appointed as the contractor is given the full authority with regard to employment and dismissal of staff, purchase of supplies and equipment and the determination of the operating policies. He is reimbursed all expenses incurred by him in connection with the management of the public enterprise. In U.S.A. The Atomic Energy Commission has entered into operating contracts with the Du Pont and General Electric company for the management of its plants and laboratories. Operating contract is a flexible organisation. Statues applicable to the government companies do not apply to the operating contract. It makes available to the State the managerial kill and technical knowledge of the private enterprise. This form of organisation b used for the transitionary period during which the State lacks the necessary knowhow or experience in industry. Entrustment of a public enterprise to private sector is appropriate where work involved is an entension of private enterprise or to develop enterprises which are ultimately to be taken over by the government. For instance, in the initial states of their operation, the management of the HMT and the U.P. Cement Factory was entrusted to a Swedish and British firm respectively. The system of operating contact may prove to be inefficient and expensive. There is no competition and the personnel employed by a contractor are generally paid at a higher rte than the government serpents employed in similar activities. The enterprise may operate against the public interest an police due to lack of effective control over the contractor. When the contractor makes a default, the Government may have to terminate the contract. It would lead to a complete breakdown in the project until a new contractor is appointed. ================================
#################### 2. In a democracy like India, can we eliminate the concept of Public Enterprises and totally give the rights to the Private sector? Elaborate with detailed arguments and suitable examples.
Based on the past socio-economic trend and the current situation, it is impossible to visualize INDIA without public enterprises.
IF WE CONSIDER THE FOLLOWING NATIONAL FACTORS
-growth of population rate.
-growth of [15—30] age segment.
-no. of people below the poverty line
-unemployment status
Etc
PE IS A MUST FOR ANOTHER 20 YEARS AT LEAST.
===============================
PE MEANS
the business units owned, managed and controlled by the central, state or local government are termed as public sector enterprises or public enterprises. These are also known as public sector undertakings.
A pubic sector enterprise may be defined as any commercial or industrial undertaking owned and managed by the government with a view to maximise social welfare and uphold the public interest.
Public enterprises consist of nationalised private sector enterprises, such as, banks, Life Insurance Corporation of India and the new enterprises set up by the government such as Hindustan Machine Tools(HMT), Gas Authority of India(GAIL), State Trading Corporation(STC) etc.
CHARACTERISTICS OF PUBLIC ENTERPRISES
Looking at the nature of the public enterprises their basic characteristics can be summarized as follows:
(a) Government Ownership and Management: The public enterprises are owned and managed by the central or state government, or by the local authority. The government may either wholly own the public enterprises or the ownership may partly
be with the government and partly with the private industrialists and the public. In any case the control, management and ownership remains primarily with the government.
For example, National Thermal Power Corporation(NTPC) is an industrial organisation established by the Central Government and part of its share capital is provided by the public. So is the case with Oil and Natural Gas Corporation Ltd.(ONGC).
(b) Financed from Government Funds: The public enterprises get their capital from Government Funds and the government has to make provision for their capital in its budget.
(c) Public Welfare: Public enterprises are not guided by profit motive. Their major focus is on providing the service or commodity at reasonable prices. Take the case of Indian
Oil Corporation or Gas Authority of India Limited(GAIL). They provide petroleum and gas at subsidised prices to the public.
(d) Public Utility Services:Public sector enterprises concentrate on providing public utility services like transport, electricity, telecommunication etc.
(e) Public Accountability: Public enterprises are governed by public policies formulated by the government and are accountable to the legislature.
(f) Excessive Formalities: The government rules and regulations force the public enterprises to observe excessive formalities in their operations. This makes the task of management very sensitive and cumbersome.
? Owned, managed and controlled by Government.
? Funded by Government
? Welfare oriented
? Concentrate on public utility services
? Responsible to parliament
? Observance of Government formality is necessary
DIFFERENCE BETWEEN PRIVATE AND PUBLIC SECTOR ENTERPRISES
In the earlier lessons you have studied about the various forms of business organization existing under private ownership or in private sector. By private sector, we mean, economic
and social activities undertaken privately by a single individual or group of individuals.
They prefer to do business in private sector basically to earn profit.
On the other hand public sector refers to economic and social activities undertaken by public authorities. The enterprises in public sector are set up with the main aim of protecting
public interest. Profit earning comes next.
Besides the difference in the objective, the enterprises in both these sectors also differ in many other aspects. In this section let us know the differences between the enterprises of public sector and private sector.
Basis of difference Private sector enterprises Public sector enterprises
1. Objective
PRIVATE
Maximisation of profit.
PUBLIC
Maximise social welfare
and ensure balanced economic development.
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2. Ownership
PRIVATE
Owned by individuals.
PUBLIC
Owned by Government.
-----------------------------------------------
3. Management
PRIVATE Managed by owner / professional managers PUBLIC
Managed by Government.
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4. Capital
PRIVATE Raised by owners through loans, private
funds and sometimes public issues. PUBLIC
Raised from Government through public issues
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5. Area of operation PRIVATE Operates in all areas.
PUBLIC
Operates in basic and public utility sectors.
#######################################
3. What you do you understand by the term ‘Financial Autonomy’ of the PE? Discuss in details, by citing examples, the methods of ensuring Financial Accountability of PE’s,
Public Enterprises(PEs) as we all know are set up wholly or substantially owned by the government for the purpose of undertaking activities of industrial, manufacturing, trading or allied nature. They are government owned enterprises
functioning under both central and state governments. The PEs are corporate bodies, set up either under specific acts of Parliament or under Companies Act.
The PEs since they are established with public funds, are accountable to the public i.e. through thq parliament.
Autonomy in simple terms means freedom to take decisions and function accordingly while accountability refers to rendering of accounts to some higher authority. The financial autonomy given to PEs means empowering them to take decisions on
their own in the areas of investment management, financing of investments and monitoring the financial performance of respective enterprises based on sound business principles and the wisdom of the financial administrators. Insofar as investments are concerned, other things remaining the same, PEs should have
freedom in identifying the projects, preparing the detailed feasibility project reports, appraising the projects, making investment choices, and implementing and monitoring them. They should also be free to decide the optimal level of investments in the various items of inventory book debts and floating stock of cash. By the
same principle they should be free to peg the level of current liabilities to any proportion of the current assets. The financial decisions in the normal run may be made by these enterprises as guided by the cost of capital. They should possess
the freedom to choose among the various debt-equity propositions. They should be at liberty to select bankers, financial institutions and the channels of money and capital markets for financing their working fund requirements. Subject to the
social constraints imposed on them by the government, these enterprises should be vested with the autonomy to develop their own costing and pricing systems,
norms of profitability .and monitoring mechanism to ensure desired financial status alike any business firm in the private sector.
Financial autonomy is a phenomenon external to the organisation. In other words, it flows from the environment governing the functioning of PEs. Thus there are six tiers of financial autonomy. These include -the parliament, -the government,
-the Comptroller and Auditor General(CAG) of India, the Courts of Law i.e. .
-the Supreme Court of India and the High Court, -the mass media and the citizen.
All these six institutions can have an explicit policy about the financial autonomy they may like to provide to PEs in order to enable them to operate efficiently and effectively. As the enterprises under discussion are both 'public' and 'enterprise',
these institutions cannot be overjealous in controlling each and every aspect of financial business of PEs. The respect for the corporate status of these enterprises will have to be maintained by these institutions. While saying so we do not deny
the need for exercising checks and balances on the financial decision making in these enterprises. The main mint is that these institutions should be selective in exercising the financial controls on PEs. PEs may enjoy autonomy in the day-to-day
financial decision making which in its ambit may include matters such as normal purchases, cost allocations, evolving suitable price structures, selection of suitable sources and mix of finance, installation and operation of the financial information
systems, and preparation and finalisation of accounts, etc. On the other hand,
the six institutions may however intervene in the policy aspects of the financial decision making. For instance, if the parliament so desires, it may discuss the financial performance, financial position, pricing, financial aspects of foreign
collaborations and the position of internal financing in PEs, etc. The government may reserve the right to approve the appointments of executives drawing salaries
above certain levels and issue directives to PEs to provide certain services at particular prices, even if they are not economical. The CAG can give directions to PEs to follow a specific format for the presentation of their accounts and
disclosure of the financial information. The various courts of law may direct PEs to alter their financial decisions if the fundamental rights of the citizens are affected. The mass media and the citizens may criticise certain financial decisions
by PEs and as a result the PEs may have to reconsider the matter. Such decisions may include matters relating to pricing, and selection of suppliers of plant and materials which may attract public resentment. At times public enquiry can be
camed out on certain decisions taken by the management of P.E.'s. For instance in 1970, on the recommendations made by the Committee of Public Undertakings,
a one man commission was set up to enquire into award of contract for laying some pipelines to an American firm by the Indian Oil Corporation. The financial accountability of P.E.'s pertain to:
Major Accounting Decisions: These include: an increase in depreciation, changes in tender procedures, stores valuation and replacements.
Matters of Internal organization: These include internal audit, procedures for ordering materials, delegation of powers, watch and ward supervision over financial transactions, provisions relating to disciplinary matters etc. These are examples
of matters which may be left to be properly evolved within the enterprise itself.
Broad fund : These are fundamental aspects of financial accountability.
They require plans between those evolved by the board and the socioeconomic aims set by the parliament. These may include matters pertaining to self-financing,
outlines of capital expansion programmes and the rates of dividend, repatriation of foreign funds or consultancy fees and so on.
PEs may owe an accountability to various institutions in respect of financial results, productivity and growth. The memorandum of understanding(MOU) is emerging as an important instrumentality whereby PEs are required to spell out
their objectives and the targets they are expected to achieve-during a given financial year.
THE METHODS OF ENSURING FINANCIAL
AUTONOMY AND ACCOUNTABILITY IN
PUBLIC ENTERPRISES
To ensure financial autonomy, both external and internal methods have been resorted to. Externally the government spells out the financial freedom of the
PEs in regard to several aspects in their articles of association. The limits for investment, commercial borrowings, working capital borrowings, salaries offered to employees and powers of recruitment, etc., are specified in the articles of association of PEs. The provisions regarding business budgeting, costing and pricing etc. are also contained therein.
The government indicates the extent of autonomy to PEs in respect of pricing, investment and profitability, in the MOU. In the articles of association as well as the enabling acts under which public corporations have been set up the
government exercises self-restraint on itself not to interfere in the day to day working of PEs including matters pertaining to financial functioning.
Internally PEs ensure autonomy at different levels of functioning by enforcing delegation and decentralisation of financial powers. In many a PE, there is a healthy tradition to hold group meetings which are also known as communication meetings. In these meetings the departmental heads are the invitees. The workers'
representatives are also invited. The problems are discussed and decisions are taken then and there. These meetings deal with the decisions regarding procurement, plant acquisition, investment of funds and acceptance of tender. This instrument
provides a great deal of financial autonomy to the executives and work force.
The methods of ensuring financial accountability may be divided broadly into two categories: organisational methods and the external methods. The former may take the shape of arrangements which may enable a PE to give a good financial account of itself. The external means may be a sequel to the autonomous organisation of a PE, created for ensuring that the managers, to whom it does
not belong, behave responsibly vis-a-vis the parliament.
The organisational means of financial accountability are as follows:
a) Clear financial procedures.
b) Efficient internal audit.
c) Commercial audit by private auditors.
d) Proper internal organisation of the enterprise, based on optimal criteria and decentralisation.
e) Appointment of a Financial Advisor of the enterprise by the government or under governmental approval.
f) Governmental control is exercised through the Board of Directors of the PE.
The Chief Executives and full-time Directors of the PEs are appointed by the government. In most of the enterprises government's representatives on
the boards in the form of nominee directors are present. They are from the concerned Administrative Ministry and Ministry of Finance serving in an ex-officio capacity on the board.
g) Reservation of certain financial matters for government approval, under the Articles of Association or under the Act governing a public enterprise.
h) Audit of PEs by the Comptroller and Auditor General is another means of financial accountability. In PEs there is a system of double audit. The accounts of PEs are first audited by the statutory auditors of the enterprise. After this is passed by the Board of Directors of the enterprise, then the supplementary audit is conducted by the office of the C & AG.
PROBLEMS PERTAINING TO FINANCIAL
AUTONOMY AND ACCOUNTABILITY IN PUBLIC ENTERPRISES
The financial autonomy and accountability of PEs occupy an important place in a democratic country such as ours. However, as things stand, these are treated as two separate facets of the personality of PEs and often the perceptions of the
government and PEs on the issues relating to autonomy and accountability differ.
i An important problem in this context is the government's insistence to get matters referred to it on the various financial issues and the aversion of PEs to disclose the requisite financial information to their principals i.e. the respective administrative
ministries. Whereas the government continues to treat these enterprises as its extensions, the PEs do not or cannot make concerted efforts to come out of the
gravitational pull of the government. The parliament, the administrative ministry,
the CAG and the Courts are considered as the trustees of public funds and are prompted, therefore, to impose a variety of controls on these enterprises. They do not want to take any risk with the public money, but prefer safety and security. SUGGESTIONS FOR ENSURING IMPROVED AUTONOMY AND ACCOUNTABILITY OF PUBLIC ENTERPRISES
A number of suggestions can be offered to ensure improved financial autonomy and accountability in PEs. To begin with, these enterprises should be commercialised.
This will enable PEs to charge economic rates for the goods and services provided to their users. This will result in the generation of adequate internal resources and consequent reduction of financial support from the government to fund their
operation and expansion needs. In turn, the government control on financial matters will decline drastically. Corporatisation of these enterprises is another
suggestion. This will transform the systems, structure and strategy of PEs and resolve many thorny problems with regard to financial autonomy and accountability.
A large number of PEs have been complaining about lack of autonomy to them as they do not have adequate powers to procure the requisite amount of materials,
stores and supplies etc. On the contrary, the government is of the view that the inventories in these enterprises should be rigorously controlled as there is a heavy
over-investment in this component of assets in PEs. The government's suspicion cannot be questioned as many a PE do not have materials management manual.
The absence of such a manual has encouraged them to procure materials disproportionate to their needs.
The CAG in his various audit reports has commented upon the non-preparatiun of the budget, cost, internal audit, Research and Development and capital expenditure manuals. Many PEs do not have even the budget manual. The enhanced delegation and decentralisation of financial powers within PEs is a must.
In order to achieve this objective well defined structures must be developed. The boards of management in PEs should specify the financial powers vested in each functionary. Similarly, the various executives in PEs should be encouraged to delegate financial powers to their junior colleagues. The government, on its part
Financial Administration should instead of putting limits on investments, expenditure, borrowings, etc, issue
Public Enterprises only suggestive guidelines. In case a PE exceeds the suggested ceiling, it may be required to report the matter to the government. The principle of management-by-exception should be followed. The government should intervene
only in such cases where it is necessary to do so in the larger public interest.
PEs should formulate clearly financial strategies and goals which should be both unambiguous and quantifiable. For instance, PEs could specify proposed rate of return on their capital employed, declare a specified dividend on their equity,
finance their expansion programmes largely through internal generation of resources and approach the capital market to finance the rest of their expansion needs. A clarity in financial objectives will enable PEs to acquire the necessary financial
autonomy from the government. It will also lead to self-imposed controls. This will eliminate the need for the government to clamp ,financial controls on them.
There must also be a sincere application of the Management by Objectives(MBO) for attaining financial objectives.
It is desirable to eliminate the multiple audits in PEs which are mostly unproductive.
The audit approach needs to undergo a change in order to yield the desired results. The auditors must be made conversant
with the operations and philosophy of PEs.
The annual reports can serve as an important medium to satisfy the autonomy and accountability needs. They can be a good instrument to win greater autonomy for PEs and fulfil, at the same time, the control needs of the parliament, CAG
and the Courts. An analysis of the annual reports of PEs shows that they are not brought out in time. The time lag in their finalisation and presentation to the parliament ranges from one year to ten years. Secondly, in many cases they are either sketchy or lack important information relating to the trerids in output, productivity, prices, profitability, comparative performance and so on.
Necessary steps must be taken to improve the practices pertaining to the preparation and presentation of the annual reports by PEs.
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1. Explain the concept of Public Enterprises on the following lines;
1. Features of PE
A careful analysis of the above definitions reveals the following characteristics of public enterprises 1. State ownership: A public enterprise is wholly owned by the Central Government or Stat Government(s) or local authority or jointly owned by two or more of them. In case the enterprise is owned both by the Government and private sector, the Stat must have at least 51 percent share in ownership.
2. State control: The ultimate control of a public enterprise lies with the Government which appoints its Board of Directors and the Chief Executive. 3. Government financing: The whole or a major portion of the capital of a public enterprise is provided by the Government.
4. Service motive : The primary aim of a public enterprise is to render service to the society at large. It may have been to incur losses for this purpose. However, public enterprises are expected to generate surplus in course of time. 5. Public accountability: Public enterprises are financed out of public money. Therefore, they are accountable for their results to the elected representatives of he public, i.e, the Parliament and the State Legislature. That is why, the working of pubic enterprises is scrutinized by the Committees of the Parliament or the State Legislature. @@@@@@@@@@@@@@@@@
2. Goals / Objectives of PE
The main objectives of public enterprises are as follows 1. To stimulate economic growth: The basic purpose of setting up public enterprises is to accelerate the pace of economic development in the country. Public enterprises provide the basic infrastructural facilities for rapid industrialization. That is why the Government of India has st up units in various sectors like electricity generation, transportation and communication network, machine building, fertilizers, petro-chemicals, pesticides, river valley projects, etc. These enterprises have filled up critical gaps in the country's industrial structure. 2. To mobilise public savings: A high rate of savings and capital formation is essential for rapid economic growth. The Government has nationalized commercial banks and insurance companies to direct public savings in productive channels. Moreover, several term lending institutions have been set up to provide finance to industries both in private and public sectors.
3. To provide employment: As a welfare State, the Government has assumed the responsibility of providing gainful employment to more and more people. In order to protect employment of a large number of persons, the Government has often taken over sick and mismanaged units in the private sectors. It has set up several undertakings to create larger employment opportunities.
4. To control monopoly: The existence of a large and expanding private sector results in the growth of private monopolists. Therefore, the Government has reserved certain basic and strategic sectors exclusively for public enterprises. In order sectors public enterprises offer competition and theory prevent the emergence of private monopolies. 5. To establish an egalitarian society: An important goal of h public sector is to reduce disparities in the distribution of income and wealth. Such diffusion of economic power helps to establish an egalitarian order in the society. Therefore, the public sector was designed to control the 'commanding heights' of the economy. 6. To conserve national resources : Public enterprises have also been set up to ensure proper utilisation and conservation of natural resources. For example, the coal mines ere nationalized to protect, conserve and promote scientific mining and to prevent indiscriminate slaughter mining. 7. To stimulate research and development: The foundation and tempo of economic development is based upon technology. Technological inventions and innovations require substantial investment of funds and development of scientific talent. Public enterprises alone can afford such investment which do not give direct and immediate monetary gains. The Government has st up several institutions to undertake research an development on a large scale. The foregoing objectives of public enterprises may be divided into three categories, namely(a) economic objectives : to stimulate economic growth, to mobilise public savings, to develop sound industrial base, to ensure balanced regional development, etc;(b) social objectives: to generate employment, to create egalitarian society, to control monopoly, to provide essential commodities; and(c) political objectives : to conserve and develop national resources, to ensure national defense, to safeguard national priorities etc. @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
3. Forms of PE with their merits and demerits The main forms of State enterprises are given below: 1. Department undertaking 2. Government companies
3. Public or statutory corporations
4. Control boards 5. Operating contracts.
1.DEPARTMENTAL UNDERTAKING
Under this form of organisation, a public enterprise is run as a department of the Government. It is organised, financed and controlled like any other Government department. A departmental undertaking is self-contained but it is under the overall control of the departmental head and the ministry concerned.
It has, however, its own management incharge of and responsible for the undertaking. For example, Posts and Telegraphs are a department in the Ministry of Communications. Similarly, the Chittranjan Locomotive Works and the Integral Coach Factory are parts of the Ministry of Railways. The Ordnance Factory the Gun Carriage Factory, the Delhi Milk Scheme, the Tarapur Atomic Energy Plant, All India Radio, Doordarshan, the Government Printing Press and Mint are other examples of departmental undertakings. Where a public enterprise is of national significance in view of its giant size or nationwide operations. It may be organised as a separate fullfledged ministry. For instance, the Indian Railways is managed by the Ministry of Railways through the Railway Board. The Railway Board consisting of a Chairman , three members and a financial commissioner manges the Indian Railways under the overall direction and control of the Railway Minister. The Railway Minister is in turn responsible to the parliament. There is no basic difference between departmental setup and the ministerial set-up and in both the cases, the undertaking operates as a wing of the government with ultimate control and responsibilities vested in the Minister concerned. Salient Features The essential features of departmental organisation are as follows:
1. Line authority: The ultimate responsibility for management lies with the Minister concerned. The Minister in turn delegates his authority downward to the various levels, e.g., the departmental head, the chief executive of each undertaking, etc.
2. Government financing: The undertaking is financed through annual budget appropriations by the parliament or the State Legislature. The revenues of the undertaking are paid into the treasury. 3. Executive decision : A departmental undertaking is set up by an executive decision of the Government without any legislation. 4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting and audit procedures applicable to other government departments. 5. Civil service code: The enterprise is manged by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government. 6. Soverign immunity: Being an integral part of the Government, a departmental undertaking cannot be sued at law without the consent of the government. Merits
The main advantages of departmental organisation are as follows:
1. Accountability : Departmental organisation ensures maximum degree of parliamentary control. In the words of Krishna Men on Committee, “accountability of departmental undertakings to Parliament is complete, their management being under the Ministry concerned”
2. Effective control: The management of the undertaking is under the absolute control of the Minister concerned. Therefore, there is maximum degree of government control on the enterprise. 3. Financial discipline : Tight budgetary, accounting and audit controls ensure that public funds are not misused. There is unified and centralized management and any surplus earned by the undertaking goes to the government treasury. 4. Policy instrument : The Government can realize its social, political and economic objectives through departmental undertakings. Demerits A departmental undertaking suffers from the following drawbacks: 1. Loss of autonomy: Excessive public accountability and Parliamentary control result in loss of freedom which is essential for efficient business operations. Frequent investigations by Parliamentary committees hamper the efficient functioning an growth of departmental undertakings. 2. Political influence: The undertaking is subject to political changes and its fate depends on the balance of power between the ruling party and the opposition. There is lack of continuity in management due to frequent changes in the Cabinet. Political considerations affect the policy matters and long range planning is not possible. 3. Lack of flexibility: Complete centralisation of control and political interference in day-to-day operations lead to lack of flexibility. There is bureaucracy and red-tape in day-to-day administration. As a result decisions get delayed. Rigid adherence to time-consuming procedures an formalities make it difficult to run the undertaking in a business like manner. 4. Lack of professional management: The undertaking is managed by civil servants who do not often possess managerial knowledge and skill. Frequent transfers and seniority based promotions tend to lower their motivation and morale. There is lack of initiative because the civil servants are afraid of breaking new ground due to fear of criticism by the Minister and the Parliament. 5. Inefficiency: Bureaucratic management, undue delays and insensitivity to consumer needs, and cumbersome regulations result in low efficiency of operations. There is a tendency not to take the losses seriously as these are borne by the treasury. Suitability
In general, the structure and working of a departmental undertaking is incompatible with the financial and operational requirements of a business enterprise. Departmental organisation is in many ways the direct negation of the requirements of autonomy and flexibility. A departmental undertaking tends to raise the power of the government tot the maximum and reduce its initiative and flexibility to the minimum. It should, therefore, be “the rare exception, and not the general rule”. The exceptional cases wherein the departmental organisation is suitable are as follows:
1. in defense industries on account of their strategic importance and the need for utmost secrecy
2. for the operation of economic controls like rationing, State trading, etc., which involve exercise of monopoly power and the use of governmental authority
3. for the operation of public utilities
4. for projects not really ripe for technical and financial sanction because they have not been worked out in detail, e.g., control body for river valley projects
5. for projects which have reached the stage of technical or financial sanction of which the requisite financial provision is not assured. A new development concerning departmental undertakings in India has been the setting up of corporations to raise loans from the public through the issue of bonds. For example The Railway finance Corporation has issued railway bonds Mahanagar Telephone Nigam has also issued telephone bonds and it is coordinating the telephone services in the metropolitan cities.
=============================================
2.GOVERNMENT COMPANY
A Government company is a company in which 51 per cent or more of the total paid up capital is held by the Central Government and/or State Governments. Any company which is a subsidiary of such a company is also considered a government company
It is registered under the Companies Act, 1956 either as a wholly-owned company(private company) or public company in which the capita is held jointly by the State and private(Indian or foreign) parties. A government company in which both the private concerns/individuals are shareholders is known as a mixed ownership company. Hindustan Machine Tools(HMT), Hindustan Steel Ltd., Indian Drugs and Pharmaceuticals Ltd., State Trading Corporation of India, Hindustan Aeronautics Ltd., are examples of the government companies in India.
Salient Features
The main features of government company organisation are as follows: 1. Corporate body: A Government company is a body corporate registered under the Companies Act. It has a separate legal entity of it sown. Therefore, it can own property in its own name. It can sue and be sued in its own name. 2. Executive decision: It is created by an executive decision of the Government without seeking the approval of the Parliament or the Stat legislature. 3. Ownership: A Government company may be wholly or part owned by the Government. In case it is partly owned, the Government must hold not less than 51% of the paid up share capital. 4. Regulation: It is created by the provisions of the Companies Act. However, the Central Government may, by notification in the Official Gazette, direct that any of the Provisions of the Act(except Sections 618, 619 and 69A) shall not apply to Government companies. 5. Independent staffing: The employees, except the deputationists, of a Government company are not Government servants. Their methods of recruitment and service conditions may be different from those of Government employees. However, the Chief Executive is generally appointed by the Government. 6. Financing: The whole or major part of the capital is provided by the Governments. But the revenues of the company are not deposited into the treasury. 7. Separate accounting: A government company is not subject to the budgeting, accounting and audit rules applicable to government departments. Merits
The government company form of organisation enjoys the following advantages;
1. Operational autonomy and flexibility. Being a separate legal entity, a government company enjoys operational autonomy an can be run in a business-like manner., It enjoys flexibility of operations due to freedom from bureaucratic control an red-tapism. 2. Professional management. A government company can employ professionally qualified managers because it has its own personnel policies and practices. Availability of managerial talent helps to improve efficiency and profitability. 3. Public accountability. The annual reports and working of government companies are discussed and debated in the Parliament. Therefore, it is accountable to the public and its management has to remain alert. 4. Discipline. The management of a government company is governed by the companies Act. The healthy discipline of the Act helps to keep the management active and efficient. It puts the enterprise at par with a private enterprise. 5. Private participation. Company form of organisation permits foreign collaboration and private participation. The Hindustan Steel Limited ha obtained technical and financial assistance from the U.S. S.R., West Germany and the U.K. For its steel plants located at Bhilai, Rourkela and Durgapur. Similarly, capital and technical knowledge of the private sector can be obtained through a mixed ownership company. 6. Easy to establish and alter. It is very easy to establish government company as no law needs to be passed by the Parliament and State legislature. Similarly, it objectives and powers can be changed simply by altering its Memorandum of Association without seeking the approval of the Parliament.
Demerits Government company organisation suffers from the following drawbacks:
1. Avoids constitutional responsibility: Parliament's approval is not required for the creation and alternation of a government company. Therefore, it may evade its constitutional responsibility to the elected representatives of the public. 2. Ineffective control: Regulations of the companies Act become meaningless because the controlling votes always lie in Government hand. Moreover, the Government can exempt the enterprise form most of the provisions of the Act. Therefore, government company organisation has been criticised as “a fraud on the companies Act and the Constitution.”
3. Doubtful autonomy: The operational autonomy of a government company exists only on paper. In real practice, there is ministerial and bureaucratic interference in its functioning. Since the directors are appointed by the Government they often fail to act independently. 4. Problem of deputation: The key personnel of a government company are often deputed from the government departments. Such deputationists generally lack the necessary expertise an commitment. As a result the efficiency of the enterprise is reduced. 5. Fear of exposure: The annual reports of government companies are placed before the Parliament. Therefore, their working is exposed to the glare of public and press criticism. The strong phobia of public accountability often results in undue publicity and unwarranted criticism of the companies. Therefore, the management is of then demoralized and does not take initiative to enter new areas of activity. This has an adverse effect on the efficiency and profitability of the enterprise. Suitability In spite of its drawbacks, the government company organisation is very useful under the following circumstances:(1) When the State wants regulate a company in the private sector without nationalizing it. Due to an emergency created by a financial or employment crisis, the Government may have to takeover an existing company. Merely by acquiring majority of shares the State can control such an enterprise. Eastern Shipping company, Indian Iron and Steel Co., Swadeshi Cotton Mills, FACT, etc., are examples of such companies in India.(ii) When the State intends to a launch an enterprise with collaboration of private sector. The government company form enables the public sector to avail of the financial resources and technical knowhow of the foreign countries and the private sector. Hindustan Machine Tolls Ltd., Hindustan Steel Ltd., Heavy Engineering Corporation have been set up in this manner.
(iii) when the government wishes to start an enterprise entirely as a public venture in order to put it on sound footing and to transfer it as soon as possible to the private sector.(iv) To promote trade an commerce or to promote a particular field of economic activity. State Trading corporation and the Export Credit an Guarantee Corporation have been st up for this purpose.(v) To enable private enterprise to set up subsidiary operating companies and to acquire interest in them.
3.PUBLIC
A public or statutory Corporation is an autonomous corporate body set up under a special Act of Parliament or State Legislature.
The Act or statute defines its objectives, powers an functions. A public corporation seeks to combine the flexibility of private enterprise with public ownership and accountability. In the words of the late President Roosevelt to U.S.A., “a public Corporation is an organisation that is clothed with the power of the government, but is possessed of th flexibility and initiative of private enterprise.” A public Corporation is thus a combination of public ownership, public accountability and business management for public end. Life Insurance Corporation of India, Reserve Bank of India, Employees State Insurance Corporation, Industrial Development bank of India are examples of public Corporation. It must be remembered that, an enterprise does not become a public corporation simply by using the word 'corporation' in its name. For example, the Stat Trading Corporation of India is a government company and not a public corporation. Features The essential features of a public corporation are as under: 1. Corporate body: It is a body corporate established through a special Act of Parliament or Stat Legislature. The Act defines its powers and privileges and its relationship with government departments and ministries. 2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal. It can acquire an own property in its own name. It can sue an be sued and can enter into contracts in its own name. 3. Government ownership: The public corporation is wholly owned by the Central and/ or State Government(s).
4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings are provided by the government but it is supposed to be self-supporting. It can borrow money from the public an is empowered to plough back its earnings. 5. Accounting system: The corporation s not subject to the budgetary, accounting and audit regulations applicable to government departments. It is generally exempt from the rigid rules applicable to the expenditure of public funds. 6. Management and personnel: A public corporation is manged by a Board of Directors appointed by the Government. However, its employees need not necessarily be civil servants. They can be employed on terms and conditions laid down by the corporation itself. 7. Service motive : The primary motive of the corporation is public service rather than private profits. It is, however, expected to operate in a business-like manner. Merits A Public corporation offers the following advantages; 1. Operational autonomy : A public corporation enjoys internal autonomy as there is no Parliamentary interference in its day-to-day working. Therefore, it can be run in a businesslike manner. There is “a high degree of freedom, boldness and enterprise in the management of undertakings and circumspection which is considered typical of government departments”
2. Flexibility operations: Being relatively free from bureaucratic control, a public corporation enjoys flexibility and initiative in business affairs. It can experiment in new lines of activity and decisions can be taken without undue delay. 3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It can, therefore, maintain continuity of policy and operations. 4. Special privilege: A public copora ton is often granted special privileges. The special law by which by which it is created can be tailor made to meet the specific needs of the particular situation. 5. Availability of managerial talent: A public corporation can employ professional managers by offering them better terms and conditions or service than those available to government servent.
Demerits A public corporation suffers from the following drawbacks:
1. Difficult formation: It is very difficult and time-consuming to set up a public corporation because a special law has to be passed in the Parliament. 2. Inflexibility: It is very difficult to change the objects and powers because the special law has to be amended by the Parliament or the State legislature. 3. Excessive accountability: There are frequent debates and discussions on the reports and working of public corporations. Ministerial and political interference in day-to-day working do not allow internal autonomy in actual practice. 4. Clash of divergent interests: When the Board of Directors is constituted to give representation to divergent interests, a conflict may arise. This will hamper the smooth and efficient functioning of the corporation. Emphasis on service motive and lack of incentive may further reduce the profitability of operations. Suitability Despite its weaknesses, the public corporation is generally considered appropriate for public enterprises of industrial and commercial nature. It represents an appropriate combination of public accountability and operational autonomy. According to Prof. Robson: “It is destined to play as important a part in the field of nationalized industry in the 20the century as the privately-owned corporation played in the realm of capitalist organisation in the 19the century.”
The public corporation is suitable for undertakings requiring monopoly powers,. e.g., public utilities. It is also useful for undertakings which involve exercise of powers to be conferred by legislature and enterprises which may not be self-supporting and have to be financed by regular grants by the State. However, in India, “it would not be wrong to say that for the most part the public corporation has lost the spirit but retained the form.” Bureaucratic management, financial dependence on the government and lack of personal motivation are the main reasons for this state of affairs. 4.CONTROL
In India, a new form of organisation known as 'Control Board' has been evolved to manage certain public enterprises. It is a composite board set up the central Government in association with the State Government concerned to execute and control river valley projects. At present 14 control boards are working in the country. Bhakra Nangal Control Board, Hirakund Control Board, Nagarjunasagar Control Board are some examples of control boards. This form of organisation ensures uniformity of action and unitary control over the particular project. Control Boards enjoy autonomy of day-to-day operations. But in practice the boards are staffed with bureaucrats and politicians. The ex-officio members of the board take little interest and decisions are usually taken through the circulation. A clash arises between nominees of the Central and State Governments. As stated by the Gorwala committee, “composition of the Board should be such as to subserve only one purpose that of good and efficient direction in public int erest. There should be no place on the Board for the representation of interests, nor for display directors.” A control board is created by executive authority and is not a statutory body. It is entrusted with the overall responsibility for the management of the project. On the whole this form of organization has proved to be useful for river valley projects. ==================================
5.OPERATION This form of organisation has been used in the U.S.A. And Europe. Under it, the State centers into a contract with an established private enterprise to entrust to it the management of a public enterprise in consideration of a fixed fee. The private enterprise appointed as the contractor is given the full authority with regard to employment and dismissal of staff, purchase of supplies and equipment and the determination of the operating policies. He is reimbursed all expenses incurred by him in connection with the management of the public enterprise. In U.S.A. The Atomic Energy Commission has entered into operating contracts with the Du Pont and General Electric company for the management of its plants and laboratories. Operating contract is a flexible organisation. Statues applicable to the government companies do not apply to the operating contract. It makes available to the State the managerial kill and technical knowledge of the private enterprise. This form of organisation b used for the transitionary period during which the State lacks the necessary knowhow or experience in industry. Entrustment of a public enterprise to private sector is appropriate where work involved is an entension of private enterprise or to develop enterprises which are ultimately to be taken over by the government. For instance, in the initial states of their operation, the management of the HMT and the U.P. Cement Factory was entrusted to a Swedish and British firm respectively. The system of operating contact may prove to be inefficient and expensive. There is no competition and the personnel employed by a contractor are generally paid at a higher rte than the government serpents employed in similar activities. The enterprise may operate against the public interest an police due to lack of effective control over the contractor. When the contractor makes a default, the Government may have to terminate the contract. It would lead to a complete breakdown in the project until a new contractor is appointed. ================================
#################### 2. In a democracy like India, can we eliminate the concept of Public Enterprises and totally give the rights to the Private sector? Elaborate with detailed arguments and suitable examples.
Based on the past socio-economic trend and the current situation, it is impossible to visualize INDIA without public enterprises.
IF WE CONSIDER THE FOLLOWING NATIONAL FACTORS
-growth of population rate.
-growth of [15—30] age segment.
-no. of people below the poverty line
-unemployment status
Etc
PE IS A MUST FOR ANOTHER 20 YEARS AT LEAST.
===============================
PE MEANS
the business units owned, managed and controlled by the central, state or local government are termed as public sector enterprises or public enterprises. These are also known as public sector undertakings.
A pubic sector enterprise may be defined as any commercial or industrial undertaking owned and managed by the government with a view to maximise social welfare and uphold the public interest.
Public enterprises consist of nationalised private sector enterprises, such as, banks, Life Insurance Corporation of India and the new enterprises set up by the government such as Hindustan Machine Tools(HMT), Gas Authority of India(GAIL), State Trading Corporation(STC) etc.
CHARACTERISTICS OF PUBLIC ENTERPRISES
Looking at the nature of the public enterprises their basic characteristics can be summarized as follows:
(a) Government Ownership and Management: The public enterprises are owned and managed by the central or state government, or by the local authority. The government may either wholly own the public enterprises or the ownership may partly
be with the government and partly with the private industrialists and the public. In any case the control, management and ownership remains primarily with the government.
For example, National Thermal Power Corporation(NTPC) is an industrial organisation established by the Central Government and part of its share capital is provided by the public. So is the case with Oil and Natural Gas Corporation Ltd.(ONGC).
(b) Financed from Government Funds: The public enterprises get their capital from Government Funds and the government has to make provision for their capital in its budget.
(c) Public Welfare: Public enterprises are not guided by profit motive. Their major focus is on providing the service or commodity at reasonable prices. Take the case of Indian
Oil Corporation or Gas Authority of India Limited(GAIL). They provide petroleum and gas at subsidised prices to the public.
(d) Public Utility Services:Public sector enterprises concentrate on providing public utility services like transport, electricity, telecommunication etc.
(e) Public Accountability: Public enterprises are governed by public policies formulated by the government and are accountable to the legislature.
(f) Excessive Formalities: The government rules and regulations force the public enterprises to observe excessive formalities in their operations. This makes the task of management very sensitive and cumbersome.
? Owned, managed and controlled by Government.
? Funded by Government
? Welfare oriented
? Concentrate on public utility services
? Responsible to parliament
? Observance of Government formality is necessary
DIFFERENCE BETWEEN PRIVATE AND PUBLIC SECTOR ENTERPRISES
In the earlier lessons you have studied about the various forms of business organization existing under private ownership or in private sector. By private sector, we mean, economic
and social activities undertaken privately by a single individual or group of individuals.
They prefer to do business in private sector basically to earn profit.
On the other hand public sector refers to economic and social activities undertaken by public authorities. The enterprises in public sector are set up with the main aim of protecting
public interest. Profit earning comes next.
Besides the difference in the objective, the enterprises in both these sectors also differ in many other aspects. In this section let us know the differences between the enterprises of public sector and private sector.
Basis of difference Private sector enterprises Public sector enterprises
1. Objective
PRIVATE
Maximisation of profit.
PUBLIC
Maximise social welfare
and ensure balanced economic development.
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2. Ownership
PRIVATE
Owned by individuals.
PUBLIC
Owned by Government.
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3. Management
PRIVATE Managed by owner / professional managers PUBLIC
Managed by Government.
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4. Capital
PRIVATE Raised by owners through loans, private
funds and sometimes public issues. PUBLIC
Raised from Government through public issues
--------------------------------------------------------
5. Area of operation PRIVATE Operates in all areas.
PUBLIC
Operates in basic and public utility sectors.
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3. What you do you understand by the term ‘Financial Autonomy’ of the PE? Discuss in details, by citing examples, the methods of ensuring Financial Accountability of PE’s,
Public Enterprises(PEs) as we all know are set up wholly or substantially owned by the government for the purpose of undertaking activities of industrial, manufacturing, trading or allied nature. They are government owned enterprises
functioning under both central and state governments. The PEs are corporate bodies, set up either under specific acts of Parliament or under Companies Act.
The PEs since they are established with public funds, are accountable to the public i.e. through thq parliament.
Autonomy in simple terms means freedom to take decisions and function accordingly while accountability refers to rendering of accounts to some higher authority. The financial autonomy given to PEs means empowering them to take decisions on
their own in the areas of investment management, financing of investments and monitoring the financial performance of respective enterprises based on sound business principles and the wisdom of the financial administrators. Insofar as investments are concerned, other things remaining the same, PEs should have
freedom in identifying the projects, preparing the detailed feasibility project reports, appraising the projects, making investment choices, and implementing and monitoring them. They should also be free to decide the optimal level of investments in the various items of inventory book debts and floating stock of cash. By the
same principle they should be free to peg the level of current liabilities to any proportion of the current assets. The financial decisions in the normal run may be made by these enterprises as guided by the cost of capital. They should possess
the freedom to choose among the various debt-equity propositions. They should be at liberty to select bankers, financial institutions and the channels of money and capital markets for financing their working fund requirements. Subject to the
social constraints imposed on them by the government, these enterprises should be vested with the autonomy to develop their own costing and pricing systems,
norms of profitability .and monitoring mechanism to ensure desired financial status alike any business firm in the private sector.
Financial autonomy is a phenomenon external to the organisation. In other words, it flows from the environment governing the functioning of PEs. Thus there are six tiers of financial autonomy. These include -the parliament, -the government,
-the Comptroller and Auditor General(CAG) of India, the Courts of Law i.e. .
-the Supreme Court of India and the High Court, -the mass media and the citizen.
All these six institutions can have an explicit policy about the financial autonomy they may like to provide to PEs in order to enable them to operate efficiently and effectively. As the enterprises under discussion are both 'public' and 'enterprise',
these institutions cannot be overjealous in controlling each and every aspect of financial business of PEs. The respect for the corporate status of these enterprises will have to be maintained by these institutions. While saying so we do not deny
the need for exercising checks and balances on the financial decision making in these enterprises. The main mint is that these institutions should be selective in exercising the financial controls on PEs. PEs may enjoy autonomy in the day-to-day
financial decision making which in its ambit may include matters such as normal purchases, cost allocations, evolving suitable price structures, selection of suitable sources and mix of finance, installation and operation of the financial information
systems, and preparation and finalisation of accounts, etc. On the other hand,
the six institutions may however intervene in the policy aspects of the financial decision making. For instance, if the parliament so desires, it may discuss the financial performance, financial position, pricing, financial aspects of foreign
collaborations and the position of internal financing in PEs, etc. The government may reserve the right to approve the appointments of executives drawing salaries
above certain levels and issue directives to PEs to provide certain services at particular prices, even if they are not economical. The CAG can give directions to PEs to follow a specific format for the presentation of their accounts and
disclosure of the financial information. The various courts of law may direct PEs to alter their financial decisions if the fundamental rights of the citizens are affected. The mass media and the citizens may criticise certain financial decisions
by PEs and as a result the PEs may have to reconsider the matter. Such decisions may include matters relating to pricing, and selection of suppliers of plant and materials which may attract public resentment. At times public enquiry can be
camed out on certain decisions taken by the management of P.E.'s. For instance in 1970, on the recommendations made by the Committee of Public Undertakings,
a one man commission was set up to enquire into award of contract for laying some pipelines to an American firm by the Indian Oil Corporation. The financial accountability of P.E.'s pertain to:
Major Accounting Decisions: These include: an increase in depreciation, changes in tender procedures, stores valuation and replacements.
Matters of Internal organization: These include internal audit, procedures for ordering materials, delegation of powers, watch and ward supervision over financial transactions, provisions relating to disciplinary matters etc. These are examples
of matters which may be left to be properly evolved within the enterprise itself.
Broad fund : These are fundamental aspects of financial accountability.
They require plans between those evolved by the board and the socioeconomic aims set by the parliament. These may include matters pertaining to self-financing,
outlines of capital expansion programmes and the rates of dividend, repatriation of foreign funds or consultancy fees and so on.
PEs may owe an accountability to various institutions in respect of financial results, productivity and growth. The memorandum of understanding(MOU) is emerging as an important instrumentality whereby PEs are required to spell out
their objectives and the targets they are expected to achieve-during a given financial year.
THE METHODS OF ENSURING FINANCIAL
AUTONOMY AND ACCOUNTABILITY IN
PUBLIC ENTERPRISES
To ensure financial autonomy, both external and internal methods have been resorted to. Externally the government spells out the financial freedom of the
PEs in regard to several aspects in their articles of association. The limits for investment, commercial borrowings, working capital borrowings, salaries offered to employees and powers of recruitment, etc., are specified in the articles of association of PEs. The provisions regarding business budgeting, costing and pricing etc. are also contained therein.
The government indicates the extent of autonomy to PEs in respect of pricing, investment and profitability, in the MOU. In the articles of association as well as the enabling acts under which public corporations have been set up the
government exercises self-restraint on itself not to interfere in the day to day working of PEs including matters pertaining to financial functioning.
Internally PEs ensure autonomy at different levels of functioning by enforcing delegation and decentralisation of financial powers. In many a PE, there is a healthy tradition to hold group meetings which are also known as communication meetings. In these meetings the departmental heads are the invitees. The workers'
representatives are also invited. The problems are discussed and decisions are taken then and there. These meetings deal with the decisions regarding procurement, plant acquisition, investment of funds and acceptance of tender. This instrument
provides a great deal of financial autonomy to the executives and work force.
The methods of ensuring financial accountability may be divided broadly into two categories: organisational methods and the external methods. The former may take the shape of arrangements which may enable a PE to give a good financial account of itself. The external means may be a sequel to the autonomous organisation of a PE, created for ensuring that the managers, to whom it does
not belong, behave responsibly vis-a-vis the parliament.
The organisational means of financial accountability are as follows:
a) Clear financial procedures.
b) Efficient internal audit.
c) Commercial audit by private auditors.
d) Proper internal organisation of the enterprise, based on optimal criteria and decentralisation.
e) Appointment of a Financial Advisor of the enterprise by the government or under governmental approval.
f) Governmental control is exercised through the Board of Directors of the PE.
The Chief Executives and full-time Directors of the PEs are appointed by the government. In most of the enterprises government's representatives on
the boards in the form of nominee directors are present. They are from the concerned Administrative Ministry and Ministry of Finance serving in an ex-officio capacity on the board.
g) Reservation of certain financial matters for government approval, under the Articles of Association or under the Act governing a public enterprise.
h) Audit of PEs by the Comptroller and Auditor General is another means of financial accountability. In PEs there is a system of double audit. The accounts of PEs are first audited by the statutory auditors of the enterprise. After this is passed by the Board of Directors of the enterprise, then the supplementary audit is conducted by the office of the C & AG.
PROBLEMS PERTAINING TO FINANCIAL
AUTONOMY AND ACCOUNTABILITY IN PUBLIC ENTERPRISES
The financial autonomy and accountability of PEs occupy an important place in a democratic country such as ours. However, as things stand, these are treated as two separate facets of the personality of PEs and often the perceptions of the
government and PEs on the issues relating to autonomy and accountability differ.
i An important problem in this context is the government's insistence to get matters referred to it on the various financial issues and the aversion of PEs to disclose the requisite financial information to their principals i.e. the respective administrative
ministries. Whereas the government continues to treat these enterprises as its extensions, the PEs do not or cannot make concerted efforts to come out of the
gravitational pull of the government. The parliament, the administrative ministry,
the CAG and the Courts are considered as the trustees of public funds and are prompted, therefore, to impose a variety of controls on these enterprises. They do not want to take any risk with the public money, but prefer safety and security. SUGGESTIONS FOR ENSURING IMPROVED AUTONOMY AND ACCOUNTABILITY OF PUBLIC ENTERPRISES
A number of suggestions can be offered to ensure improved financial autonomy and accountability in PEs. To begin with, these enterprises should be commercialised.
This will enable PEs to charge economic rates for the goods and services provided to their users. This will result in the generation of adequate internal resources and consequent reduction of financial support from the government to fund their
operation and expansion needs. In turn, the government control on financial matters will decline drastically. Corporatisation of these enterprises is another
suggestion. This will transform the systems, structure and strategy of PEs and resolve many thorny problems with regard to financial autonomy and accountability.
A large number of PEs have been complaining about lack of autonomy to them as they do not have adequate powers to procure the requisite amount of materials,
stores and supplies etc. On the contrary, the government is of the view that the inventories in these enterprises should be rigorously controlled as there is a heavy
over-investment in this component of assets in PEs. The government's suspicion cannot be questioned as many a PE do not have materials management manual.
The absence of such a manual has encouraged them to procure materials disproportionate to their needs.
The CAG in his various audit reports has commented upon the non-preparatiun of the budget, cost, internal audit, Research and Development and capital expenditure manuals. Many PEs do not have even the budget manual. The enhanced delegation and decentralisation of financial powers within PEs is a must.
In order to achieve this objective well defined structures must be developed. The boards of management in PEs should specify the financial powers vested in each functionary. Similarly, the various executives in PEs should be encouraged to delegate financial powers to their junior colleagues. The government, on its part
Financial Administration should instead of putting limits on investments, expenditure, borrowings, etc, issue
Public Enterprises only suggestive guidelines. In case a PE exceeds the suggested ceiling, it may be required to report the matter to the government. The principle of management-by-exception should be followed. The government should intervene
only in such cases where it is necessary to do so in the larger public interest.
PEs should formulate clearly financial strategies and goals which should be both unambiguous and quantifiable. For instance, PEs could specify proposed rate of return on their capital employed, declare a specified dividend on their equity,
finance their expansion programmes largely through internal generation of resources and approach the capital market to finance the rest of their expansion needs. A clarity in financial objectives will enable PEs to acquire the necessary financial
autonomy from the government. It will also lead to self-imposed controls. This will eliminate the need for the government to clamp ,financial controls on them.
There must also be a sincere application of the Management by Objectives(MBO) for attaining financial objectives.
It is desirable to eliminate the multiple audits in PEs which are mostly unproductive.
The audit approach needs to undergo a change in order to yield the desired results. The auditors must be made conversant
with the operations and philosophy of PEs.
The annual reports can serve as an important medium to satisfy the autonomy and accountability needs. They can be a good instrument to win greater autonomy for PEs and fulfil, at the same time, the control needs of the parliament, CAG
and the Courts. An analysis of the annual reports of PEs shows that they are not brought out in time. The time lag in their finalisation and presentation to the parliament ranges from one year to ten years. Secondly, in many cases they are either sketchy or lack important information relating to the trerids in output, productivity, prices, profitability, comparative performance and so on.
Necessary steps must be taken to improve the practices pertaining to the preparation and presentation of the annual reports by PEs.
################################################################
- darik2
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