MS 92 Complete Book

UNIT 1 PUBLIC ENTERPRISE: CONCEPT AND POLICY
Objectives After going through this unit you should be able to:
Forms of Public Enterprises
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1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Understand the concept of public enterprise; Understand the rationale of the public enterprises; Differentiate between the dimensions of the public sector policies.
Structure Public Enterprise in Economic Development Models of Economic Growth The Rationale of Public Sector Public Sector Enterprise: Concept and Form Summary Self Assessment Questions References Further Readings
1.1 PUBLIC ENTERPRISE IN ECONOMIC DEVELOPMENT

The role of the state in the lives of the people of a country has been a matter of intense debate ever since the institution emerged centuries ago. The functions and systems of the state have oscillated between an autocratic or a mercantilist state (with deep penetration into the socio-economic fabrics of society) to total unbridled laissez faire. Whenever it was found that the freedom of the weaker sections of the community was threatened, the state made heavy inroads in curbing the freedom of the people who wielded dominant and disproportionate economic power. It generated, over a period of time, an antithesis leading to an upsurge against the overbearing power of the state. th The emergence and decline of the public sector during the 20 Century is only a part of this societal difference. The concentration of economic power in a few hands, the marked economic inequalities and intense poverty among the millions in the world compelled the state to intervene. The intervention was either regulatory or participatory (or both). The latter process took the forms of socialism, command economies and centralised planning. The public sector is a product of this process and consequent initiatives. The first half of the 20th Century saw the prevalence and growth of the public sector in a large number of economies, industrialised as well as developing. Towards the end of the 1970s, it was discovered that the state organs became the instruments of uncontrolled power. The resources were inefficiency utilized leading to low productivity and less effectiveness in most cases. This was the experience in a number of countries necessitating a close scrutiny and examination of the public sector. The scrutiny has become much more imperative due to globalization and global changes in the social, political and economic evironments which has been a trigger - indeed a powerful one. th th Looking back historically, the industrial revolution in the 18 and 19 centuries in the West and the colonial rule in a number of countries left a part of the world
Public Enterprise: An Overview
undeveloped and consequently poor. As people became conscious of the stark realities of existing economic disparities, the need for development was felt. Economic development was sought to be achieved in different countries at different stages of development through divergent economic models. Though the need for and methods and models used, have varied from period to period and from one country to another. The ills and aberrations of the prevailing systems led the policiy makers and the administrators to spell out strategies for changing the economic and social order. Two distinct economic and political ideologies th capitalism and socialism, emerged since the second half of the 19 Century. Their configurations demonstrated wide variations, subject to divergent cultures, ethos and contemporary problems of development.
1.2
MODELS OF ECONOMIC GROWTH
Capitalism Capitalism emerged when feudalism with its medieval system of land tenure lost its relevance due to the invention of steam and new energy sources for a host of industrial applications. Capitalism (Burns etal, 1948) has been defined broadly as a system based on private ownership of means of production regulated by market forces, in which each producer seeks to maximise profit. The capital is privately owned and the owners have the freedom to allocate and dispose of resources and to employ workers to serve the owner interests. The system seeks to meet the economic needs of the society through entrepreneurial efforts of individuals (or groups of individuals) who own the resources and hire the workers. Workers, like land and machinery are just another tool of production. The basic motivation, is to make profit the bottomline of share holder value. Mercantilism began to dominate the economic thinking by the end of the 17th Century (ibid p,35) and, towards the end of the next it witnessed the decline. In its economic dimension, mercantilism sought the growth of capital to create industry and trade which would provide the nation-state with powerful economic band. In effect, the activities of mercantile class were helped by the State. Growth of trade was basic to the philosophy of mercantilism. The strength of a nation was measured largely by its merchant fleet and the gold and silver earned from trading. A favourable balance of trade for a country meant that its gold and silver coffers were growing. East India Company is a classic example of the mercantilist government in which the United Kingdom (UK) fostered export trade by granting monopoly privileges to the trading company. The aim of mercantilism was to strengthen the nation-state. Most of the countries in Europe were ruled during the period by monarchs, whose dominant interest was to strengthen their kingdom through policies of state intervention to produce goods, both for domestic consumption and for exports, such as woollen textiles in the U.K. or iron in France. Production of machines and inputs for manufacturing was encouraged by all mercantilist governments, either through subsidies or by compulsion. State regulation became the order of the day. It is thus interesting that the state intervention is not a new phenomenon of the 20th Century. Encouragement to and protection of domestic industry was a deliberate state policy. Gradually, the allocation of economic resources and the composition of national output became matters of governmental responsibility. The systems imposed by the mercantilist states weakened during the 19th
Century, mainly in the face of rising demand of the colonies for independence, starting from America, where the traditions of British and European mercantilism did not take firm roots. Laissez Faire The decline of mercantalism led to economic liberalism. Under this dispensation, the individual was accorded the freedom to buy and sell, to produce and consume, as he liked. Individualism was motivated by self-interest. The governments role in peoples economic activities receded in importance with laissez faire or let alone style of administration. The philosophy was to allow trade to move freely and to remove governmental restrictions on production, employment, prices, wages, and consumption. Free market economy became the guiding force. It was assumed that it would result in furthering the common wealth (Smith Wealth of Nations). The underlying assumption was that the sum total of individual interests constituted the public interest. A growing segment of the business community saw in the economic freedom an abundant scope for profitable ventures. Laissez faire was dominant in Britain during the Nineteenth and early Twentieth Centuries. Even in the United States, it remained dominant as a social philosophy, though, it waned overtime. The theory of laissez faire, in sum, represents the maximum degree of freedom for the individual in economic activities (investment, production, trade, distribution, consumption), perhaps regulated only when serious concerns of national security arose. Free enterprise system, there, is therefore the quintessence of capitalism. This system, however, led to concentration of economic power in the hands of a few and exploitation of the labour The workers were subject to long working hours and harsh working conditions, with little or minimal concern for their welfare. Only those with advantage of wealth and concomitant social connections succeeded. This led to wide disparities in income and wealth among people in the society. It was discovered that self interest could not be trusted to guide the processes of production, income distribution and consumption. Private interest needed to be modified, regulated and supplemented by government interventions. In Europe, two World Wars and the widespread depression led to restoration of considerable authoritarian control over the economic processes. While North America remained largely wedded to free enterprise, Europe, especially, the UK, turned to socialism. Socialism The ground conditions which helped sowing the seeds of socialism were the appalling living conditions imposed by industrialisation in the early 19th Century. The towns became overcrowded as people were forced out of rural occupations and ways of life. Profits earned by the industrialist class were high but wages to the workers were low and the living conditions of the wage earners were miserable. Some reformist measures were set in motion in England after 1832 with a slant towards humanitarianism movements to protect child and female labour. Several social thinkers and activists, however, developed the belief that those conditions cannot be made better under the prevailing capitalist order. They felt the need for creation of a new social system to undo the evils caused by the capitalistic system.
As the capitalist model of economic development was associated with the exploitation of both workers and consumers from the very inception of the Industrial Revolution in the 18th Century, the consequent economic and political pressures led to a new philosophy of social organisation. It took the form of socialism. It was an alternative economic social order in which a major part, if not all, of the economic resources came to be directly controlled by government through ownership of means of production, and meeting the needs of the society through regulated production and distribution. The rationale of the socialist doctrine rests on three premises: (a) capitalism as a system builds itself through monopolistic activities; (b) it generates glaring inequalities of income and wealth; and (c) it perpetuates poverty among a large segment of the population. These could be ameliorated through the Government ownership of the means of production and distribution. The trigger for the socialist movement was provided by the French Revolution (18th) century revolution) which dismantled a political and social order dominated by the French Catholic Church and nobility. A dominant variety of socialism, however, took shape only with the October Revolution in Russia inspired by the Marxian philosophy propounded in Marxs The Communist Manifesto and Das Kapital . The adoption of the socialist doctrine by the Union of Soviet Socialist Republics, Eastern Europe and subsequently by China and some of the newly independent countries of Asia, Africa and Latin America, gave fillip to the public sector assuring greater importance and role in development.. There are a number of schools and practitioners of socialism with varying configurations. The concept translated and operationalised into practice led to further divergencies. According to Bertrand Russell, a British philosopher, Socialism like everything else that is vital, is rather a tendency than a strictly definable body of doctrines. The essence of socialism in his view is the advocacy of communitys ownership of land and capital by a democratic state. A concern for the hitherto denied or deprived section of the community is a marked feature of socialism. Fabian Socialism A moderate variant of socialism is the Fabian variety. In the 1880s, a group styled themselves as Fabian Socialists, as opposed to Marxists following a philosophy of overthrowing governments by violent means, emerged in the U.K. The fabians as they, came to be known, which included distinguished social thinkers like Bernard Shaw, H.G. Wells and Sidney and Beatrice Webb. The writings and essays of the Fabian Society led to the formation of the Labour Party in the U.K., many of whose intellectual elite were either members of the society or closely associated with it. The Fabians believed in the inevitability of socialism sweeping the world because of the injustices of capitalism. The Fabian Socialists opted for a peaceful political change sharply different from the Marxists. This evolutionary Fabian Socialism, which emerged in Britain, got extended to Germany and some other countries of the continent (Dutt). The first Prime Minister of independent India, Jawaharlal Nehru, broadly subscribed to the Fabian philosophy and was committed to the non-violent form of socialism through a democratic process. Marxism The radical school of socialism was propounded by Karl Marx (1818 1893). The Europes movements of socialism in the late Nineteenth and early Twentieth Centuries drew inspiration from the Marxist thesis.
Marx called his socialist doctrine as communism and scientific socialism. In their monumental work, The Communist Manifesto, Marx and Eagels (Mars & Engles, 1948) established that capitalism was inherently a system of exploitation and it was doomed to collapse. Labour theory of value is a marked contribution to the literature on socialism which, in essence, means that value is created only by human labour. Since it is only the labour-power which produces value, the capitalist, who owns the means of production (land, buildings, machinery and raw materials), extracts surpluses from labour and claims these as his profit. As an ideology, therefore, communism is based on the premise that there would always be conflict of class interests between the haves and have nots and a change must occur - or be forced - if an equitable society has to be established. The Communist Manifesto maintained unequivocally and forcefully that a new social and economic order can be attained only by forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletariat, that is, the wage earners, have nothing to lose but their chains. They have a world to win. Let the working men of all countries unite (Das Kapital 1867). The Manifesto states that the history of all hitherto existing society is the history of class struggles, implying thereby that the capitalists and workers are opposed to each other in an adversorial position. The cherished - but the initial phase of the communist movement was the dictatorship of the proletariat which was anticipated eventually to lead to a classless society. The concept questions the very basis of democracy. The Soviet State symbolised the essence of Marxism to the world. Other types of socialism which flourished at that time were syndicalism of France or guild socialism or Fabian Socialism of Britain. The state ownership of the means of production translates itself into the concept of the public sector. The public sector is that segment of production and distribution system in a country which is owned and controlled by the community through the state or its organs. The World Wars I and II ravaged a number of countries, both on the European and Asian continents. Great depression was witnessed in 1930s. Employment became scarce and destitution was witnessed everywhere. Thinkers of the time, like John Maynard Keynes (propounded the General Theory of Unemployment, Interest and Money) advocated a greater role for the government to address the issues of unemployment, economic disequilibria and misery of the common man. The General Theory of Keynes was published in 1936, the seventh year of the Great Depression, when the older policy of laissez faire (minimum intervention of the state and the operation of free markets) had failed. Unlike the traditional policy-makers who expressed the view that depression and unemployment are caused by supplies drying up, Keynes felt that infusion of demand for goods, services, manpower and capital would lead to growth - demand-led growth - in the economy. The General Theory was also supported by the market collapse of 1929 that wiped out a lot of savings and incomes of people. The only way to arrest the downturn in the economy, the theory envisaged, was to increase spending. It would be unrealistic to expect individuals to open their wallets during a downturn and the only agency which could boost demand is government. The centrality of government making massive investments to trigger growth is the core of the Keynesian economics of state-funded job creation - dig trenches and fill them up. Mixed Economy Model The Indian brand of socialism chose a middle path avoiding the fundamental doctrines of both capitalism and communism. Violent or revolutionary path was
not acceptable to the Indian ethos and culture. Peace and tolerance are deeply embedded in the Indian philosophy (of different denominations). Indias approach to economic development was a compromise between a centrally planned economy and market economy. While the public sector emerged in the West, particularly in the U.K. and France, through nationalisation of existing industries, the approach of the Indian experiment was different. The country, when it became independent in 1947, was miserably underdeveloped. It was considered counter-productive to destroy something that was existing and accordingly, the country decided to focus on the creation of new production capacities and to accelerate development at minimal cost. Although the Indian National Congress, as early as 1931, adopted a resolution at its Karachi session which advocated nationalisation of key industries, Jawaharlal Nehru, the first Prime Minister, who dominated the political scene, held the view that the interest of development would be best served by utilising the resources, the state could spare in setting up new units of production in the public sector. The economic policy and programmes of the Congress, the ruling party, for decades after independence, envisaged that the new undertakings in defence, key and public utility industries and those which were in the nature of monopolies or served the country as a whole, be publicly-owned. The Economic Policy Report also recommended that private industry be subject to state control and regulation and that banking and insurance be nationalised while financial cooperatives be set up. The Report envisaged the establishment of a planning body to plan integrated development of the countrys economy in order to establish a just social order eliminating exploitation in production. The undercurrent in the thinking was that while the existence of private sector was transitional in nature, a transformation of the social order should be brought about without upsetting the existing economic pattern. It observed that the private units in the transitional period should not only be allowed to exist but, in fact, should be given the opportunities for growth within their own spheres of activity. The mixed economy model presupposes the existence and growth of private enterprises along with public enterprises. It, however, envisioned that the public sector would occupy the commanding heights of the economy. The concept of the commanding heights was articulated further. Under the model, the role of the private sector would be limited and controlled through a planning system. The first Industrial Policy Resolution in 1948 implicitly spelt out the mixed economy concept combining the essentials of the American model of market economy and the Russian model of centrally planned economy. It was recognised that barring a few large scale industrial undertakings in steel, textile and sugar sectors which belonged to the industrial houses of the Birlas, the Tatas and a few others, India possessed hardly any industrial base or infrastructure, which could enable the country to achieve the required rate of economic development. The private sector had neither the financial resources of the magnitude needed nor the capacity or experience to manage giant projects. The government had, therefore, no option but to make investments in various socio-economic sectors like infrastructure, industry, education, health, and other essential services. The country needed massive investments in almost all sectors - agriculture, industry and other tertiary sectors, in infrastructure (power, roads and road transport, communications, railways, aviation, shipping). The development of backward and inaccessible regions was equally urgent to bring about balanced social and economic development of the people.
It was found later that, because of outdated technologies and bad managements, a large number of private sector industrial undertakings had fallen sick. To protect the employment of these units, it was felt that it was imperative for the government to step in the absence of any other viable alternative.
1.3
THE RATIONALE OF PUBLIC SECTOR
In this way, ideological, strategic, economic and social considerations provided, the genesis, growth and development of the public sector in several countries like India. A structural shift from the agrarian economy to the industrial economy created the base for the socio-economic structural changes. In order to accelerate industrialisation and address other economic and social problems of the day, active involvement of the state in the processes of development became an economic necessity for many countries, especially the developing countries. The historical developments of the last two centuries thus provide the backdrop of how the public sector emerged as a problem-solver to the fallouts and ramifications of the prevailing economic systems. The recourse to the instrument of the public sector thus emerges from at least two strategies of economic dynamics: first, to undo what the private enterprises do or are not able to do for the peoples welfare; and second, to accelerate the industrial and economic development of the country in the desired direction, at the least social and economic cost to community. The first is achieved through takeover (or nationalisation of the existing activity); and the second by the creation of new production or related facilities with fresh investments. The growth of the public sector had been a global phenomenon since the 1950s and India was no exception. By design and policy, the public sector expanded and occupied a vital position in different economies, such as Great Britain, France, Italy. Only the state, it was believed, could mobilise massive means to invest in infrastructure and public utilities like railways, telecommunications and power generation and distribution. The public sector became a major instrument of planned economic development (Mohnot, 2003) and was viewed as its prime mover in several countries. The state intervention was considered necessary also to regulate the use of scarce resources depleted by war efforts and undo or prevent the distortions arising from undiluted profit motive of private entrepreneurs. The public sector and planned economic development became inseparable. Bereft of ideological considerations, a practical approach adopted in many countries through the instrumentality of state was to fill the gaps left uncovered by private endeavours. Strategic considerations and control over natural monopolies were other objectives. Some important strategies adopted in India include the following:
the state to take the initiative to set up industries or other activities (industrial, trading infrastructural or service-related) in which the scale of investment, gestation period and risk factors are such as to make them unattractive to private investors; the industrial or other enterprises made sick by private promoters be rehabilitated to ensure continued employment and production (Rolls-Royce in the United Kingdom and textile mills in India are good examples); the state to take initiatives to accelerate the growth rate of the economy and to change the direction of development as required by the welfare of the populace at large;
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the state to control the entity and activities of the multinationals as these were found to affect domestic economic interests; the state to take on the task of achieving some urgent social and socioeconomic objectives such as creating new employment opportunities, securing balanced regional or segmental development, reducing economic inequalities and mobilising scarce resources, such as capital and foreign exchange.
The Indian case provides a good illustration of the rationale or the raison detre of the public sector. More so, with the private sector not having the wherewithal and the will to build infrastructure roads, railways, ports, capital intensive industry with long gestation period involving massive investments and generating poor returns at least in the initial stages. Massive investments could therefore, come only through state intervention, indeed, participation. In this context, the public ownership and control (leading to commanding heights of the economy with planned investments, creation of large scale capitalintensive basic goods sector, establishment of infrastructural facilities and prevention of the outflow of foreign exchange), was considered necessary and desirable on economic and social considerations. It led to the establishment of public enterprises in steel, heavy engineering, basic chemicals, oil and gas exploration and oil refining, fertilizers and petrochemicals, energy generation and transport and communications. These sectors were to forge strong interlinkages with the development of other sectors of the economy including the small scale sector. The rationale of public enterprise thus assumed a wide spectrum of activity. It became a powerful instrument of economic development. Social services like health and education were also promoted by the state although not distinctly in the form of the public sector. The public sector in India, evolved itself through three basic modes :
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the government initiative in setting up new industries and other undertakings; support to existing enterprises in the domain of private initiative as supplementary or complementary efforts; limited nationalisation with a focused objective - such as protection of employment.
Nonetheless, the main thrust of the public sector was to accelerate the core, basic and strategic industries, such as coal, power, steel, oil exploration and refining, fertilizers, minerals. Economic security and national self-reliance were the other underlying principles. Greater socio-economic equality and the building up of a countervailing power against the power of private individuals and groups were the other considerations for government to be in business. Infact, the rationale for the establishment of public enterprises are many and varied. A catalogue compiled by an Expert Group of United Nations Industrial Development Organisation (UNIDO) (UNIDO, 1979) provides a comprehensive although not an exhaustive - inventory of developmental objectives of the public sector:
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to adopt a socialistic model of development; to control strategic sectors of the economy; to evolve the balanced economic structure; to control and manage natural monopolies;
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to undertake tasks beyond the capability of private enterprise; to provide a competitive element to private industry; to develop backward areas; to stimulate the advancement of weaker sections of the society; to increase the availability of essential consumer goods; to generate employment; to acquire, assimilate and develop technology; to generate foreign exchange earnings; to stimulate agricultural development; to commercialise activities traditionally run as government departments; to discourage the wrong use of economic power; to utilise economic resources optimally; to control the exploitation of unused natural resources; to help stabilise prices; to take over the management of ailing private sector firms; to develop self-reliance; to improve income distribution; to favour or accomplish structural changes in the economy.
To this tally may be added: to prevent or to minimise environment pollution; to utilise available skills; to forge international agreements and to facilitate international cooperation. to promote national brands in international markets.
In promoting the public sector, the government had also got other objectives to attend to, such as preventing the emergence of private monopolies as distinct from natural monopolies, promoting import substitution, enhancing exports to save and earn foreign exchange so vital for import of capital goods, intermediates, raw materials and essential goods. Some of the major objectives in setting up public enterprises, as envisaged originally in India, could be broadly summed up in the following set:
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to help in rapid industrialization and economic growth of the country; to create the necessary infrastructure for economic development; to promote balanced regional development; to ensure equitable distribution of income and wealth. to ensure adequate supplies of essential goods and their equitable distribution; to assist the development of small scale and ancillary industries; to promote import substitution, and to save and earn foreign exchange; to generate resources for development.
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1.4
PUBLIC SECTOR ENTERPRISE: CONCEPT AND FORM
The term public sector (sampat, 2002) has been used in different contexts by people of different backgrounds. It has come to mean different things in different countries. In its widest connotation, the public sector encompasses all economic activities of a government. It has been used to mean public enterprise (PE), government controlled enterprise (GCE) (Mazzolini), state-owned enterprise (SOE) (Working paper, WB), public undertaking (PU) or public sector undertaking (PSU) or simply state enterprise or undertaking (SE or SU). Public sector in the Indian context includes, for purposes of planning, all activities funded out of the government budget. In this sense of the term, the size of public sector is, indeed, very large. It includes not only the government companies but also government departments, whether in the central or state sector, irrigation and power projects, railways, posts and telegraphs, ordnance factories, and other departmental undertakings, banking, insurance, financial and other services, especially social services (like education, health and medicare, social insurance and social security). Accordingly, public sector is a very comprehensive term encompassing a vast array of activities undertaken through public funding from resources raised mainly through fiscal efforts. In that sense, it does not have a personality of its own. On the other hand, public enterprises which are set up by allocation of states resources with a corporate face or in any other distinctive organisational form, have their own distinct identity. These, strictly speaking, constitute the public sector. In many countries, economists, administrators and analysts use the terms public sector and public enterprise interchangeably. Useful guidance is provided by the International Centre of Public Enterprise. It identifies public sector by any commercial, financial, agricultural or promotional undertaking owned by public authority, either wholly or through majority shareholding engaged in sale of goods and services. Public enterprise, obviously, has two facets public and enterprise. The ownership and control of government follow public funding and the entrepreneurial effort. The government investment is through allocated resources in the nature of (i) equity, that is, shareholding or just capital investment; and (ii) debt, that is, long term loans secured for the entrepreneurial activity. Ownership is exercised through majority holding of equity shares (or investment) by the government. The debt is also often provided by the government. The public sector takes a number of organisational forms: departmental enterprises, statutory public corporations, limited liability joint stock companies, autonomous organisations and non-profit organisations. To start with, a clear distinction needs to be recognised between a public sector enterprise which is owned by government, on the one hand, and a public company registered under the Companies Act, but privately owned (which also has both equity and debt components), on the other. A public company privately owned - also has a corporate form, with both cost and profit centres, set up under the provisions of corporate law, which is applicable both to public sector enterprises and public companies in the private sector. A primary distinction is that a private company owes its origin to the efforts of individual promoters with the ownership of a sizable chunk of shares to exercise both ownership and management control. Shareholding may, however, be widely dispersed in a private sector company through public offerings. On the other
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hand, a public sector enterprise is owned dominantly by the state and comes under the control of government as a major shareholder. Both, however, prepare for purposes of accounting, a profit and loss or income and expenditure account and a balance sheet, which reflect their financial operations and position, to be presented annually. The accounts are subject to statutory audit and need to be placed before the general body of the shareholders, who have the power to approve and adopt them. Ownership and Management The patterns of ownership and management of public enterprises vary from country to country. In several countries, the forms of ownership and management have evolved over time. These varied also with the sector of activities in which these were located. Management is an extension of the ownership pattern. With the involvement of the resources of the state, the public sector represents the extension of state power. It imposes certain discipline on the management of these enterprises. Generally, the public ownership implies that at least 50 per cent of capital is held by the state itself or by any national, regional or local authority. The management ownership then falls within the domain of the state. In the Indian context, larger than 50 per cent shareholding in an enterprise by the state determines the characteristic of public ownership, (Article 12 of the Constitution of India). However, the state ownership does not mean that the subject enterprise has to be run by government on day-to-day basis. Since it is created by the investments from the funds provided by the public exchequer, the enterprises are, subjected to public accountability. In a democratic state, legislative supervision is the essential ingredient of accountability. At the same time, operational autonomy of public enterprises is also needed as the enterprise functions, especially in a mixed economy, competing with private enterprises and operating in the same environment. In the management of public enterprises, the crucial aspect is of coordination and control. It needs striking a balance between accountability to public and business principles. Also there is a continuous conflict and quest to strike a balance between autonomy and accountability. Given a corporate form, public enterprise is managed by a board of directors. Ownership provides the authority to the government to decide who should constitute the board and, as a corollary, the board is answerable to the government. Some of the important issues confronted are: what are the powers which should be vested with the owners? How much authority should be delegated by the owners to the management of enterprises (such as in regard to capital expenditure, or in branching out to new activities or diversification)? While spelling out the characteristics of the corporate form of public enterprise or public company, it is interesting to comprehend the Trusteeship concept propounded by Mahatma Gandhi. It relies on the innate goodness of human beings and gives a call to all possessors of wealth to regard themselves as trustees of the people. Gandhian Trusteeship does not contemplate any change in the structure of the society as does Socialism. It is recognised that the very nature of acquisitiveness (and possessiveness) inherent in capitalism cannot transform the system into benevolence or trusteeship. A lofty moral value is attached to the theory of Trusteeship which is almost impossible to translate into practice. While, private profit is an anathema to the socialist philosophy, the emerging rules of corporate governance is a pointer to Gandhijis concept of Trusteeship and, if followed in letter and spirit, it can achieve a great deal of the
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desired goal. This will, in fact, reduce substantially the cleavage between a public enterprise and a private public company. Germany provides examples of a variant of public trust, in major enterprises such as Salzgitter, VEBA, VW, which are integrated with market economy and operated on commercial principles. Federal governments participation is of a varying kind. Public private partnership in the trust is a noteworthy feature. These trusts promote research and development in the field of technology in order to meet competition, both national and international, while building on strengths for the future. Policy Dimension Governments, in general, adopt different policies whether to take over existing enterprises or to establish new enterprises. Policies are determined by socioeconomic and political factors which trigger the policies, which could be grouped as:
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Socio-political; Natural resource exploitation; Self-reliance; Employment generation; Income distribution; Mobilisation or saving of foreign exchange; Acceleration of industrial growth; Control of private sector, domestic and foreign; Removal of regional desparties.
All these motivations get translated into national policies. One or more of these usually more - dominated the policy thrusts in different countries such as Botswana, Brazil, China, India, Malaysia, Mexico, Nigeria, Pakistan, Sri Lanka, Zambia and others. Public sector policies basically have two dimensions exogenous and endogenous. Each one is significant. In economic sense, market structure and supply constraints determine macro level public policies. The other aspects are socio-political imperatives. Public policy determinants cover issues such as :
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What are the economic objectives to be subserved by public enterprises? What should be the role of social objectives? What are the industries or activities which need to be developed exclusively in the public sector? What are the areas in which both can exist together? What are new areas to be explored? What are the new technologies needed? And what shall be their sources? How much of self-reliance can be achieved? What shall be the form or forms of organisation? What shall be the precise role of the government (and the legislature) in their control? What shall be the mechanism for making policy decisions?
These are all exogenous or macro-level questions of public enterprise policies. Endogenous policies at micro level fall within the jurisdiction of enterprise management. These reflect the day-to-day operating level. Most of these are common with private enterprise with the distinction that the public enterprises have to follow the policies and procedures laid down by the government and accountable for promoting public interest. With the operationalisation of corporate governance, much of the distinction between public and private enterprises will diminish. Real value creation as distinct from the value creation for the shareholder will be the rendezvous of both sectors. Activity a) List some of the major objectives in setting up public enterprises. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... b) Think of more such objectives and list them. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
1.5
SUMMARY
Societal differences have created a large economic disparity resulting in economic inequalities. Public sector emerged in the 20th century as a formal concept but soon declined due to non-proportionate economic power. Since then the role of public sector in economic development has not found a proper place. This unit specifically touches upon this aspect and also takes a short tour to the different models of economic growth. The rationale of public sector has also been discussed in brief alongwith the developmental objectives of the public sector. It has been tried to cover the major aspects of concept and form of public sector enterprises as a whole.
1.6
1. 2. 3. 4.
SELF ASSESSMENT QUESTIONS

Discuss the two facets - public and enterprises of a public enterprise. Briefly discuss the role of public enterprise in economic development. Discuss the concept of socialism with reference to public enterprise. India's approach to economic development was compromise between a centrally planed economy and a market economy, discuss.
1.7
REFERENCES
Burns Edward Arthur, Neal C. Aflred and Watson, D.S. (1948). Modern Economics. ibid p,35 Smith Adam, Wealth of Nations, Cannon edition, p.508,
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th 18 Century Revolution in France led to elimination of aristrocracy by public guillotine. Dutt, R.C., Socialism of Jawaharlal Nehru, p.4 Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto. Das Kapital. (1867), Vol. I. Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and Economic Research. UNIDO Meeting of Role of Public Sector in Industrialisation, (1979). Vienna. Public Sector, Legal & Regulatory Framework & Interfaces Sampat, R. (March 2002). World Bank paper, CPAR Study Phase-II CPSUS. Mazzolini Ronalto, Government Controlled Enterprises International Strategic and Policy Decisions, John Wiley & Sons. Managing State-owned Enterprises, World Bank Staff Working Paper No.577
1.8
FURTHER READINGS
Smith Adam, Wealth of Nations, Cannon edition, p.508, Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto. Das Kapital. (1867), Vol. I. Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and Economic Research. Mazzolini Ronalto, Government Controlled Enterprises International Strategic and Policy Decisions, John Wiley & Sons.
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UNIT 2 PUBLIC ENTERPRISE SCENARIO: NATIONAL AND INTERNATIONAL

Objectives After going through this unit, you should be able to understand:
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2.1 2.2 2.3 2.4 2.5 2.6 2.7
The public sector emergence in its independent form; The public, sector as the global concept; The public sector as the rational concept.
Structure International Scenario- Post 1980s The Indian Scenario The Impact of Economic Reforms Objectives in the Indian Context Summary Self Assessment Questions References and Further Readings
2.1
INTERNATIONAL SCENARIO - POST 1980s
The emergence of public sector, even in its independent enterprise form, has been a widespread phenomenon worldwide. It covers both, the developing and developed countries. It may be recapitulated that some of the countries where the institution of the public sector was used after the Great Depression in the 1930s include France, South Korea, the U.K., Italy, Germany, and after obtaining independence by countries like Sri Lanka, Bangladesh, Malaysia and India. This is besides the whole host of the command economies of Eastern Europe including the Soviet Union and China. The post-1980 period, however, witnessed dismantling of the public sector in countries which shifted to the market economy model with a growing emphasis on private enterprise and free competition. Despite the dismantling, several countries like Russia, France, China and India have a strong prevalence of the public sector. Privatisation of state enterprises have not made deep inroads in these and several other countries. Selected Country Cases A brief overview of selected countries, representative of different models, would demonstrate the overall environment for the public sector and its rapid transformation through privatisation into private enterprises. France France provides the earliest example of growth of public sector having adopted nationalisation as a strategy. In 1936-37, under the then popular government, railways and a part of the armaments industry with a total employment of over 500,000 were nationalized. In 1946, the coal mining industry was nationalised and came to the public enterprise fold. Five main banks, thirty four insurance companies, privately-owned enterprises in the energy sector, airlines and two major industrial companies were taken over by the government.
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Controls over the public enterprises were fairly rigid in France. The controls were three dimensional: (a) governmental, (b) parliamentary, and (c) judicial. NORA Report of 1968 advocated dismantling of many control structures. The share of public sector was dominant in sectors such as energy (94%), transport and telecommunication (59.8%) and financial services (43.5%). Its role was also significant in the manufacturing sector which included automobiles, ship building, armaments and aircraft manufacture. The developments in the public sector upto early 1980s showed that in sectors where it was already well-established, it played a significant role without making inroads into large areas of economy covered by other industries. France continues even now to have a very strong public sector in the national economy and presents a picture of mixed economy model, despite being a major Western industrialised country. Federal Republic of Germany th In the early years of the 20 Century, the government developed a national network and established post and telegraph services, mostly to aid the war effort. There was, however, not much of public sector activity until the end of 1920s. West Germany after World War II (when the nation was divided into two parts) possessed vibrant private sector industries. The governments approach was not to nationalise the existing industries. Even the Social Democratic Party gave up nationalisation as a strategy as early as 1959. Case-by-case approach was adopted instead of a sweeping action across the board. Some utility services, such as supply of gas, water and electricity were entrusted to mixed enterprises, in which the government, local authorities and private entrepreneurs shared the responsibilities, including the mobilisation of investment resources. Electricity, mines, public savings banks, dockyards and ship building industries were examples of the mixed pattern with both public and private enterprises co-existing. Pragmatic considerations and not per se ideology dominated the German scene. Public industrial enterprises, on the whole, played a limited role in the economy of the Federal Republic. Among the 50 largest industrial entities, only 5 were in the public sector. A mere 1.6 per cent of the total gross fixed asset investment in manufacturing industries was accounted for by public enterprises. The shares of the public sector in basic raw material production in 1997 were: coal, including lignite 16.9 per cent; iron ore 45.7 per cent; aluminium 49.7 per cent; cars 40.3 per cent. The government had a concentration of shareholding in 6 enterprises (Salzgitter AG, VIAC, IVG, VEBA AG and VW). A significant feature of West Germany was that public enterprises were fully integrated into the market economy. They operated on commercial principles like private sector enterprises. A contrast is provided by East Germany which adopted a different model as a part of the Soviet Block. Practically, the entire economy was under public control engined by centralised planning system Privatisation measures were adopted in East Germany only after reunification of West and East Germany. An agency, Treuhandanstalt (THA), was set up by the government to privatise and restructure. All public enterprises were placed under this Agency which broke the existing enterprises into small units to facilitate restructuring and privatisation. Privatisation contracts made provisions for retraining an agreed number of employees for a specific number of years. A social safety net for retrenched employees was a part of the package.
Italy Italy provides a classic example of another industrial country in which public enterprises contributed significantly, both quantitatively and qualitatively. They were concentrated in highly capital intensive sectors iron and steel, telephones, hydrocarbons and motorways. The state-owned Institute for Industrial Restructuring (IRI) established in 1933 became the largest industrial employer in Europe with half a million employees . The share of public enterprises as a group accounted for 77.8 per cent of mining, 73.5 per cent of transport and communications and 12.8 per cent of the manufacturing industry. The share of the public sector in gross output was significant in metallurgy 40.8 per cent, food 12.8 per cent, chemicals 10.8 per cent, mechanical engineering 10.5 per cent and construction industries 10.7 per cent of gross output. United Kingdom In the United Kingdom, the worlds first industrial nation, public enterprises played a dominant role in post World War II period until end-1970s. Nationalized industries were an integral part of the economy as suppliers and purchasers of inputs from the rest of the economy. The public sector retained a strong position in coal, iron and steel, telecommunications , railways, energy, and in automobile manufacturing. The nationalised steel industry contributed handsomely to exports. However, substantial subsidies were needed by the nationalised industries. Over 1000 million annually was the outgo on account of subsidies to the public enterprises. British Rail and British Steel accounted for 70 percent of total subsidies during the period 1976-79. The Economist, May (1983). In 1979., the public sector accounted for 11.1 per cent of GDP, 8.1 per cent of total employment and 20 per cent of gross fixed capital formation (CEEP Review, 1981). It accounted for 84 per cent of output in mining and quarrying and 77 per cent in the energy sector. Economic recession in the West in the late-1970s was attributed to an excessive involvement of government. In many countries, large public, as well as private, firms came to regard government as a last resort guarantor of corporate existence. During the periods of stagnation, unemployment became the focus of political activism and in such times governments had to rescue the losing firms, by what is termed as bail out and this necessitated increase in the public sector borrowing requirements. Dismantling of the states industrial empire was expected to revitalize the national economy by reducing the level of monopolist control of the state. The country took the lead in public sector reforms towards the end of 1970s under the lead provided by Prime Minister Margarette Thatcher. The Conservative Government, which took power in 1979, held the philosophy that too much government control was a major problem of the economy and the market forces could provide the solution. The Prime Minister advocated the idea that it was not the business of the government to be in business. The scope and sweep of the public sector underwent a major change mainly due to political leadership. Privatisation became a new doctrine leading to dismantling of the public sector. This led to the transfer of all the nationalized industries which before nationalisation were in the private sector into private ownership along with the public utilities. The reform process had twin objectives:
first, to reduce the burden on the exchequer; and second, to encourage competition for the benefit of consumers. A sectoral approach was adopted to carry forward economic reforms. Coal mines were the first to face the brunt. There was already a decrease in coal requirement owing to shift from coal to gas-powered power generation. Major coal consumers preferred to import coal from Australia because of the price differential. Many coal mines were closed through a gradual process. Redundancy was tackled by worker-friendly schemes. Retraining and redeployment of workers was also a part of the package. The scale of dominance of the public sector was reduced through a series of privatisations, with the sale of nationalised industries, such as Cable and Wireless and British Aerospace (1981), British Petroleum (1983); British Telecom (1984), utilities such as Gas (1986), Water (1989) and Electricity (1990). The privatisation of British Rail was the most significant act of the Thatcher regime. Simultaneously, a regulatory mechanism was put in place in the near monopoly utilities such as gas, telecom and power. The role of the regulator was to help consumers get lower price and better service. China China has had an economic model totally dominated by the public sector since the 1950s. This included collective ownership in agriculture as well. A dramatic shift in the economic policy initiated by Deng Xiaping led to reforms. Many factories were corporatised and converted into companies. Services like hospitals and schools, which were part of public enterprises, were separated. By 1998, most of the state-owned enterprises (SOEs) were detached from the ministries. The State Economic & Trade Commission (SETC) was made the nodal agency for the SOEs. A Committee for appraisal of Chairmen and Boards of SOEs and a Supervisory Board for Audit were integral parts of the reform measures. Writing-off of loans, offer of shares to banks and financial institutions were other highlights of the reforms process. A recent survey had shown that the number of sick companies came down from 6000 in 1996 to 3000 in 1999. Contract mechanism was adopted to improve performance. A significant feature of the Chinese policies has been so far to avoid privatisation of state assets in contrast with the policies adopted by other command economy countries of Eastern Europe and some countries of the Third World. Malaysia New Economic Policy adopted by the Malaysian Government in 1970 led to the creation of public sector enterprises in the country and by 1983 there were 900 such enterprises. The inability of the public sector to promote growth and the mounting burden on the exchequer led to the formulation of privatisation policy in 1983. Detailed guidelines on privatisation were issued in 1985, which included (i) reduction in governments direct involvement in economic activities; (ii) allowing private sector to play a leading role in economic development; (iii) allowing market forces to govern economic activities; and (iv) bringing changes in the organisation, management and performance of public enterprises. The Privatisation Master Plan was drawn up in 1991 which identified a total of 46 entities/activities to be privatised. The process of privatisation is continuing.
Mexico Mexico had over 1000 public enterprises. However, Mexico is considered as one of the success stories of privatisation policy adopted by many countries. The programme began in 1983 and in a decade, the number of public enterprises declined from 1155 to just over 200. A phased programme led to the divestiture of a large number of small enterprises during the first phase itself ending in 1989. In the second phase (1989-92), bigger enterprises were put on the chopping block, mostly for sale. Monopolistic organisations of the telecommunications, fertilizers, steel and banking sectors were sold. The success of the programme has been attributed to three factors : (i) clarity in policy to divest all public enterprises; (ii) setting up of a single authority with total responsibility for divestiture; and (iii) eliciting cooperation of workers, including giving stock options and the right of first refusal to workers unions, which prevented laying off and threat of job losses in cases of closure. The Global Trends The public sector had assumed fairly large proportions in countries other than the foregoing. For example, during the mid-1980s, Jamaica had 640 and Srilanka 200 undertakings accounting for 20 per cent of GDP, in both countries, Malawi 91 undertakings with 25 per cent of GDP, Kenya 150 undertakings with 15 per cent of GDP. And then there came a sudden change. The public sector bashing became a fashion. The prevailing opinion in early 1980s in many countries, spearheaded by the policies of the World Bank and the International Monetary Fund, was that the public sector had become a drain on national economies, which warranted radical measures. In most countries political leadership leaned on this view in the context of the collapse of the Soviet system, demotion of the concept of socialism and the consequent ascendancy of the free market economic model. Privatisation emerged as a significant element of the economic reform process. The major objective was reduction of fiscal deficits, subsidies and debt-servicing. The interests of workers were sought to be protected through safety nets. In the USSR, the bastion of socialism, and in the erstwhile other Eastern Bloc countries, the reforms were carried out through a political process. A paradigm shift was clearly in evidence. It is widely believed that with the onslaught of globalisation and the opening up of the economies consequent to the acceptance by most countries the WTO (World Trade Organisation) regimen, only world-class standards of manufacture and services can meet the challenges. It required total reconstruction and professionalisation of the economy. Outsourcing and economies of scale emerged as the mantras of global competitiveness and survival. One could also see the emergence of Information Technology as a very strong driving force. The convergence of computing power and telecommunications provides a thrust for organisational changes leading to dismantling of the bureaucratic way of functioning. Only knowledge-based professionalised firms can survive competition and grow. New management patterns are fast evolving. Intellectual capital, rather than asset-based capital, will dominate, leading to more of private initiatives. As a fallout, the governments role will be more of a catalyst rather than as an active player. Technological breakthrough, shortening product cycle and rapidly changing markets will provide the momentum for
economic development. A new market environment is emerging, rendering, in the process, organisations subject to rigid controls of government, unviable. This, however, is one view. The economic history has ample evidence to show that it is only a phase. As in the past, the pendulum could move to the other side. The management aberrations in private enterprise (Enron, AOLTime Warner, Merck, Arthur Anderson) have shaken the American scenario. It is increasingly being recognised that serious regulatory measures will have to be enforced to protect the interests of a multitude of stakeholders - shareholders, workers, consumers and the community at large. And to enforce such measures is not an easy task despite the best intentions.
2.2
THE INDIAN SCENARIO
When India became independent in 1947, emerging from a colonial rule to a sovereign state, a new era of political and economic transformation was ushered in, raising the aspirations of a substantial part 16 per cent of the humanity. Even before the attainment of political independence, there was a growing realisation that political and economic freedoms were an inseparable phenomena. The seeds of the mixed economy model, adopted by the country, could be traced back to the thinking of the then dominant political party articulated clearly in the Karachi Resolution in 1931 which spelt out, as referred to earlier, in its Fundamental Rights Resolution, that the state would own or control key industries and services, mineral resources, railways, waterways, shipping and other means of transport. The colossal problems of the Indian socio-economic conditions and deployable limited resources needed a different approach so as to avoid the extremes of a free economy and a command economy. The principles of democracy and the freedom of the individual were needed to be injected into the growth dynamics of development while targeting economic welfare of the masses and preventing concentration of economic power in a few private hands. Economic planning was the instrument used to accelerate the pace of development and to ensure more equitable distribution of incomes and of essential goods and services. It was realised that the leeway which needed to be made to ameliorate the economic conditions of the teeming millions and assuring them decent living standards could not be achieved without the full-scale intervention by the state. Private enterprise did not possess the financial resource, nor the technological and management skills, to undertake the stupendous challenges faced by the nation. The adoption of the Industrial Policy Resolution of April 1948, soon after Indian independence, is a landmark event, which laid down the path for economic development. The state assumed the role of an entrepreneur, and not only of a catalyst, a facilitator and a regulator, allowing the private sector to operate in areas other than those reserved for the public sector. It was the first formal green signal to the structure of mixed economy. The landmark enunciation of the policy observed: The state shall play a progressively active role in the development of industries and that, for sometime to come, the state could contribute more quickly to the increase of national wealth by expanding its present activities wherever it is already operating and by concentrating on new units of production in other fields, rather than on acquiring and running existing units. Meanwhile, private enterprise properly directed and regulated has a valuable role to play.
Manufacture of arms and ammunition; production and control of atomic energy, and ownership and management of railways became the state monopoly. Six basic industries, namely, (i) iron and steel, (ii) coal; (iii) aircraft manufacture, (iv) ship building, (v) mineral oils; and (vi) manufacture of telephones, telegraph and wireless apparatus were to be developed only by the state. All other areas were then kept open to private initiatives. The policy direction was provided by the Constitution of India, which became effective from January 26, 1950 when the country was declared a Republic. The Articles 39(b) and 39(c) have a direct bearing on the obligations of the state. To quote : The ownership and control of the material resources of the community are so distributed as best to serve the common good and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. Immediately after the Constitution was adopted, an institutionalised system of planning was installed by the setting up of the Planning Commission to undertake macro level planning for effective mobilisation, allocation and utilisation of the national resources. The public sector and planned development became inseparable. The First Five Year Plan which covered the five-year period, 195152 to 1955-56, made a specific reference to the role of state in the following words: Whether one thinks of the problem of capital formation or of the introduction of new techniques or of the extension of the social services or of the overall realignment of the productive forces and class relationship within the society, one comes inevitably to the conclusion that a rapid expansion of the economic and social responsibilities of the state will alone be capable of satisfying the legitimate expectations. It followed that the state had to assume greater social and economic responsibilities to meet the aspirations of the people without resorting to nationalisation of the existing means of production or eliminating the private sector. The national ruling party (Indian National Congress) adopted a Resolution Avadi Resolution in 1954 - to usher in what it called Socialist Pattern of Society as a national goal and this provided the trigger for spelling out the policy parameters by the government through the second Industry Policy Resolution adopted by the Parliament. The statement in April 1956 provided the direction for the state to assume a dominant role in the years to come. A new orientation was given to the mixed economy concept enlarging the scope and coverage of state intervention. At the same time, the Second Plan (1955-56 to 1960-61) contemplated increased emphasis on heavy industry (steel, capital goods). The Policy Resolution laid increased emphasis on state intervention by spelling out industries of basic and strategic importance or public utility services which were intended to be in the public sector. It also said that other industries which were considered essential and required investment on a scale which only the state could provide, also had to be undertaken by the public sector. Accordingly, the industries were classified into three, groups: 1) Seventeen industries reserved exclusively for development by the state, namely, arms and ammunition, iron and steel, heavy castings and forgings, heavy plant and machinery required for iron and steel production and mining, heavy electrical equipment, coal and lignite, zinc, copper, lead, aircraft, ship building and telecommunication equipment. 2) Twelve industries which would be progressively state-owned and in which the state will, therefore, generally take the initiative in establishing new
undertakings, but in which private enterprise will also be expected to supplement the effort of the state. These included aluminium, fertilizers, other minerals, machine tools, ferro alloys and tools, basic and intermediate products required by chemical industries, antibiotics and other essential drugs, synthetic rubber, carbonisation of coal, chemical pulp, road transport and sea transport. 3) The remaining all industries were left open to private initiatives. The state assumed a commanding role by virtue of the parliamentary approval of the Industrial Policy and whatever was undertaken in regard to the national development stemmed from this policy direction. It opened up the possibilities of national investment over a wider area. A multiplicity of objectives motivated the policy, such as:
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to strive for reduction of regional imbalances; to augment the revenues of the state and providing resources for further development in fresh fields by public enterprises; to improve the living and working conditions of the workers.
The successive Five Year Plans adopted by the National Development Council (with the Prime Minister as the Chairman and the Chief Ministers of different states constituting the body), emphasized the importance of the public sector in the national economy. Three major developments are noteworthy in the development of public enterprises in India: 1) In 1955-56, some two hundred and odd life insurance companies were nationalised merging their business into a larger entity, Life Insurance Corporation of India, which operated as a monopoly organisation until insurance business was opened up to private enterprise as a part of the economic reforms programme. Later ( in 1972) all companies doing general insurance business were also nationalised and formed into four companies headed by a fifth holding company (General Insurance Corporation of India). 2) In 1969, as a seemingly political move, 14 major private banks were nationalised. More were added later. Their identities were retained and there function independently even now. 3) As a matter of public policy, some 120 private textile mills were nationalised. These mills were those either closed down, while some had gone bankrupt. Many more companies outside the textile sector also received a similar dispensation. These moves were milestones in the journey of public enterprise in India towards attaining commanding heights or at least in establishing an ambience in favour of public enterprise. In 1977, a policy statement placed before the Parliament by a newly elected government declared : There will be an expanding role for the public sector in several fields. Not only will it be a producer of important strategic goods of basic nature, but it will also be used effectively as a stabilising force for manufacturing essential supplies for the country. A new dimension thus got added with a focus on market stabilisation and production of essential goods, through state intervention. Again, with the change in the Government at the Centre in July 1980, a fresh statement of industrial policy was made before the Parliament. This statement,
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while reiterating the socio-economic objectives of the earlier industrial policy, emphasized on the efficiency in the utilisation of the resources deployed. The goals set for the public sector were : a) to utilise optimally the installed capacity; b) to achieve higher productivity; c) to strive for higher employment generation; d) to correct regional imbalances; e) to strengthen the agricultural base through agro-based industries; f) to promote export-oriented industries;
g) to promote equitable spread of investment and dispersal of returns; and h) to protect the consumer against high prices and poor product quality. While there was a continuance of the role of the state, the emphasis got shifted to efficiency and effectiveness of investments as it was realised that the public investments were not resource-efficient in the given context.
2.3
THE IMPACT OF ECONOMIC REFORMS
There was, however, a major change after the launch of the economic reforms in 1991. The predilection for the public sector was waning in the context of global economic changes and the economic (foreign exchange) crisis encountered by the country. The restructuring and disinvestment of the public sector became a significant component of the economic reforms programme. A roll-back of the state and reliance on market forces became the dominant theme. The concept of mixed economy was redefined with a shift for a greater role to the private sector. Reservation list of industries in the exclusive domain of the public sector got abridged. Presently, there are only 4 industries which are in the exclusive list. These are : a) Manufacture of arms and ammunition b) Atomic Energy c) Atomic Minerals d) Railways No other industry stands reserved for the public sector. Large areas were thrown open to the private sector. Even the industrial licensing system which regulated setting up of industries with precise capacity stipulations was dismantled (except with regard to a few industries). Some of the significant policy measures bearing on the public sector are : a) a review of portfolio of public sector investments to focus on strategic industries, b) emphasis on high-tech and essential infrastructure; c) reference of the chronically sick industries to the Board for Industrial & Financial Reconstruction for revival/rehabilitation; d) disinvestment of shares in public sector enterprises to enable wider participation; e) bringing about greater degree of professionalisation in the public enterprises; f) thrust on performance improvement through a system of performance contracting called, Memorandum of Understanding (MoU), under which
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targets are set annually for achievement and evaluation, through agreements signed by the chairman of the public enterprise and secretary of the administrative ministry controlling the enterprise.
2.4
OBJECTIVES IN THE INDIAN CONTEXT
A fairly large spectrum of activities is covered by the public sector. The objectives of these enterprises may be classified as (a) economic, (b) strategic, (c) service promotion, (d) social, (e) promotional, and (f) financial. A large number of enterprises have economic-orientation focusing on building infrastructure. These help in industrialisation and development of the economy with multiplier effect. These include Steel Authority of India, Coal India, National Thermal Power Corporation, Oil and Natural Gas Commission, Indian Oil Corporation, Bharat Heavy Electricals. The strategic objectives can be identified in a number of undertakings both departmental and non-departmental which meet the defence needs and include ordnance factories, Hindustan Aeronautics, Bharat Dynamics, Bharat Electronics. The social role has two facets first, the supportive function to other activities, (such as providing housing, education and medical facilities to employees) and second reservation of posts for weaker sections of the society, Scheduled Castes and Tribes or setting up undertakings exclusively for their benefit, such as National Scheduled Castes & Tribes Financial Corporation. This latter phenomenon is witnessed more in states, (Tamilnadu Backward Classes Development Corporation, Haryana Harijan Kalyan Nigam Ltd., Punjab Women & Children Development Corporation). The promotional objectives have been served by setting up corporations, such as the National Research Development Corporation, Indian Dairy Corporation. In States, there are enterprises for development of specific industries such as leather, livestock, fisheries, poultry, agro-industries. Financial objectives are in the nature of providing loans basically long term for economic and industrial development, (such as the Industrial Development Bank of India, Industrial Finance Corporation of India, Small Scale Industries Development Bank, Power Finance Corporation). Other objectives sought to be achieved through the instrumentality of the public sector include self-reliance, import substitution, providing infrastructural support to the economy, development of backward regions, supply of basic materials and capital goods, prevention of concentration of economic power, stabilisation of market forces, development of technology, employment generation, generation of resources for future development. State Level Public Undertakings India is a Union of 28 states and 7 centrally administered territories. Indias public sector operates at the central, state and local self-government levels. The foregoing covers mainly the Central public sector. Every state is endowed with resources of one kind or the other. The exploitation of such resources falls primarily within the domain and responsibility of the concerned states. There are some 900 to 1000 autonomous independent enterprises for development of leather, meat, livestock, fisheries, poultry, sugarcane, brassware, handicrafts, minerals, textiles, films, theatres and other services. There are also development corporations, such as for housing and
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tourism. Most of these are promotional in nature. Agro-industries corporations are also functioning in many states, set up for promoting food processing industry and industries for the manufacture of machinery, equipments and accessories needed for industries in rural areas. Significant activities of state public undertakings in the statutory or corporate form are electricity generation, transmission and distribution, road, transport, besides manufacturing. Several of the state government public enterprises are mostly promotional in nature. Illustrations:
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Agro-Industries Corporations Fisheries Development Corporations Forestry Development Corporations Mining & Minerals Development Corporations Small Industries Corporations Road Transport Corporations Warehousing Corporations Housing Finance Corporations Industrial Investment and Financing Corporations
Of identified tally of about 840 SLPEs, Kerala has the maximum number (109) followed by West Bengal (82), Karnataka (76), Orissa (68) and so on. A significant feature of state level public enterprises is that the state government control on their functioning is more pervasive and they are in a sense an extension of the respective departments of the state governments. The top executive functionaries are drawn from the civil services. The state level enterprises have been plagued by political ramifications of a divergent kind. While some of the state enterprises are doing exceedingly well, most others have performed badly. A large number are closed down any way. As a group, these provide a contrast to Central public enterprises in their size, structure, functioning and performance. At the end of March 2000, according to one estimate, 222 state level enterprises were slated for disinvestment/winding up/restructuring.
2.5
SUMMARY
The Indian case of public enterprise is, perhaps, a unique case. Considering the problems of a developing economy, the central public sector in particular has made rich contributions to the development process. Its share in several sectors is significant. Subject to the following three conditions, it has performed well: a) it was loaded with closed and bankrupt private undertakings to protect employment; b) it had to bear with administered prices (both for inputs and outputs); c) most of the state level enterprises could not perform well because of political and bureaucratic interference. A review of the performance of the Central public sector was made by a study carried out of the Centre for Industrial & Economic Research and commissioned by the Standing Conference of Public Enterprise (apex body of the central public sector) (Mohnot, 2000). It came to the following interesting conclusions:
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Given the exogenous contraints, the public sector in India has performed the task assigned to it reasonably well, constraints notwithstanding. There are aberrations, but all are not of its making. The acquisition and operations of bankrupt private sector companies was, for example, a result of decision imposed on it. The public sectors main objective was socially-focused, in many cases by the conception of enterprises and in others by their mechanisms. The administered prices were not commercially viable, which implied subsidies. Commercial enterprises could not provide large subsidies and at the same time generate high level of profits. Empirically, the performance of the public sector, seen in its total perspective, is comparable to that of the private sector, although the formers perceived substandard performance has received recurrent and critical acttention. On a rationally comparable basis, the profitability of the public enterprises more than matches with that of the total private sector. Performance of the public sector in terms of financial parameters has been improving markedly since the onset of the economic reforms programme, while a number of analysts had predicted its doom. The government had recovered in the form of dividends, interest and taxes during the three years ending March 2002, more than the total invested capital. Large non-performing assets damaging the results of financial institutions and banks are indicative of the losses incurred and defaults made by the private enterprise entities. So are the large number of sick units. The overall dividend record of private corporates has been abysmally poor. More than half the number of the listed companies do not pay any dividends. A large number of sick units in the public sector are a legacy of the private sector. The takenover enterprises acquired at the direction of the government from time to time and not adequately supported by the government have badly damaged the image of the public sector. It is universally admitted that there has been very little autonomy in public enterprises. Vital clearances for decisions from conception to commissioning to current operations have often been delayed for months, years and even decades. Many turnaround programmes remain non-starters. Apart from the dilatory clearances, there has been marked positive interference. Despite the bureaucratic procedures, which the public sector undertakings have had to follow, a high degree of professionalism has been in evidence with far more focused and efficient HRD interventions and R & D development. The public sector has established management and training institutes of which any industrial or service organisation can be proud of. PSUs have attended to the welfare and social dimension of the work force in particular and the community in general in a much more effective manner. Undeterred by the changing and highly destabilising pronouncements including those on privatisation and disinvestment, which have created uncertainties and demoralisation, the public sector has produced enough evidence that it marches on to meet the challenges of the global competition. The public enterprises are working on a new agenda of global competitiveness and have envisioned even launched expansion, diversification, modernisation and restructuring programmes. They have also entered into strategic alliances and joint ventures
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within the public sector and between the public sector, on the one hand, and domestic and foreign enterprises, on the other. Although continuing to be owned by the government, budgetary support, sometimes critical, has been denied to the public sector enterprises. PSUs are not basing their ambitious plans of expansion, diversification and technology upgradation on fiscal support. They are confident of generating surpluses and of mobilising the resources by accessing the market on their own. Since the onset of the economic reforms programme, even the government has taken some positive steps declaring selected CPEs as navaratna and miniratnas with some doses of autonomy. The structure, vision, goals and systems of the public sector have gone through a whole reformation. Assured of the freedom to operate under new standards of corporate governance now advocated by professional dispensation, the public sector appears confident to be globally competitive. Activity a) List any five housing finance corporations owned by the State Government ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... b) List any five state government owned industrial investment and financing corporations. ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
2.6
1. Discuss the impact of economic reforms in the state of public enterprises 2. Discuss the role of public enterprises in any two sectors in the Indian context. 3. List any two public enterprises having economic orientation with main focus on building infrastructure and briefly discuss their role in present context.
2.7
REFERENCES AND FURTHER READINGS
The Economist, (May 14,1983), p.31. Public Enterprises (1981), in the European Economic Community-CEEP Review pp. 116-117. Mohnot, S. R.(2000), Performance of Public and Private Sectors, Centre for Industrial and Economic Research (CIER), New Delhi.
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UNIT 3 NATURE AND SCOPE OF PUBLIC ENTERPRISE

Objectives After studing this unit you should be able to:
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3.1 3.2 3.3 3.4 3.5 3.6
Understand the nature of public enterprise; Know the growth process of public enterprise; Understand the role of administrative ministries.
Structure Extent and Scope Growth of Public Enterprise Role of Department of Public Enterprises Summary Self Assessment Questions References and Further Readings
3.1
EXTENT AND SCOPE
The nature and scope of public sector flows from the strategies and policies governing economic development and the structure of the economic system of a country. In developing countries, it has been targeted at acceleration of economic development with social justice. In industrialised countries like France, Italy and the UK, it was intended primarily to ensure supply of essential goods and services at reasonable prices and to augment countrys competitive capabilities in selected areas. In countries like India, massive investments were made in the public enterprises as an economic strategy adopted for accelerated and equitable economic development. With every successive National Plan commencing from start of the First Plan (1951-56) to the end of Ninth Plan (1997-2002), progressively large investments were made in the public sector. The strategy led to defining and redefining the role of the state in national development. Economic planning served as a tool for launching relatively massive programmes and projects for economic and social development. These led to large investments by the state in different sectors of the economy primary, secondary and tertiary. The public sector investments were not limited to enterprises which assumed autonomous forms of organisations in the manufacturing and service sectors of the economy - but also extended to departmental undertakings such as the railways, financing and other service-providing or promotional organisations. Besides, fairly large investments were channelled into state level undertakings. India is a country of continental dimensions, with a land mass covering over 3.29 mn sqkm, and a population exceeding 1000 million, with density variance ranging from a high of 655 persons per sqkm in one state to as low as 8 persons per sqkm in another. The level of economic and human development also varies very widely from one state to another. Inequalities are marked in all economic parameters and development coefficient are low. As a result, the public sector engaged in the task of accelerated economic development involving one-sixth of the human race, took on multiple roles, multiple forms and multiple strategies of operation.
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Public Enterprise: An A wide spectrum of activities covered by the Central Government alone included Overview many areas of production and services, as listed below:
A. Manufacturing
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
Producing of steel and non-ferrous metals and products; Mining and beneficiating coal and a host of other minerals; Exploring, extracting and processing crude oil; Refining crude oil and marketing petroleum products; Casting and forging metals; Producing and marketing petrochemicals, fertilizers and other chemicals; Producing and marketing drugs and pharmaceuticals; Manufacturing and marketing heavy machine building plants and equipments; Manufacturing and marketing capital goods including heavy electrical equipments; Manufacturing defence-oriented products; Manufacturing transport equipment including ships, passenger cars and aircraft; and Producing and marketing of consumer goods like textiles, watches.
B . Services Developing and operating infrastructure facilities, such as railways, road transport, shipping, ports and telecommunications, airlines; Development of small scale industries; Providing services like technical consultancy, trading and marketing, contracting and construction; Organising social services like development of backward regions, upliftment of backward classes of society and skill upgradation; Promoting tourism; Promoting Research & Development; Providing institutional finance for development and exports and commercial banking services; and Promotion of life and general insurance
The scope of public sector gets wider when the state level public sector is included. Besides service and promotional activities, the states widened the area of manufacture and services. Nevertheless there is a qualitative and dimensional difference between the enterprises run by the Central Government and those by the State Governments. While the former were established mainly to achieve industrialisation and economic development of the country as a whole, the latter, other than the State Electricity Boards and Transport Corporation, were smaller in scale (though larger in number about 1000) and were supplementary in character. These were intended more to utilise natural resource available in the respective states or to develop skills and provide employment. Several of these were established with social orientation; others for political reasons. These may be grouped under the following dispensations:
! ! ! ! !
Forms of Publicminerals, Enterprises to maintain control over the natural resources of the state (forests, fisheries);
to address regional imbalances within the state; to promote industrial development of the state; to provide certain services not adequately provided by the private sector, or if provided, at high prices; and to satisfy political pressure groups.
The state level enterprises, which have taken corporate form, include a variety of areas:
! ! ! ! ! ! ! ! ! ! ! ! ! ! !
Manufacturing and industrial development Small industries promotion Agro industries development Forestry and forest development Fisheries and marine life development Mining and mineral development Road transport Corp support and warehousing Corporation Financing and financial services Housing assistance and financing Scheduled castes and tribes development Backward classes upliftment Womens development Land mortgage banks Electricity Boards statutory bodies, now in the process of corporatisation in many states.
The number of enterprises for which returns were filed at the end 2002 was 840. In terms of number of enterprises Kerala led with 109 undertakings, followed by West Bengal 82, Karnataka 76, Orissa 68, Maharashtra 65. The states with 50 to 60 undertakings were Gujarat, Punjab, Tamil Nadu and with 20 to 50 undertakings Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Madhya Pradesh and Rajasthan. Other states had less than 20 public sector undertakings.
3.2
A. B. C.
GROWTH OF PUBLIC ENTERPRISE

Formative Years Maturity phase Disinvestment and competitive mould 1951 to 1975 1976 to 1990 1991
The development of the public sector in India should be divided into three phases:
The maximum growth was witnessed during the expansion period. In a span of 13 years (1972-85), employment level tripled from 0.7 mn to 2.1 million.
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Public Enterprise: An The number of Central public enterprises had grown from 5 in 1951 to 244 in Overview 1990 with the investment expanding from a mere Rs 0.29 billion to Rs 993 bn. While the number remained practically same in post 1991-era (vacillating practically within a narrow band), the investment expanded from about Rs 1000 billion to Rs 3246 bn. (See Table 1.1)
The composition of the Central public sector corporations shows wide variations in terms of investment and turnover. The manufacturing organisations (149) reported a total investment of Rs 1974 bn in 2001-02 against Rs 1169 billion by service and trading organisations (81). The respective turnover was of the order of Rs 3715 bn for the former and Rs 1072 for the latter (See Table 2.2). The total tunrover constituted over 22 per cent of gross domestic product (GDP) of India in 2001-02. The total investment of Rs. 3246.32 billion has two components : equity and loan. A break-up of the investment shows multiple sources from which the funds are drawn. (See Table 3.3). Out of a total equity of Rs. 1017 billion, the share of the Central Government was of the order of Rs. 864 billion or 85 per cent. This reflects the dominant stake of the Central Government. Of the total turnover of Rs. 4787 billion, the top 10 enterprises accounted for Rs. 3308 billion, a share of 69 per cent. Enterprises with the high turnover were : 1) Indian Oil Corporation Ltd. 2) Hindustan Petroleum Corporation Ltd. 3) Bharat Petroleum Corporation Ltd. 4) Food Corporation of India 5) Bharat Sanchar Nigam Ltd 6) Oil & Natural Gas Corporation Ltd 7) National Thermal Power Corporation Ltd 8) Steel Authority of India Ltd 9) Gas Authority of India Ltd 10) IBP Co. Ltd (now a subsidiary of Indian Oil Corporation) The contribution of the Central public sector in the total national production of key sectors has been impressive. In some areas like coal, lignite, crude oil, natural gas, lead and zinc, it had exceeded 80 per cent (See Table 3.4). Spatial Spread of Investments and Employment The spread of capital assets and employment of the Central public enterprises in different states and union territories followed no specific economic rationale (See Table 3.5). While there was a preferential treatment assigned to less developed states, in practice, it all depended on the nature of projects and programmes, local and political pressures, availability of natural resources and the nature of developmental activity. Some examples of the investments undertaken with added emphasis on development of backward regions are:
!
4
Nagaland Pulp & Paper Mills (Nagaland)
! ! ! !
Cement Plant in Bokajan (Assam) Cement Plant in Rajbans (Himachal Pradesh) Bhilai Steel Plant (Madhya Pradesh, now Chattisgarh)
Bharat Pumps & Compressors at Naine (Uttar Pradesh)
Out of about 1.8 million total manpower strength of public enterprises in the Central public enterprises, in 2001-02, some 50 per cent was accounted for by sick units takenover from private ownership. Product Profile The annual capacities created in the country through investments in Central public enterprises have been the major drivers of economic growth in the country. (See Table 3.6). The products cover a wide spectrum from different electronic goods, cables, foundry forge items, steel products, machine tools, compressors, diesel engines, transmission line towers, conveyers, railway wagons, locomotives and coaches, X-ray films, contraceptives, watches, lubricants, tea, drugs and pharmaceuticals, petrochemicals, phenol, DDT, LPG, propane, ethylene, polypropylene, textiles. Financial Services Public sector has played a catalytic role in promotion of industry by offering credit and other facilities for development of industries in the private sector. Some significant activities in this area may be recapitulated. Industrial Development Bank of India (IDBI) is one of the financial institutions set up by Government of India empowered by an Act of Parliament to finance all types of industrial concerns engaged in or to be engaged in the manufacture, processing or preservation of goods, mining, shipping, transport, hotel industry, informatics, medical and health services, leasing and ancillary activities for small entrepreneurs, generation and distribution of power, fishing or providing shore facilities for fishing, maintenance, repairs, testing services of machinery or vehicles. The Bank also assists industrial concerns engaged in the research and development of any process or product or in providing special and technical knowledge or other services for promotion of industrial growth. Tourism development and related facilities have been recognised as industrial activity which could be financed by IDBI. Three subsidiaries IDBI Bank, IDBI Capital Market Services and IDBI Intech offer a vast range of services to corporate and other business segments. The services offered by IDBI include project loans, in rupee as well as foreign currency, equity financing, corporate finance (including short term/working capital loans, venture capital, equipment leasing, refinancing of industrial loans as well as fee based services). The total assistance sanctioned under all schemes for the year 2001-02 amounted to Rs. 160 billion (for one year) and disbursals amounted to Rs. 112 billion for the same year and the total assistance including assets given on lease at the end of March 2002 stood at over Rs. 620 billion . Loans and advances to industrial concerns at end-March 2002 was Rs. 450 billion. The significant financial support rendered for industrial development can be gauged from the scale of assistance. Another development banking institution which is rendering financial services is Small Industries Development Bank of India (SIDBI). It is also a statutory body. It was set up in April 1990 under an Act of Parliament, as a financial institution for the promotion, financing and development of industry in the small scale sector. SIDBI has two subsidiaries SIDBI Venture Capital Fund, and SIDBI Trustee
Public Enterprise: Company Ltd An and two associate organisations, namely, Credit Guarantee Fund Overview for Small Industries and Technology Bureau for Small Enterprises.
The scope of financial assistance of SIDBI covers the entire spectrum of Small industry sector, including tiny, village and cottage industries and assistance is rendered through suitable schemes for setting up of new projects, expansion, diversification, and modernisation of existing units. Financial services rendered by SIDBI include refinance assistance, equity assistance, project related financing, promotion and development assistance. Over the last 12 years of existence, SIDBI sanctioned Rs. 752 billion and disbursed Rs. 523 billion of assistance. Apart from the Industrial Finance Corporation of India, there are 8 other financial services enterprises, which have taken the corporate form and are in the business of assistance in the respective areas of operations:
! ! ! ! ! ! ! !
Balmer Lawrie Investments Ltd. Export Credit Guarantee Corporation Ltd. Housing & Urban Development Corporation Ltd. Indian Railway Finance Corporation Ltd. Indian Renewable Energy Development Agency Ltd. National Film Development Corporation Ltd. Power Finance Corporation Ltd. Rural Electrification Corporation Ltd.
Insurance Sector Life Insurance Corporation of India (LIC) and General Insurance Corporation along with four subsidiaries (GIC) were set up by Acts of Parliament as statutory corporations, the former for life insurance activities and the latter for carrying out the general insurance business in and outside the country. These were created out of the nationalised private companies operating in the respective fields. Both life insurance and general insurance businesses are now thrown open to the private sector. The presence of the public as well as the private insurance companies is expected to ensure a very healthy competition in the market in the coming years. Infrastructural Sector The major segments of infrastructure are railways, civil aviation, power, roads, ports and telecommunications, in which the government has been participating actively. Excepting for railways, which is still in the Reserved List, holding a monopoly status, the rest have shifted to a competitive mould, open to initiatives of both, the public and private sectors, some in a collaborative or partnering framework. The Indian Railways, a public utility service organisation, is the second largest railway systems in the world, exclusively operated as a departmental undertaking. It has an extensive network, spread over 63,000 route kilometers of which 25 per cent is electrified. A new innovation is a special purpose vehicle (SPV) with equity participation of the Ministry of Railways and Gujarat Pipav Port Ltd., formed to provide broad ) gauge connectivity to the Port of Pipav. SPV is a firm which embodies a financial contract. It has no management and no employees, but is a legal
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person, which is governed by contractual obligations.
Another innovative form is the partnership between the railways and state governments and users for funding of projects. Illustratively, an MoU was signed between the Government of Jharkhand and the Ministry of Railways for execution of six projects at an estimated cost of about Rs. 20 billion; two-thirds of which would be borne by the state government and one-third by the Ministry of Railways. The projects are to be completed in a time-frame of 5 years. Public-private sector partnering is a new innovation in sectors like civil aviation. New international airports planned at Bangalore, Hyderabad and Goa are to be set up with private sector participation. These airports are to be set up as joint ventures where the private sector partners will hold 74 per cent of equity and state governments and Airports Authority of India (a Central Government undertaking) will together hold the balance 26 per cent. An important project, the National Highway Development Project (NHDP), entails expansion of the existing 2-lane highways to 4-6 lanes and the strengthening of existing lanes on nearly 13000 kms. The project is one of the largest single highway projects in the world and comprises 5846 kms of Golden Quadrilateral (GQ) connecting 4 metros of Delhi, Mumbai, corridors connecting Srinagar-Kanyakumari and Silchar-Porbander. The implementing agency for the project is a statutory body, the National Highways Authority of India (NHAI) set up under an Act of Parliament. The NHDP is estimated to cost Rs. 540 billion of which Rs. 303 billion would be spent on Golden Quadrilateral link. Multiple financing pattern is involved in regard to NHDP, some of which are on BOT (Build, Operate and Transfer) principle. Work on BOT projects worth over Rs. 26 billion is in progress. Over 20 projects costing Rs. 68 billion are under implementation under the BOT plan.
3.3
ROLE OF DEPARTMENT OF PUBLIC ENTERPRISES
The Government of India had constituted a separate department under the title, Department of Public Enterprises (DPE). Presently, it is a part of the Ministry of Heavy Industries and Public Enterprise. The DPE was earlier known as the Bureau of Public Enterprises. The DPE does not control the working of enterprises, which function is exercised by the Ministry to which each enterprise is distinctly assigned. It provides the guidelines and coordinates the activities of the Central public enterprises. DPE serves as a nodal agency for the public enterprises and assists in policy formulation pertaining to the role of such enterprises in the economy. It lays down policy guidelines on performance improvement and evaluation, financial accounting, personnel management and related areas. DPE also provides an interface between the public enterprises and other official organs such as the parliamentary committees. It is also concerned with all matters relating to MOUs between public enterprises and the administrative ministries/departments; overall policy matters relating to composition of board of directors, categorisation of posts, delegation of powers to board of directors, and broad parameters regarding pay structure and perks of top executives. DPE compiles regularly the Annual Survey of Public Enterprises and presents an analysis of the data. It constitutes the principal source of information on Central public enterprises.
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Public Enterprise: DPE provides a An forum in regard to settlement of commercial (except taxation) Overview disputes between two or more enterprises and between the enterprises and external agencies, such as port trusts.
Role of Administrative Ministries Central public enterprises function as separate entities but under the over all control of different administrative ministries or departments to which each enterprise is attached. These number some 35 to 40 ministries and departments. The administrative ministries and departments are accountable to the Cabinet and the Parliament. The respective administrative ministry processes the cases of appointment of Chairman-cum-Managing Director and board level directors through the Public Enterprises Selection Board (PESB) and secures the approval of the Appointments Committee of the Cabinet. The budgetary support to any loss making enterprise and the capital expenditure beyond the limits delegated to the enterprises are processed by the ministry for getting approval of the competent authority such as the Planning Commission or the Ministry of Finance. The administrative ministry has the prerogative of issuing directives to the enterprises under their administrative control. Autonomy and Accountability The term public enterprises represents, to reiterate two dimensions public and enterprise. The public has reference to ownership, control and objectives of an enterprise. It is commonly recognised that the public sector is intended for public good. The enterprise dimension is reflective of the commercial character of the activity, again for the stated objective. Germane to this is the concept of freedom to operate in a competitive environment. The dilemmas of the public enterprise system are the dichotomies of public accountability and commercial freedom, on the one hand, and social responsibility and profit maximisation, on the other. One has to carve out balancing modes of accountability, with autonomy and social responsibility with profitability which are inherent in the very concept of public enterprise. However, it is in the act of balancing the two binary concepts, that there is a constant quest, discussion and debate. Where the accountability should end and autonomy begin or how to intermesh these two opposing stands is the million dollar question. So is the balancing trick between the other two seemingly opposite phenomena. The quest is universal but equally daunting. The Administrative Reforms Commission of India observed as early as 1967 that since the public enterprises are financed from public funds, it is imperative that these operate within the confines of public accountability. The essential feature of this accountability in a democracy is the supervision and control exercised by the Parliament (or legislature, by whatever name called). The need for such supervision and control is all the greater in a country like India which is committed to a developing and equitable society. On the relationship of public enterprises with the government, the Commission had observed that excessive external control inevitably has a frustrating effect on the management; it weakens its initiative and restrains it from taking quick decisions on the spot. At the same time, government must have the power to issue policy directives, exercise strategic control and make the necessary coordination keeping in view its responsibility for the effective implementation of the socio-economic programmes of the country. It is, therefore, necessary to
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of Public Enterprises provide for a proper system of coordination and control of Forms the public undertakings while adequately safeguarding their operational autonomy.
Several other expert bodies have covered the subject of interface between the government and public enterprises like Krishna Menon Committee, Arjun Sengupta Committee, Economic Administrative Reforms Commissions. The Krishna Menon Committee had observed, among other things, that : There obviously have to be limits to autonomy. At the same time, delegation of authority and freedom for initiative must be left to those who have to produce results. On the question of accountability, the Committee had this to say : The Minister . is accountable under the general law and practice of the country for anything that Parliament chooses to ask him to account. The normal practice of making such accountability real is provided for by the many usual methods of expression of public opinion. These include questions, debates on any issue under normal Parliamentary procedures at the discretion of the Speaker, motions of adjournment, censure, confidence, etc. Paul Appleby, who in the mid-1950s, examined the Indian administrative system with special reference to administration of governments industrial and commercial enterprises (Appleby, 1956), pointed out that in a democratic framework, it is inevitable that Government retains powers of control to intervene, while granting delegation of authority consistent with accountability. The subject of accountability was one of the main themes in a seminar organised by the Bureau of the Public Enterprises in 1979 (Seminar, 1979). The seminar discussed inter alia three dimensions of accountability, namely, to whom, for what and how it is to be ensured. It was recognised that public enterprises are accountable to the public at large because it is the public money which is invested in those enterprises, which boils down to the representatives of the people, in the state legislatures or in the Parliament, as the case may be. The rationale is the assumption that the accountability to Parliament or the state legislature can ensure that the investments are optimally used for achieving the objectives of the undertaking. To achieve this, it was recognised that suitable information system from the enterprise to the government and through government to the Parliament was a pre-requisite. Accountability for what underlines the need for clear cut objectives to be given for each public undertaking. Unless the objectives are well-defined, it would be difficult to hold the management of the enterprise accountable. In order to ensure accountability, the control system has to be so devised that both the Parliament and the government are enabled to oversee the working of the enterprises without interfering in the day-to-day administration of the undertakings. In a report, the Economic Administration Reforms Commission observed that what had taken place in the name of accountability were certain distortions. It said: There can be no accountability if there is no perception of what is to be done and in what time frame..what we have today (in the governmental system) is essentially accountability for error and wrong-doing and not for nonachievement and inefficiency. From the foregoing discussion, it appears that in a parliamentary democracy, ministerial control cannot be dispensed with in public enterprises. Autonomy of an enterprise has necessarily to be tempered with by a system of checks and balances. What is required is a clear set of objectives for these enterprises and
Public An of the control system to ensure fulfilment of those objectives. wider Enterprise: understanding Overview The equilibrium between autonomy and control can be maintained provided the public enterprises, the government and legislature play their part being fully conscious of the boundaries of each. Authority delegated to the enterprises needs to be exercised fully without reference to any external authority. Where the authority vests with outside agency, it is imperative on the enterprise to seek approval from appropriate agency. The legislature on their part should not concern itself with the day-to-day running of an organisation. A certain amount of self-discipline is essential, which is at the core of autonomy. It is, nonetheless, difficult for the political and bureaucratic system to resist the temptation where some door is open for intervention and, therefore, for the exercise of authority. The business world is, however, changing in the global context. Even the private enterprise is learning new rules of the game. The concern for different stakeholders and not merely of the shareholders is emerging as a new goal. Corporate governance is making the impact. The public sector has to transform itself for survival.
While the theoretical framework is obvious, certain practices and tendencies tend to become eroding factors. This phenomenon is often termed as back seat driving or calling the tune. Informal and covert relationships subsist between the public enterprise management and the executive arm of the government. Such interference is not open and, therefore, not susceptible for any easy identification; nor could it be easily tackled. It prevails in the matter of recruitment which falls within the delegated sphere of authority of public enterprise management or in the award of contracts or in spheres of activities within the domain of an enterprise, such as expenditure on advertisement, entertainment, foreign travel. Here, the judgement of public enterprise management is superimposed by an external authority. While some negative features have crept in, it is important to recognise that some healthy conventions and formalised procedures have been established with regard to central public enterprises over time. These need to be taken note of: 1) Questions and interpellations of the concerned Minister in Parliament are governed by certain conventions. Questions relating to day-to-day administration of public enterprises or questions which tend to throw work of the ministries and the public enterprises incommensurate with the results to be obtained therefrom and questions which seek to obtain information which the Member may obtain directly by addressing the management of public enterprises, are not admitted. 2) The scope and functions of the Parliamentary Committees on Public Undertakings consisting of 15 Members from Lok Sabha and 7 Members from the Rajya Sabha, are well defined . The Committee inter alia is to examine, in the context of autonomy and efficiency of the public undertakings, whether the affairs of the public undertakings are managed in accordance with sound business principles and commercial practice. 3) The areas of responsibilities of the government and the public enterprises are defined more clearly. Certain powers have been reserved for the government in regard to appointment of top executives at board-level; for the rest, the public enterprises themselves have been given more authority and responsibility with regard to the affairs of those enterprises. Capital expenditure upto specified limits could be incurred by public enterprises under the system of delegated authority. Unless deficit is anticipated, revenue budget need not be placed for approval to the government.
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of Public Enterprises 4) In order to ensure accountability, the reporting systemForms of enterprises to the government has been streamlined and formalised. As part of the system, Quarterly Performance Reviews are conducted in the administrative ministries with the participation of chief executives of public enterprises and representatives of Planning Commission and the Department of Public Enterprises. The system of MOU also serves as a tool for accountability.
The question that seriously needs to be addressed along with autonomy is the one of accountability. In the name of accountability there are many players in the field. Public enterprises are owned by the state. As these enterprises are created by investments from the funds of the exchequer, they become accountable. It is not easy to define the precise degree of control that accountability involves. Equally, it is difficult to strike a balance between the requirements of accountability consistent with autonomy. There are two types of control in the name of accountability, direct and indirect. Direct controls are exercised by the administrative ministry. Questions by members of Parliament, debates in the House and interpellations of the minister serve as instruments of control. The indirect control is exercised through multiple agencies including the Comptroller & Auditor General of India and Central Vigilance Commission, which are statutorily empowered to keep a watch. The Performance Contracting An important recommendation stemming from the Report of Arjun Sengupta Committee is the concept of Memorandum of Understanding (MOU) a system which was conceived in early 1988 on the South Korean model of performance contracting. It was intended to give greater autonomy to PEs and at the same time to ensure their greater accountability. The 1991 Industrial Policy of the Government of India envisaged that the MOU system needs to be extended to all public enterprises, excepting those which being sick needed to be referred to the Board for Industrial and Financial Reconstruction (BFIR). One could see the reasons for the latter exclusion, but it is these enterprises which needed planning and commitment even more unless these were those which were non-revivable despite reasonable turnaround strategies. The main objectives to be achieved through the MOU System are:
! ! !
fostering of a contractual relationship between government and Public enterprises; providing an objective evaluation mechanism on agreed criterion and the actual performance of the public enterprise annually; achieving performance improvement through recognition of outstanding performance through an assessment by a group of experts associated with the MOU System (mostly retired chief executives, senior level professionals and retired civil servants, who were associated with public sector management. Some outside professionals were also included).
The thrust of the MOU system is to specify measurable goals and to assess the achievements related to targets. The system takes cognisance of the measures accepted both by the government and the public enterprise management. Parameters were set to measure the achievements in a 1 to 5 scale with the grading of Excellent, Very Good, Good, Fair and Poor ratings - computed from
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Public Enterprise: An the actual performance against the targets related to the various facets of Overview working of the enterprise, such as financial and fiscal achievements, inventory management, customer satisfaction and project management.
A High-Power Committee (HPC) is supposed to guide and oversee the operations of the MOU system and to evaluate the performance based on actuals at the end of the year against the understandings arrived at the beginning of the year. It operates- under the chairmanship of the Cabinet Secretary. The members include Finance Secretary, Expenditure Secretary, Planning Secretary, Secretary, Programme Implementation, Chairman, Public Enterprises Selection Board and Chief Economic Adviser. The Secretary, Department of Public Enterprises is the Member-Secretary. The HPC is assisted by an actively engaged Ad Hoc Task Force of Experts and the Department of Public Enterprises, serves as Secretariat for the MOU system. This system included granting of Awards, called MOU Awards for outstanding performance. However, it did not incorporate the much needed rewardpunishment package which could provide the incentive for better performance. The MOU system is to be viewed as a contract between the management of public enterprise and the government with the latter represented by the secretary in the concerned administrative ministry. It is an annual exercise. A significant aspect of the system is evaluation of managerial performance through objective criteria both quantitative and qualitative. This system is in operation for a decade-and-a-half with refinements introduced from time to time. About 100 to 108 enterprises are covered by the MOU system from year to year. While a system like the MoU is a sine qua non for the public sector to ensure autonomy and accountability, the system has not achieved the desired results. Among others, the reasons are insistence on soft targets, non-fulfilment of conditions promised by the government and the continuing frequent interface between the government and the public enterprises, and sometime frequent change of the Directors. To sum up, the scale and dimensions of investment in the public sector make large claims on scarce national resources. The public enterprises could not, therefore, be left entirely free of control and accountability. The argument is not about whether the control is necessary but only over the degree of control and, more importantly, how it is exercised. A clear distinction between policy issues, on the one hand, and day-to-day administration, on the other, would help in balancing the two opposing concepts of autonomy and accountability. Public enterprises have no escape from the dual role expected of them. While, they have to take care of public interest, these must operate as efficient commercial entities, creating value for all stakeholders. While the grant of navratna/ miniratna status to selected enterprises and the system of MOU in operation over a decade are attempts to address the issue of autonomy consistent with accountability in the public sector, these need to be streamlined and reinforced with commitment from both sides, the government and the management of the public enterprises. The Audit Function Public enterprises in the corporate mode operate under the provisions of the Indian Companies Act. Their accounts are to be certified by the statutory auditors appointed by the government. The appointment of auditors, who are accredited members of the Institution of Chartered Accountants, are always made on the advice of the Comptroller & Auditor General of India (CAG). The accounts certified by the Chartered Accountants are subjected to supplementary or 12 test audit by officers of CAG. The Companies Act also empowers CAG to
Forms of Public Enterprises issue directions to the statutory auditors on the manner in which the audit is to be conducted.
In respect of the enterprises set up under the specific Acts, like Airports Authority of India, Food Corporation of India, the accounts are also required to be audited by CAG, under the provisions of the relevant Acts. CAG presents its reports to Parliament in three modes: Report 1. Report 2. Report 3. Review of accounts (giving a critique of overall performance). Comments on accounts of the companies audited. Transaction audit observations on individual topics of interest.
An Audit Board is set up by CAG, with a chairman of the rank of Deputy. Controller & Audit General, two whole time members of CAGs office and two part-time experts from outside the government. The reports of Audit Board based on efficiency audit are given as a separate report, called Reviews of Some of the Activities of Selected Public Undertakings. Report 3 brings out individual cases of gross irregularities through audit paras. The audit paras are examined by the Parliamentary Committee on Public Undertakings for suitable direction. A question that is often raised is whether the public enterprises are not being subjected to double audit leading to excessive control on their transactions, in comparison to companies in the private sector which are also set up under the provisions of the Indian Companies Act. The latter are audited by the Chartered Accountants only. This view is countered by CAG, that as massive investments are made with public money in the public enterprises and as it is the constitutional authority set up under the Constitution of India as a statutory body, CAG is the best judge to decide on the system of audit. Vigilance Machinery Another form of indirect control is exercised on the working of public enterprises by the Central Vigilance Commission (CVC), a statutory authority set up with the approval of the Parliament. CVC exercises superintendence over the vigilance administration of the various ministries or the corporations established by or under any Central Act and government companies. CVC has jurisdiction over the Central Bureau of Investigation (CBI), an investigative wing with discretionary powers of scrutiny and filing of charge sheets against various functionaries. Vigilance angle is generally perceived as prevention and control of illegal gratification, possession of disproportionate assets, forgery, cheating, abuse of official position with a view to obtaining monetary gain for self or any other person, lapses, such as flagrant violation of systems and procedures. It is the sweep of vigilance machinery which leads to a fear psychosis in public enterprises, which are expected to function on commercial basis with the intention of earning maximum financial returns. The existence of multiple checks, financial and others, does affect the freedom of action which is demanded of a vibrant global organisation. While there are issues of public morality and interest, it is an issue which has plagued the working of the public sector. Article 12 of the Constitution of India considers a government owned (51 per cent or more of equity) undertaking as a part of the state and these controls cannot be dispensed with unless the government equity stake is reduced below 51 per cent.
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Public Enterprise: An Activity Overview
Name any two public enterprises covering the following activities. a) Production of steel and non-ferrous metals and products. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... b) Promoting tourism. ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
3.4
SUMMARY
Public sector includes the enterprises owned by centre as well as the state. The scope of public enterprises cannot be limited to the centre alone as the state owned enterprises also play an important role in the economy of the nation. This unit tries to cover the extent and scope of the public enterprises at both, the central level as well as state level. The growth of public enterprises in different sectors have been discussed in brief to give a fair idea of the progress of the public enterprises. It also highlights the role of different departments to monitor the activities of public enterprises. In short, this unit covers the nature and scope of public enterprises.
3.5
1. Discuss the scope of public enterprises in the service sector taking into account the financial services. 2. Discuss the terms 'autonomy' and 'accountability' with reference to public enterprises. 3. What are the main objectives, which are to be achieved through MOU with reference to the performance contracting.
3.6
Administrative Reforms Commission Report of public sector undertakings, (October 1967), p.26. Appleby Paul, Re-examination of Indias Administrative System with special reference to Administration of Governments Industrial & Commercial Enterprises, 1956, Government of India, p 4, Cabinet Secretariat, O&M Division. Seminar on Profitability, Accountability and Social Responsibility of Public Enterprises, (August, 1979).
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Table 3.1 : Growth of Central Public Enterprises Periods At the start of First Plan Second Plan Third Plan Fourth Plan Fifth Plan Sixth Plan Seventh Plan Eighth Plan Ninth Plan Tenth Plan 1950-51 1955-56 1960-61 1969-70 1974-75 1980-81 1985-86 1992-93 1997-98 2002-03 5 21 47 84 122 179 215 246 240 240 Enterprises No.
Total Investment Rs. bn
0.29 0.81 9.48 38.97 62.37 181.50 426.73 1354.45 2310.24 3246.32
Source: Public Enterprises Survey 2001-02, Department of Public Enterprises, Ministry of Heavy Industries And Public Enterprises, Govt. of India. Table 3.2: Investment and Turnover of Central Public Enterprises Enterprises No. 1. Manufacturing organisation Steel Minerals & Metals Coal & Lignite Power Petroleum Fertilizers Chemicals & Pharmaceuticals Heavy Engineering Medium & Light Engineering Transportation Equipment Consumer Goods Agro-based Industries Textiles Total 2. Service and Trading 15 149 235 57 273 460 367 181 60 417 50 30 32 1 187 1974 212 69 220 240 2598 74 64 79 78 61 12 1 8 3715 Investment (b) Rs.bn Turnover Rs. bn
Public organisations Enterprise: An Overview
81 27 69 66 447 160 23
Trading & Marketing Transportation Services Contracts & Construction Services Industrial Dev. & Consultancy Services Tourist Services Financial Services Telecommunications & IT Services Section 25 Companies
148 2 578 265 14 1169
49 3 84 304 2 1072 4787
Total
a 240
3246
* Includes 10 enterprises under construction b) 2001-02 Source : ibid Table 3.3 : Sources of Investments in Central Public Sector End 2001-02 Rs. billion Equity Central government State governments Holding companies Foreign parties Financial institutions and banks Total Source: ibid Table 3.4 : Central Public Sector Production in Selected Areas 2001-02 Item Lignite Nuclear energy Lead Coal Crude oil Natural gas Zinc Refinery crude Finished steel 16 Unit mn MT MW th MT mn MT mn MT mn MT th MT mn MT mn MT Public sector production 23.50 2620 37.8 312.53 27.89 25.66 176.3 72.13 9.95 Share of national Production 100 100 99 95 87 86 86 67 33 864.67 14.68 103.28 5.75 24.31 1012.69 Borrowings 567.38 0.26 160.05 62.69 1396.16 2186.54 Total 1432.05 14.94 263.33 68.44 1420.47 3246.32
Aluminium Nitrogenous fertilizers Phosphoric fertilizers Source: ibid
th MT mn MT mn MT
231.67 2880 479
36
27 12
Table 3.5 : Investments and Employment Generated by Central Public Enterprises by States Gross Block Rs. 1. Andaman & Nicobar Islands 2. Andhra Pradesh 3. Arunachal 4. Assam 5. Bihar 6. Chandigarh 7. Chattisgarh 8. Dadra Nagar Haveli 9. Delhi 10. Goa 11. Gujarat 12. Haryana 13. Himachal Pradesh 14. Jammu & Kashmir 15. Jharkhand 16. Karnataka 17. Kerala 18. Madhya Pradesh 19. Maharashtra 20. Manipur 21. Meghalaya 22. Mizoram 23. Nagaland 24. Orissa 25. Pondicherry 26. Punjab 27. Rajasthan 28. Sikkim 29, Tamilnadu 30. Tripura 31. Uttar Pradesh 32. Uttaranchal 33. West Bengal 34. Others (Unallocated) 1.62 381.72 17.60 211.92 88.23 1.59 110.58 0.62 250.35 3.15 344.18 96.18 123.26 97.05 214.13 180.42 135.04 219.92 812.77 2.25 8.02 1.40 13.85 271.31 0.74 73.54 131.67 9.41 339.56 13.17 338.52 80.74 267.13 63.54 Employment in thousands 2 111 1 60 24 4 112 0 88 3 63 21 10 9 281 94 49 125 243 1 5 0 6 75 3 28 40 1 110 2 107 24 285 4 17
Public Enterprise: An Source : ibid Overview
Table 3.6 : Annual Production Capacities in The Central Public Sector Product/Service Steel Copper (wire rod) Zinc (ingot) Atomic minerals (ilmenite) Iron Ore Aluminium Coal Lignite Power (thermal, hydel, nuclear) Petroleum crude Petroleum refining LPG (Propone & Ethylene) Fertilizers (nitrogen) Heavy electricals Heavy vessels Cranes Conveyors Mining equipment Material handling equipment Structurals Earth moving equipment Unit mn MT MT MT MT mn MT th MT mn MT mn MT Mn mn MT mn MT mn MT mn MT th MT MT MT MT MT MT MT nos Annual Capacity 12.8 60,000 169,000 465,000 22.2 230 225 18 23,674 30 78 1.17 28.8 1.65 24,000 7,000 7,890 5,000 4,000 13,600 1,010
18
Forms of Public Enterprises companies, the court decided that since the two corporations, namely, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, were established by Acts of Parliament, the government cannot privatise them without the clearance of the Parliament.
Government Joint Stock Company The limited liability company in corporate mode is the most common form of public sector undertakings in several countries. The setting up of such companies does not require the consent of the law making authority, that is, the legislature. By executive decision and subject to the general compliance with the provisions of the Companies Act, these government companies can be incorporated. These are simple joint stock, limited liability companies with a majority stake of the government. This form of organisation makes it convenient to operate, expand, diversify, merge, sell, transfer (ownership or management) more easily. These companies function like any other private company except that the major or the dominant shareholder, the government, exercises substantive control over its management. According to the definition given in the Indian Companies Act, 1956 (as amended from time to time), a government company is any Company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments, or partly by one or more State Governments, and includes a Company which is a subsidiary of Government Company thus defined. At the end of March 2002, there were 240 (Central) public sector companies. (For distribution see Table 3.1, Unit III). The state-owned banks in India are a separate category by themselves. These are also incorporated as limited liability companies since these are erstwhile private banks which were nationalised. The public sector banking system comprises The State Bank of India (the largest commercial bank) and its 7 subsidiaries, 14 major commercial banks nationalised in July 1969; another 6 banks nationalised with effect from April 15, 1980 and the Regional Rural Banks established later. These banks play a catalytic role in helping mobilisation of savings of the people and to utilise them for productive purposes, in accordance with the national plans and priorities. They operate as normal banks but their operations are regulated by the government and the Central bank of the country, namely, the Reserve Bank of India. Co-operative Society A few public enterprises in India have taken the cooperative form. The cooperatives get registered and operate under the Cooperative Societies Act, but function basically as a corporate entity. A large part of the total capital is held by government and the rest is dispersed among cooperative federations or individual cooperative societies. Some examples from the Indian public enterprise domain are: Indian Farmers & Fertilisers Co-operative Ltd.(IFFCO) and Krishak Bharati Cooperative Ltd. (KRIBCO), both engaged in fertilizer manufacture and owning and operating large fertiliser and chemical plants. Holding Company The holding company concept is only a two-tiered corporate form. Some of the companies falling in a cognate group are woven in a network of companies with the entire or dominant shareholding held by the parent or an investment company.
1
Public Enterprise: An The concept of holding company in the Indian context can be traced back to the Overview reform measures suggested by the Administrative Reforms Commission in the 1960s. In 1967, the Commission in its Report on Management of Public Sector recommended that the industrial and manufacturing concerns in the sector should be grouped into 12 sectoral corporations. The Commission drew its inspiration from the Italian experience of ENI (petroleum complex) and IRI (Institute for Reconstruction of Industry), which are statutory corporations in that country. The Commission recommended setting up sectoral corporations in which units constituting them did not have a separate entity of their own except for accounting purposes and decentralisation of functioning. The objective of setting up of sectoral corporation is to avoid fragmentation of industrial effort and to help in maintaining an arms length relationship between the government and the sectoral corporation. The government did not accept this recommendation but decided that under certain conditions there could be an advantage of having a sectoral corporation, depending on the merits of each case.
In 1971, the then Minister for Steel proposed a new model for the management of iron and steel industry by combining the concept of sectoral corporation and the holding company. All the public sector steel plants, as also other related public enterprises, were converted into subsidiary companies under the umbrella of one holding company known as Steel Authority of India Ltd (SAIL). It was registered under the Indian Companies Act and continues to function as such. A departure was made to combine the functions of the Secretary of the Ministry of Steel as Chairman of SAIL with a few other secretaries to government as members of its board. The whole objective of arms length relationship of government and the public enterprises got totally eroded. The degree of autonomy envisaged by providing a buffer in the nature of a sectoral corporation to allow operational distance between the public sector from the secretariat control got lost. The SAIL experiment was not pursued and in later years, SAIL was restructured as a steel conglomerate and activities not directly related to steel production (such as iron ore mining), were kept outside its purview and the subsidiaries became independent companies. The government set up in 1984 an Expert Committee under the Chairmanship of Arjun Sengupta, to recommend, inter alia an appropriate organisational structure for public enterprises. In relation to holding companies, the Committee observed: The Committee attaches considerable importance to devising a proper organisational structure for public enterprise in the belief that certain forms of organisations, rather than others, can be more conducive to the efficient functioning of public enterprises through a proper division of authority and responsibility between the government and the public enterprise management. Given this division, the system should run by established rules and not by exercise of discretion. In our approach, the government should be primarily concerned with overall strategic planning and policy rather than with day-to-day functioning of the public enterprises. The Committee clarified that the governments responsibility is to ensure that public money invested in those enterprises earns an appropriate rate of return, and the functioning of these enterprises is consistent with the plan objectives, including those related to employment, fair pricing, regional dispersal of industries and efficient use of scarce resources. Once the goals have been mutually agreed to, the enterprises should be allowed to operate without further intervention by the government in day-to-day functioning. The enterprises should, however, be held strictly accountable for their performance in relation to the goals set and there should be an appropriate mechanism for evaluation of their performance. 2
Forms of Public Enterprises The Committee discussed, at length, alternative models of organisational structure for public enterprises, under which there is to be a clear division of responsibility between the government, as represented by the concerned ministry or department, and the management of these enterprises, as represented by the board of directors or the chief executives. In short, the ministry should be responsible for the implementation of that policy and the interaction with the enterprises should be such as to facilitate the exercise of overall government supervision, without impairing the efficiency of operation of the enterprise. In their view such an organisational structure should keep the operations of an enterprise at arms length from the government and promote decentralised decision making.
The Committee was guided by the practices in many European countries where the holding company model was adopted to introduce an intermediate level of management between government and the individual public enterprises (constituted as subsidiaries) so that the governments interface is only with the parent company which coordinates the activities of its constituents. In other words, the governments interface is with the holding company, more or less on the basis suggested by the Administrative Reforms Commission in 1967, excepting that these holding companies will not have a statutory status, but will be companies under the company law. While recognising that a uniform structure for all public enterprises may not be desirable, the Committee felt that the holding companies provided a reasonable framework for organisational structure. It is useful to recognise that the subsidiaries also have a corporate status and, therefore, there is a need for decentralization of decision-making between the board of directors of the holding company and the boards of subsidiaries. The present practice is to have the Chairmen & Managing Directors of the subsidiary companies as members of the board of the holding company, as in the case of companies like Coal India Ltd. The recommendations of the Committee led to the formation of two holding companies, namely, Bharat Udyog Nigam Ltd. (BUNL) and Bharat Yantra Nigam Ltd. (BYNL). These were set up in 1986-87 under the administrative control of the Department of Heavy Industry. No independent and incisive assessment, however, has been made so far on the impact of this organisational form on operational efficiency of the enterprises. One could not, therefore, say whether this is an efficient - if not the optimal organisational form.
4.2 TRANSFORMATION OF PUBLIC TO PRIVATE SECTOR

The changeover from public to private sector has taken a number of forms, The Industrial Policy Statement of 24 July 1991 envisaged not only increasing involvement of the private sector in hitherto shut-out (or reserved) areas but also spelt out the policy in regard to disinvestment of government shareholding in public enterprises. Disinvestment as a policy could be traced to the Memorandum on Economic Policies (1991-92 and 1992-93) sent by the then Finance Ministry in August 1991 as a component of Structural Adjustment Programme to the then Managing Director of International Monetary Fund, acknowledging that the public sector had not generated adequate internal surpluses and because of the limited
3
Public Enterprise: An exposure to competition, had led to high-cost structure. In order to address these Overview issues, a new approach would be adopted in regard to the reform of the public sector. The key elements of that approach were:
a) existing portfolio of public investments would be reviewed, to avoid areas where social considerations are not predominant and where the private sector would be more efficient; b) a greater degree of managerial autonomy would be provided to enterprises where public sector involvement is appropriate; c) budgetary support to public enterprises would be progressively reduced; d) market discipline would be injected to public enterprises by encouraging competition from the private sector; and e) chronically sick public enterprises would not be allowed to continue incurring heavy losses. The new strategy was based on reform and restructuring through a number of measures: upto 20% of government equity in selected public enterprises would be disinvested through mutual funds. A copy of the above Memorandum of Economic Policies was also placed on the Table of the Parliament in December 1991 from which it was evident that public enterprises reforms and disinvestment would form part of the structural adjustment programme. The disinvestment policy has evolved over the last decade, by the Budget Speeches of the Finance Ministers and later outlined in a manual prepared by the Ministry of Disinvestment. The implementation for the policy started in 1991. The mode of disinvestment recommended by the Disinvestment Commission (set up in 1996) in its reports indicated a shift from public offerings to strategic/trade sales along with transfer of management. The modes spelt out by the Disinvestment Commission in respect of cases referred to it may be summed up as follows: Enterprises (no) A. Involving change in ownership / management 1. 2. 3. B. Strategic sale Trade sale Employee buyout/strategic sale 31 08 02
Involving no change in ownership/management Offer of shares 05
C.
No change No disinvestment 08 04 58
D.
Closure /sale of assets Total
The term of First Disinvestment Commission expired in 1999 and a new Commission was in place from July 2001. A three-tier mechanism is in place for decision making and implementation of the policy on disinvestment: 4 Cabinet Committee on Disinvestment (CCD) Core Group of Secretaries on Disinvestment (CGD)
Inter-Ministerial Group (IMG)
The disinvestment of government equity in Central public enterprises began in 1991-92 and until 1999-2000, it was carried out mainly through sale of minority shares in small lots. Including some small amounts from strategic sale, about Rs. 300 billion were realised through disinvestment processes from 1991-92 to 2002-2003 - against the total budgetary targets of over Rs 600 billion. Despite the shortfall, the budgetary targets were kept high. The present trend is to resort to strategic sale, which means sale of shares to a private group or company along with transfer of management. The objective to the best value for the shares, protecting the stipulated minimum or reserve price. The strategic sale route was adopted by selling substantial stakes and management control to private sector companies which include Modern Foods Ltd, Bharat Aluminium Co. Ltd, Indian Petrochemicals Corporation Ltd, CMC Ltd, Hindustan Teleprinters, Lagan Jute Machinery, Paradeep Phosphates. ITDC hotels in 8 different locations and 2 hotels of the Hotel Corporation of India were sold through as assets. Three other companies IBP, Cochin Refineries and Chennai Petroleum were sold to public sector companies. The disinvestment policy has come in for a great deal of criticism - apart from the opposition from political quarters and trade unions. There is no clear roadmap. The initiatives are ad hoc. There is an undue emphasis on big ticket privatisation and not on participation by the public. The sale of shares of Maruti Udyog Limited have proved that given a good preparatory work and right timing, public sale of shares could be an attractive route. The Indian case of public sector is a unique case. The public sector has penetrated fairly deeply into the economic framework. Several public sector organisations are performing well. There are others like technical and consultancy service companies for which there is no case for privatisation. Some of these companies have performed very well and there is nothing to be gained by selling coveted human capital. What is even more significant, some of these companies could give good competition to the private companies. These are economically strategic companies and have a significant role to play. There is, nevertheless, a good case for privatisation of companies which are losing and which have no future. The exchequer can prevent a big drain if these are privatised at market prices. There is no point in keeping the dead-wood. Even the private enterprise gets rid of companies or assets which are not performing and which have no future. The much-needed redirection to the policy of privatisation based on a well articulated plan is the need of the hour.
4.3
NAVARATNA DISPENSATION
It may be recalled that the professionalisation of boards of public enterprises and greater empowerment emerged as a new thrust of Indias new Industrial Policy of July 1991 enunciated as a part of the economic reforms programme. A major step taken by the government was to grant more operational freedom to public enterprise managements by classifying enterprises as Navaratna (symbolising 5 nine jewels) and Miniratnas (symbolising semi-precious jewels).
Public Enterprise: An was to give the boards of directors enhanced powers and The basic approach Overview operational freedom, such as to incur capital expenditure; purchase new assets or for replacement without any monetary ceiling; raising capital from domestic and international markets, creation and winding up of posts below the board level. The enhanced powers also include authority to establish joint ventures and wholly-owned subsidiaries in India or abroad, with appropriate monetary limits. However, it was also decided that these enterprises shall not depend upon budgetary support or government guarantees.
While granting more autonomy to public enterprises leading to accountability is a continuous process, the number of original navratna enterprises was increased from 9 to 11. It came back to 9 after two companies, Videsh Sanchar Nigam Ltd. and Indian Petrochemicals Corporation Ltd., were privatised. About 45 to 50 Central public enterprises, which have continuous record of profit during the preceding 3 years are given the Miniratna status, split up into 2 categories based on quantum of profit earned. Category I enterprises are permitted to incur capital expenditure on new projects, modernisation and purchase of equipments without government approval upto Rs. 3 billion or equal to their net worth (reserves capital and retained profits), whichever is lower. Category II enterprises are permitted to incur similar expenditure without government approval upto Rs. 1.5 billion or upto 50% of their networth, whichever is lower. These enterprises have also been permitted to establish joint ventures, subsidiaries and overseas offices subject to specified monetary limits on equity investment. The enterprises in both categories can enter into strategic alliances and obtain technology and know-how by purchase or other arrangements subject to government guidelines. The continuance of the status of navratna or miniratna is subject to review by the government from time to time.
4.4
MANAGEMENT STRUCTURE
The structure of the working of the public enterprise, or for that matter, any enterprise, determines how it is organised and managed. The organisation and management of public enterprises, as distinct from control exercised by the government as owners, present a varying pattern. In this context and considering the forms of organisations, seven distinct types of organisations exist in the public sector: a) A set of companies in one type of activity bound together by a holding company (eg, Coal India Ltd. with eight subsidiaries and the General Insurance Corporation with its four subsidiaries); b) Integrated multi-product, multi-unit enterprises (eg, Steel Authority of India Ltd., with its units Bokaro, Durgapur, Rourkela, Bhilai and others); c) Single product enterprises (eg, National Aluminium Corporation); d) Multi-product single enterprises like Hindustan Machine Tool Ltd., producing machines tools, watches, tractors; e) Service organisations providing a specific service or other related services (eg, National Thermal Power Corporation or Engineers India Ltd.); f) Independent governmental organisations (eg, State Electricity Boards and Port Trusts); g) 6 Cooperatives (such as Indian Farmers Fertiliser Cooperative).
Forms of Public Enterprises A common feature in all the enterprises, whether in the manufacturing or the service sector, is the existence of a board of directors, appointed by the government as the owners of the enterprise or as prescribed by law as in the case of statutory corporations.
In India, Central public enterprises are classified into 4 categories with regard to pay and perks of top management Schedules A, B, C and D. The Categorisation is based on a number of elements: investment, net fixed assets, working capital, turnover, profit, employee strength, level of technology adopted and competition from other sectors. The image of the enterprise (such as share price), MOU ratings, ISO certification, productivity in terms of efficiency in utilisation of capital assets, value addition per employee are also the factors reckoned with. The responsibility for overall management of public enterprise rests with the board of directors appointed by the government. The strength of the board varies from 5 to 15. Some large multi-unit enterprises like BHEL has, as a second tier, a Management Committee to assist the board. A usual pattern in Indian Central public enterprises is the combination of the two posts of Chairman and Managing Director into a single functionary (Chairmancum-Managing Director), assisted by functional directors such as of Finance, Personnel or Human Relations Management, Marketing, Technical, Operations. The existence of number of functional directors depends on the scale and sweep of the organisation. The combination of the two positions has its own pros and cons and has been a debatable issue. In some cases, the two positions are, in fact, separated from each other. The Chairman and Managing Director is supported by Executive Directors and General Managers down the line. Some have cross-functional roles. In the Indian Central public enterprise, no Minister or Member of Parliament is appointed on the board of directors. However, secretaries and joint secretaries to the government are nominated as members of the boards, for limited periods as the chairman. The Memorandum of Association and Articles of Association of the enterprises in the corporate form spell out objects, capital structure, composition of the board and the tenure of the directors. An over-riding power vests with the government, such as in matters of appointment on the board including Chairman & Managing Director, functional directors. Their terms and conditions, remuneration and tenure is determined by government usually adopting a uniform pattern depending on the classification of enterprises (under A,B,C and D schedules) and also have the powers to fill in vacancies caused by removal, resignation, death or otherwise of the members of the board. An important, although controversial power, which vests with the government is the issue of directives or instructions as considered necessary in regard to the conduct of the business and affairs of the public enterprise or its directors and to annul and vary any such directive. These directives have to be complied with. As indicated earlier, the new Economic Policy laid emphasis on the professionalisation of the boards of public enterprises. The guidelines issued in this regard provide that
! ! !
every board shall have full-time functional directors, the maximum strength restricted to 50% but relaxable; the number of government directors on a board should not exceed 2; and the share of non-official part-time directors should be at least one-third of the 7 total strength.
4.5
ENTERPRISE MODELS
In the foregoing context and the ownership and management perspectives, the public sectors positioning may be identified from a matrix as presented in Exhibit 1 (Mohnot, 2003). Models A and B are principally public sector enterprises in which all or majority of ownership is held by the state. The states ownership could be supported by public financial institutions which also function under the broad umbrella of the state. A minority of ownership could remain in the hands of employees or private investors individuals or corporates. There could also be participation, in voting equity, of special institutions, foreign investors or strategic alliance partners. In the case of Model A, the management control remains wholly with the state while there could be an alliance for specific functions or activities with an outside partner. This is the conventional public sector model. Under Model B, while the control remains with the state, the management total or partial is leased out for a specific period to private management. It is a variant of partial privatisation. Another variation of Model B could be Model C where the state relinquishes its majority stake and hands over the management to a private group while retaining a substantial (not majority) share of ownership. Indian privatisation moves have followed this pattern. Under Model D, the state or any other party does not hold a majority. It, therefore, ceases (like Model C) to be an organisation subject to the purview of Article 12 of the Constitution of India. However, the management control is retained by the government. The proposal to reduce the government stake to 33% but to retain the government control in Indian banks illustrates this case. While this will not be a model subject to Article 12, the parliamentary surveillance will continue since the control is retained by the government. Model E represents what in India has been termed as a joint sector. There are a large number of undertakings at the state level which took this form. The state (or state controlled organisations) and private partner together own 51% of the controlling interest. At the Central level in India, Mangalore Refinery, until its takeover in 2002, illustrates this model. Theoretically, the management was joint but, in practice, it was controlled by the private partner. The chairman of the board and a minority of directors are nominated by the state while the managing director (or CEO) is nominated by the private partner or the Board. Model F (a variation of E) is a case of real-time equal partnership between the state and a private party. Maruti Udyog in India until privatised represented this case. The voting stake is shared equally while a small percentage could remain with odd shareholders, such as the financial institutions or the employees. Nominees of the state and of the private partner share alternately the positions of the chairman and the managing director. Model G represents a wholly private enterprise model where a major not necessarily a majority owner (along with his friends and associates and invariably other controlled enterprises euphemistically styled as promoters) control the strings of management. In developing countries, like India, the state may provide equity participation as a matter of financial assistance. A variant of this model is a corporate in which the principal and his associates and nominee companies (also nominated investment companies) hold a majority of the stake. In these cases, the one-man not only one group control is complete. While this last model is a variant of Model G, the deviation basically is 8 peripheral.
Forms of Public Enterprises Exhibit 1 : Taxonomy of Enterprise Models
Ownership Majority State (with or without PFIs Minority Private (Employees Foreign)
Enterprise Models
Management State with or without Functional Alliance
A
Public Sector
B
Public Sector (Diluted)
State with Strategic Alliance Partial or Total
Majority Private Substantial State Basically equal State and private Groups
C
Partially Privatised Sector
Management Leasing or Transfer to Private
D
Public Sector (Managed)
State
E
Dominant Private with public participation
Joint Sector
Primarily Private marginal sharing with State
F
Partnering
Joint
G
Private Sector
Private
No dominant Structure
H
Professional sector
Professional
Term state is used to distinguish government from public at large. Term private is used to denote individuals, business firms, business houses or corporates.
Model H in the matrix is the professional model. In this enterprise model, there is no dominant stakeholder and the management is truly shared among the professionals. Close to the model envisaged, there do exist some robust, well managed and performing companies in the Indian economy - such as Larsen & Toubro or Housing Development Finance Corporation, or until recently BSES, a power company. These have performed well over long time spans. These could provide the right direction which robust economically strategic public sector could take. A review of their significant elements would provide the basis for evolving a truly professional enterprise model.
9
PublicProfessional Enterprise: An Model The Overview
Given the growing demands of corporate governance in all enterprises including those in the private sector and of global competitiveness, the public sector has to - in fact - is moving towards a professional sector. What then is a professional enterprise model (styled acronymically as PrEM) which imbibes the distinctive and essential elements of a professional organisation?. Optimally, a professionally strategic enterprise model is an organisation which is professionally promoted, professionally structured, professionally manned and professionally managed. Translated into an operational mode, it takes on a form which possesses a configuration having four distinctive dimensions of its own:
! ! ! !
Ownership and control, Corporate governance, Management system, Mobilisation and allocation of resources.
Ownership and Control The critical premise of a PrEM undertaking is that the government should, in principle and eventually, cease to be a stake-owner in all commercially-oriented enterprises. It is obvious in a country like India that the government holdings cannot be sold in a short span of time. A way out is that the government holdings are transferred to a specially constituted public investment fund (PIF) or trust (PIT) by whatever name called. The government as such will not hold any shares except in the transitional period. Further, the government associated agencies, apart from PIF, will collectively not hold more than 26% equity in a PrEM undertaking. Anywhere up to 50% of the equity capital preferably much less in any one PrEM undertaking may be held aggregatively by independent financial institutions, mutual funds. FIIs (foreign financial institutions) may participate to the extent permissible under public regulations but not exceeding 26%. Participation of small and medium-sized investors could be encouraged, which could assume very large proportions. The balance of the equity will be distributed among the employees and other private non-substantial shareholders, individuals or others. Strategic alliances may be forged as and when necessary to make the enterprises globally competitive. Strategic partners could be domestic (including other PrEM undertakings) and foreign organisations. This could provide for equity stake of strategic partners. Corporate Governance The PrEM model, in order to conform to the professional structure and dynamics, will call for a board-managed corporate entity. This means, in essence, that all business decisions shall be taken by the board, subject, where necessary, to the approval by the shareholders in a general meeting (annual or extraordinary, as the case may be). The governmental clearances and approvals will be applicable only as per the laws and regulations in force and not because the PrEM undertaking possesses state or state-related stakes. This is an imperative for ensuring freedom for the commercially-oriented enterprises in their decisionmaking processes. For the period of transition, the Chairman and Directors, including non-wholetime Directors, could be chosen from a panel to be maintained by a Public
10
Forms The of Public Enterprises Professional Accreditation Agency by whatever name called. shareholders, however, shall be entitled to nominate individuals for election as Directors from outside the panel, but such elected members will be subject to clearance by the Agency within a period of six months from their election.
All guidelines of corporate governance as developed and enforced will be scrupulously followed. In accordance with the guidelines related to corporate governance, the board will constitute, among others, what are termed as audit and remuneration committees. The appellation of the audit committee should be changed to management audit committee. The Management Audit Committee should go beyond the functions of a normal accounts and audit committee and should be proactive in evaluating important management decisions of the board. Management Systems The board will carve out the corporate mission with the full involvement of the entire workforce and set a vision for the undertaking. The long term vision of the PrEM undertaking could get reflected through a long-term Corporate Plan. It will review periodically whether it is moving in that direction and whether any change is needed. The entire organisation shall accept it as a matter of faith that it has a mission mission to serve all stakeholders, namely, investors, working people, customers, lenders, suppliers and last, but not the least, the society at large. Since the transformed PrEM undertaking is to be a board-managed institution, no outside directives will be issued to the board to take or refrain from taking certain decisions. Nonetheless, certain policy guidelines in the form of Code of Conduct could be issued as a part of a broad governmental policy or consensus developed by PIF. All corporates will develop their own management systems. The undertakings will follow best management practices. The managements will develop a quality management policy based on TQM (Total Quality Management) or any other equivalent model in all operations. The contemporary private sector has developed enhancement of shareholder value as an index of performance. It will be the endeavour of the PrEM undertaking not to be too much obsessed by the index of shareholder value and certainly not by market capitalisation. The latter is a highly volatile indicator and is impacted by a whole pack of factors, some completely extraneous to the functioning of the undertaking. Strategic planning will be the key to performance, which will include corporate architectural restructuring, policy redirection and financial reform. The undertaking will not hesitate to lose its identity by merger, amalgamation, even closure, when the situation calls for it. The exigencies of global competition demand that it does not have to exist in the same form in perpetuity. The undertaking will be free to forge or withdraw from strategic alliances partial or total and to acquire other organisations with a synergy which conforms to its vision. For such action it seems appropriate to seek shareholders approval but not government clearance, unless the latter is a part of common law and regulations and is applicable to other similar organisations in whatever sector. The PrEM undertaking will establish from its very inception a safety net for its workforce (covering upto the lowest) so that it is not constrained by flab. It ensures that any employee committed to it for whatever period is not
11
Public Enterprise: An the worst of circumstances even when he has to make the handicapped under Overview exit.
Communication will be taken as an instrument of management sharing and monitoring. Transparency will be a guiding principle. The legitimate right to information will be guaranteed to all involved. Mobilisation and Allocation of Resources Resource planning will be done in conformity with medium term corporate plans and annual budgets. The PrEM undertaking will take it as a basic premise that no budgetary support will be available from government unless the government decides as an independent decision with or without the concurrence of the Planning Commission or any other statutory or constitutional body that the state desires the investment (in the form of equity or lending) to be made in a specific project. The Board will determine the size, form, sourcing and timing of external resources mobilisation, where necessary in consultation with PIF. In the dynamic world of global economy, nobody is or can be self-sufficient. Networking is an essential ingredient with each unit contributing its best. Even outsourcing is often both necessary and unavoidable, if the costs have to be minimised. An independent organisation must be free to forge strategic alliances if it has to remain globally competitive. In the last few years, such alliances have been multiplying in all private, public and professional sectors. These need to be encouraged to the maximum. These alliances help to upgrade technology, human resource, marketing and management systems and to slash costs. These help to widen market horizons as well. The role of a forward-looking corporate citizen goes far beyond rewarding merely the shareholder. All stakeholders must be serviced. No corporate which overlooks the societal values can be considered to be performing well whatsoever high its financial and economic indicators be.
4.6
SUMMARY
Once the public sector enterprise is geared to the design outlined here, it would function on its own. It will not involve the state. While, on the one hand, it will ensure adequate returns of and on the investments already made by the government, it will, on the other, and absolve the government from making financial commitments and insulate it against the oscillations of financial returns. The model will conform to new dictates and demands of corporate governance and make the professionally-geared public enterprises really global in their vision and globally competitive in their techno-economic strengths. This model should be satisfying even to private enterprise since it tends to transform the public sector enterprises into a model which is akin to a reformed repeat reformed private sector corporate model. While it will free private enterprise from transferring huge capital resources to the government from its resources for acquiring public enterprises, good and performing private sector, under corporate governance, will move towards that model. Activity List ten public enterprises which have been disinvested in the past five years. .............................................................................................................................
12
4.7
1. 2.

Write short note on the professional model.
What do you understand by Navratna Dispensation? Discuss in brief.
4.8
REFERENCES
Fernandes P.J. (1975), Coordination of Public Enterprises Country Study for India, Paper prepared for the Asian Centre for Development Administration, Kuala Lumpur, Malaysia, for discussion in an Expert Group Meeting. Report of UN Seminar on Management of Public Enterprises in the ECAFE Region, New Delhi, paper No. 81, p.7. Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of Indian Administrative System with Special Reference to Administration of Governments Industrial & Commercial Enterprises, Government of India, Cabinet Secretariat, O&M Division. Robson, W.A, (1960), Nationalised Industry and Public Ownership, p.28, Allen & Unwin London. Report of the Study Team on Public Sector Undertakings of the Administrative Reforms Commission, Government of India, 1967. Mohnot, S.R, (2003), Reinventing the Public Sector, Centre for Industrial and Economic Research, Rajiv Gandhi Foundation for Contemporary Studies, New Delhi.
4.9
FURTHER READINGS
Report of UN Seminar on Management of Public Enterprises in the ECAFE Region, New Delhi, paper No. 81, p.7. Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of Indian Administrative System with Special Reference to Administration of Governments Industrial & Commercial Enterprises, Government of India, Cabinet Secretariat, O&M Division. Robson, W.A, (1960), Nationalised Industry and Public Ownership, p.28, Allen & Unwin London. Mohnot, S.R, (2003), Reinventing the Public Sector, Centre for Industrial and Economic Research, Rajiv Gandhi Foundation for Contemporary Studies, New Delhi.
13
UNIT 5 CONCEPT AND POLICY OF ACCOUNTABILITY AND AUTONOMY

Corporate Governance and Corporate Social Responsibility
! ! ! !
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8
Explain the concept of accountability of PEs; Understand the methods of securing accountability; Understand the elements of autonomy; Discuss the objectives of accountability.
Structure Introduction Concept of Accountability Methods of Securing Accountability Elements of Autonomy Objectives of Accountability Summary Self Assessment Questions References and Further Readings
5.1
INTRODUCTION
Accountability means to account for ones actions and to report on the achievements (and failures, together with necessary explanations) of the prescribed objectives. In case of Public Enterprises, the problem of accountability is high. The reason being that Public Enterprises are regulated by a supreme authority, the Government. In the private Sector the market forces keep a check but this is not the case with the public sector. Since liberalization, the public sector has grown in terms of investments made. The industrial policy statement of 1948 and 1956 clearly states the role of PEs in the development of the nation. Taking this into account, the government has since encouraged the PEs but then also the problem of accountability has been a debatable issue. In this unit we are going to discuss the major issues pertaining to accountability.
5.2
CONCEPT OF ACCOUNTABILITY
The concept of accountability has a wide social significance in the present context. Accountability in short means the governments obligation to reveal, explain and justify its policies and action to the legislature, which represents the profit (Bhatia and Batra, 1996). In accountability, the legislature should be able to perceive and scrutinize the activities of the PEs so that the programmes of PEs are implemented efficiently so as to fulfill the needs and aspirations of the masses. Three main issues in any discussion of accountability are: Accountability for what, to whom, and how, that is, methods of procedures of securing accountability.
1
Public Enterprise: Accountability and Governance
Accountability for What? This apparently simple question is difficult and complex in view of the multiple and sometimes conflicting objectives of PEs. PE managers often find themselves torn between conflicting claims of Commercial Profitability and Social Profitability. The former is easier to judge in terms of percentage return on the capital invested or by some other accepted method of measurement. But it is not so with social profitability. Thus, clear, consistent, and well-defined goals are often not available for holding PEs accountable. A PE should be judged with reference to its total contribution, only a part of which is financial. Public policy often demands emphasis on various broader aspects, which are very likely to conflict with commercial returns. Considerations like employments of backward communities, development of backward areas, import substitution and model employer often make an undefinable dent into the profit criterion. If the accountability is made more definite with reference to cost control, quality standards, capacity utlisation, and securing other physical standards of performance, it would be easier to measure it. However, the criteria of measurement of performance continue to remain vague and varying, making PE accountability difficult and confused. Further, the various interests would like PEs to be accountable on many different counts as viewed by them and PEs may emphasise different aspects of their performance. Accountability to Whom? The public at large is too diverse and heterogeneous a group of holding PEs accountable to itself. The accountability has perforce to be to the elected representative of the public in the legislature. But the public in general does express its concern over various matters by invoking the help of the press, through public meetings, demonstration, seminars and conferences by interested parties, pressure groups, and in other ways. However, the accountability supposed to be secured in these ways is mostly informal or based on traditions and conventions. On the other hand, the responsibility to the legislature is well defined and formal.
5.3
METHODS OF SECURING ACCOUNTABILITY
Formal channels of accountability are specified in parliamentary procedures and in documents of incorporation of PEs. These generally cover, among others, audit by a public body and preparation of the annual report, both of which are submitted to the legislature. Accountability is also secured when PEs on their own answer public criticism in the press, and keep the public informed through speeches, publications, and other publicity material. Accountability to the Government is also a part of public accountability because the Government is responsible to the legislature for performance of PEs. The Problem of Balancing Accountability and Autonomy In the use of their productive resources, PEs are expected to operate with the efficiency of private enterprise, but with the higher accountability for results. The legislature and the audit at times want to concern themselves not only with the overall performance but also with individual decisions. This runs counter to the type of accountability obtained in private enterprise. One side of the problem is that individual business decisions should not be scrutinized and the corporate personality should be respected. The other side is that PE involves public money, which is a sacred trust with those who handle it.
They should be above all suspicions and ready to face any reasonable scrutiny. The public also feels a sense of ownership over PEs and insists on seeking the most efficacious use of its money. Even for private enterprises, greater oneness, and a higher degree to public control and scrutiny by external agencies are being insisted upon and accepted all over the world, including India. As the public seeks to secure an unusually high level of accountability from PEs, the problem is of balancing it with the need for autnomy necessary to operate a business enterprise. Various measures have been suggested to effect a proper balance between autonomy and accountability, but nothing near a final or satisfactory solution has been obtained. One serious difficulty in striking the proper balance is that as the ministers are responsible to Parliament for the performance of their PEs, the concerned ministers often get too much and too easily involved in the working of their PEs, resulting in serious dilution of autonomy. The L.K. Jha commission has rightly observed that it is sometimes assumed that there is a conflict between autonomy and accountability. That is not so. Indeed, the two go together and what conflicts with both is control. The more detailed and extensive a system of control over actions and decisions of management, the less accountable the management becomes. If all the major decisions and even the minor ones are taken by a PE with the approval or advice or guidance or concurrence of the government, the management cannot be held accountable for the results but only for having complied with the wishes of the government.
5.4
ELEMENTS OF AUTONOMY
Researches all over believe that PEs should have adequate autonomy and should be free from the influence of government and parliament. Citing the second five years plan, the general policy, therefore is to confer upon their managements, the large measure of financial and administrative autonomy consistent with the overall responsibility of government and accountability to parliament. Elements of Autonomy for Public Enterprises (Shrivastava, 1992): i) Freedom from annual appropriation process, atleast for operating expenses;
ii) Freedom to receive and retain operating revenues; iii) Freedom to apply operating revenue to operating expenses; iv) Freedom from general government restrictions particularly in the field of expenditure; v) Freedom from normal government appropriated accounting; vi) Freedom from normal government audit of operation; and vii) Other related freedoms like freedom to borrow money, to hire and fire, the pay salaries at the discreation of the enterprise and to control its long-term planning; India has two kinds of autonomous PEs viz a viz: a) statutory or public corporation b) Government companies In practice, both the forms are similar as Government of India has not laid down a well defined set of criteria to differentiate between the two. Autonomy is important but the judgment of its importance is based on the contribution it makes to good and efficient management. In PEs the concept of autonomy is different from those of its private counterparts. Here, the funds come from the pool
of national financial resources, hence the public is the owner of such enterprises. To assess autonomy, it is important to differentiate between accountability to legislature and involvement of the government in the operational decisions in the enterprise. In PEs, autonomy is effective if the management is highly effective and if not, it is a disaster. Therefore, it becomes important that more emphasis should be laid on developing management talent than looking for statutory autonomy in PEs. There are certain factors, which hamper the autonmy of PEs. They are as follows: i) ii) Continuous dependence of PEs on government for finances; National Policy;
iii) Dominance of government on the board of directors; iv) Craze for evolving uniform procedures. If these factors are minimized, autonomy can be more effective.
5.5 OBJECTIVES OF ACCOUNTABILITY

Accountability is very important for any government irrespective of its form or mode of articulation. Accountability can be formed as the basis for measurement of the top management and it should be demonstrable otherwise it will be of no use. The extent of ministerial responsibility for a public enterprise differs from its form and the degree of control also varies from organisation to organisation. The main objectives of accountability can be stated as follows: i) ii) Promoting efficiency; Achieving specific ends;
iii) Ensuring financial accountability; iv) Establishment of co-ordination among various programmes; v) Fulfillment of generative ends and national importance; vi) Minimizing concentration of powers; vii) Ensuring ministerial accountability to parliament. Activity What are the main issues in securing Accountability to PEs?
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5.6
SUMMARY
The public sector, post liberalization has occupied a dominant position in Indian economy and PEs like ONGC are performing at the global level as well. When we discuss the concept of accountability, it directly relates to the concept of responsibility, defining the relationship between various authorities. It is necessary to ensure accountability so that the policies formulated by government are implemented consistently in order to conduct the operations with maximum efficiency.
5.7 SELF ASSESSMENT QUESTIONS

1. What is the basic problem of striking the right balance between autonomy and accountability? Discuss the objectives of accountability.
2.
5.8
Bhatia, B.S. & Batra, G.S. (1996). Accountability of Public Enterprises. Deep and Deep publication, New Delhi. Narain, Laxmi & Murly, B.S. (1984). Public Enterprise and Fundamental Rights. N.M.Tripathi (P) Ltd., Mumbai. Narain, Laxmi. (1995). Principles and Practice of Public Enterprise Management. S. Chand, New Delhi. Shrivastava, M.P.(1992). Parliamentary Accountability and Supervision over PEs. Deep and Deep Publications, New Delhi Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises. Rawat Publications, Jaipur.
UNIT 6 GOVERNMENT - PUBLIC and Corporate Social Responsibility ENTERPRISES : INTERFACE

Objectives After reading this unit you should be able to : ! Explain the nature of Central Governments Interface with its enterprises; ! Pin point the factors which affect Government PE relationship; ! Understand the various ways in which the government exercises control over its enterprises ; ! Recognize the principles which ideally should guide Government PE relationship; ! Have an understanding of the Government machinery which interacts with PEs. Structure 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 Introduction Factors Affecting Government Public Enterprise Interface Nature of Interface Ways in which Government Control is Exercised Need to review Government Public Enterprise Interface Principles of Government Public Enterprise Interface Reasons for Excessive Government Control Government Machinery which Interacts with Public Enterprises Summary Self Assessment Questions References and Further Readings
Corporate Governance
6.1
INTRODUCTION
The government as owner has a close and continuous relationship with its enterprises. It also oversees the working of PEs and controls their operations because they are instruments of its economic and social policies. The problem is to strike the right balance between government control and the autonomy required for managing PEs. For example, if the government interferes in the day-to-day decision making, PEs, cannot show results as commercial entities. Yet, the government cannot provide full freedom to its enterprises, as it is responsible for their performance to Parliament.
6.2 FACTORS AFFECTING GOVERNEMENT PUBLIC ENTERPRISE INTERFACE

The Government PE relationship is affected by many factors taken together, of which the personality of the chief executive of the enterprise and his equation with the concerned minister, and the secretary of his ministry is perhaps the most crucial. It has been noted again and again that within the same environment some PEs have been able to secure greater autonomy to operate commercially, mainly based on the personality of their chief executives. The second factor affecting the relationship is the profits earned by an enterprise. The Government somehow gets more concerned with the loss-making enterprise,
Public thoughEnterprise: the profit or loss may not always be due to the efficiency or inefficiency of Accountability the enterprise.and An enterprise can make profits due to its monopoly position or may Governance incur losses because the government may not allow it to increase the price for its products or charges for its services.
6.3
i)
NATURE OF INTERFACE
Formal : The Parameters of formal relationship and the way it would operate are laid down in the Articles of Association of a Government Company, and in the Acts of Parliament for the statutory corporations. Informal : This is exercised through personal communications, through Government directors on the Board, and through written communications suggesting a course of action for the consideration of the enterprise. Obviously, in case of informal influence, the responsibility for the decision and for its consequence is of the enterprise and not of the Government.
ii)
An important aspect of informal relationship, that the Government exercises much authority over its enterprises without accepting responsibility of its consequences. For example, the government may suggest to the enterprise to award a contract to a party, to purchase from a particular source, locate a new unit at a particular location, or not to increase the price of its products. Now, if the enterprise follows the advice and suffers a loss, the Government official or the minister could deny his role, or say that he never ordered the course but had only suggested it for the consideration of the enterprise. But the wishes of the senior officials of the Government or of the concerned minister are in practice or less than orders. It is so because PEs often depend heavily on the government for all their funds and also for numerous day-to-day approvals, clearances and other help. Let us discuss three dimensions of Government - PE Interface, which are as follows : The Government as Owner : The government interacts with a PE in three capacities. First, as owner for most PEs, the government supplies the whole or majority of the capital, and is therefore interested in getting an adequate return on its investment and also for the safety of its funds. Government as Government : Secondly as regulator of the economy, the Government would like PEs to follow various policies, rules and regulations as in case of private enterprises, for example, policy regarding foreign collaboration, location of unit, price control, import substitution, etc. similarly, laws of the land including labour laws are applicable to both the sectors. Government as Lender of Funds : Thirdly, as lender of funds, the Government as a banker evaluates capital investment proposals and working capital needs of PEs, and oversees effective utilization of funds. In the case of private sector, these three functions are often distributed : the ownership is widely distributed among the public at large, the regulation is with the Government and its agencies, and the financiers role is played by the public financial institutions, banks and the capital market. In PEs, the three roles converge into one body, namely, the Government. And this makes a qualitative difference : the PEs get unduly and excessively regulated, controlled and overseen by the government. The Government also imposes various obligations on PEs which may be incompatible with their efficient management as 2 industrial and commercial entities.
6.4 WAYS IN WHICH GOVERNMENT CONTROL IS and Corporate Social Responsibility EXERCISED
The government exercises control over its enterprises in various ways. Some of the important methods of Government control are discussed below : Power to Appoint the Board of Directors : The Government as the sole or majority owner of PEs appoints their Board of Directors. However, the exercise of this power has often not been in the best interest of PEs. The main problems have been : i) ii) Delays in filing Board level vacancies; Presence of too many officials on the Board who tend to bureaucratize decision-making;
Corporate Governance
iii) Inadequate part-time professional experts on the Board. Prior Approval for Important Matters : The Government as owner has reserved many matters to itself, on which decisions can be taken only after its approval. These matters have been listed in the Articles of Association of Government companies, and in the Acts or the rules made under them in respect of statutory corporations. Some of the important matters for which prior approval of the government is generally required are given below : i) Capital expenditure beyond the limits laid down from time to time. For example, most of the PE, can take an investment decision upto Rs. 20 crores at a time but have to get the governments approval beyond it. Formation of a subsidiary company by the enterprise.
ii)
iii) Making of rules governing the conditions of service of the employees provident funds and to create reserves and special funds. iv) Giving employees a commission on the profits of the business of the enterprise. v) The plans of the development and capital budget of the enterprise and also the revenue , budget, if there is an element of deficit in it, which is proposed to be met by the government It may be noted that PEs generally prepare two types of budgets, i) capital ii) revenue. All budgets involving capital expenditure must be approved by the Government, but budgets for revenue expenditure like purchase, wages, salaries, overheads, etc., need Government approval only if they show a deficit, which the enterprise would like to be met by the Government. vi) Agreements involving foreign collaboration.
vii) Borrowings, investment and distribution of profits. In practice, the Government approval is required for many more matters than stated in the Articles or the Acts of Parliament. The Department of Public enterprises has issued many circulars containing Government decisions. These refer to matters for which the enterprises have to secure approval of the Government. Two examples where prior approval of the Government is required are i) Wage settlement with the employees beyond the guidelines issued by the Department of Public Enterprises, and ii) Visit of the chief executive of a PE abroad. Governments Power to Issue Directives: The Government has a right to issue directive to PEs in regard to their affairs, and the enterprises are bound to comply with them. The directives could be general or specific. Two important examples of general directives are : i) reservation of posts for Scheduled Castes and Tribes and 3 ii) for ex-servicemen and dependents of those killed in action.
Public Enterprise: Examples of specific directives are i) The NTPC was once asked not to enforce Accountability and bonds against seven executive trainees who had abandoned the service agreement Governance service of the corporation to join another Government department, ii) the Indian Oil Corporation was asked to conduct departmental enquires against Officers of the Barauni refinery and, iii) the LIC was asked to set up a divisional office at Silchar.
In most cases, the provision in regard to the issue of directives as contained in the Articles of Association of Government companies is as follows : The President may, from time to time, issue such directives of instructions as may be considered necessary in regard to the finances, conduct of business and affairs of the company or the direction thereof. The directors shall give immediate effect to the directives so issued. There are many important variations in the language used. For example, in the case of SAIL and the NTPC, there is a rider which states : Provided that all directives issues by the President shall be in writing addressed to the Chairman. The Board shall, except where the President considers the national security or interest requires otherwise, incorporate the contents of the directive issued by the President in the annual report of the company and also indicate its impact on the financial position of the company. The last part of the directive is important. If the directives were published in the annual report along with financial implications to the enterprise, it would do a lot of good to the PE system. But the government sometimes managers the situation by not issuing written directives, and uses office orders, circulars, expression of opinion and through official directors on the Board of the enterprise. Circulars and Office Orders Issued by the Government: Government PE relationship is also regulated through circulars issued by the Department of Public Enterprises and by some ministries and departments from time to time. These circulars have no legal sanction. But as they are a formal expression of the wish of the owner, they are given due weight by PEs. Moreover, Government directors on the Board often insists on compliance with these circulars. Hundreds of circulars, demi-official letters, office orders etc., which deal with almost all the important (and not so important) aspects of PE working have been compiled in the form of a book by the Bureau of Public Enterprises and published by the Standing Conference of Public Enterprise (a formal body of chief executives of Central PEs), New Delhi, under the title Government Policy for the Management of Public Enterprise, A few examples of the matters covered in these circulars are : i) Avoidance of retrenchment of labour when computers are introduced ; ii) Policy regarding wage revision; iii) PEs not to present costly gifts to their Board members at the Annual general Meeting of the Company ; iv) Details of voluntary retirement schemes adopted by PEs; v) Delegation of powers regarding capital expenditure which can be incurred by the Board of an enterprise; vi) Instruction to PEs to effect economy in the provision of residential telephones on the same lines as in the Government; vii) Details of consideration to be kept in view, while fixing remuneration payable to consultants; viii) Advice to PEs to adopt a comprehensive budgetary control system. As the circulars are not legally binding, many PEs do not follow them, depending upon their circumstance and courage. The Government also rightly leaves the matter to the good sense and judgement of PEs, except where important issues like pay and benefits to the employees are involved, which may have wide repercussions. 4
Corporate Report and Returns Obtained from PEs: The Government has statutoryGovernance right to and Corporate call for such returns and other information in respect of an enterprise. Detailed Social Responsibility formats have been prescribed for this purpose.
The following is a summary of main reports which PEs submit to the Government regarding their operations.
Subject 1) Summary Information 2-A-1) Physical Production Periodicity Quarterly Monthly Broad Coverage Production, sales capacity utilization and imports and exports Production of major products and variations between targeted and actual production Reasons for loss of production and actoins for rectifying the position Machine hours targeted and utilized by shop principal machines. Loss of machine hours, causes thereof and action taken With reference to major products planned and achieved Summary of various figures before arriving at the Profit/Loss, as compared to budget and the previous year/quarter. Growth potential and efforts to secure orders Norms and actual stock of finished goods, raw materials, spares and stores (separate figures for imported and indigenous) Growth potential and efforts to secure orders Employees in various categories showing increase over the previous period Generation and utilization as compared to the budget Details of expenditure on these items, compared with the budget and previous year Eight ratios regarding production (e.g. value added per man month, and cost of sales to sales), inventories (4 ratios). Personnel 3 ratios (average sales per employee average emolument per employee, and mandays lost mandays scheduled), finance (6 ratios), and R & D expenditure to net sales (22 ratios in all). 5
2-A2) Physical Production 2-B1) Machine utilization
Monthly Monthly Monthly Monthly Quarterly
2- B2) Machine hours 3) Sales 4) Profit and Loss Position
5) Order book position 6) Inventories
Half yearly Half yearly
7) Exports 8) Employment
Half yearly Half yearly
9) Internal resources 10) Township and social overheads 11) Management ratios
Yearly Yearly
Yearly
Public Enterprise: Accountability and Governance The government does
not make the best of the report received by it because it lacks sufficient manpower/and expertise to analyze the data received and to take the necessary follow-up action. It is sometimes asked whether it should at all be necessary of the Government to receive numerous reports except for statistical purposes.
6.5
NEED TO REVIEW GOVERNMENT PUBLIC ENTERPRISE INTERFACE
The Economic and Administration Reforms Commission (Chairman L. K. Jha) was rightly of the view that there should be a radical re-examination of the nature of the Governments relationship with PEs. The concept of administrative control should be thoroughly reconsidered. PEs should be distanced from the Ministries and the latter confined to periodical reviews of overall objectives. The constant stream of instructions, questions, requests for information, summons to meetings, telephone calls etc., should be drastically curtailed. The detailed supervision of operational matters should be stopped. Determined efforts should be made to get away from the tendency on the part of administrative Ministries to treat public enterprises as subordinate offices. The above view sum up the situation in regard to Government PE interface. Most PEs though meant to operate as autonomous commercial entitles, are not so in actual practice. One of the ways to meet the situation is the institution of Memorandum of Understanding (MOU). However, it is yet to be seen how far the MOU would be able to streamline the Government-PE interface and improve PE performance.
6.6 PRINCIPLES OF GOVERNMENT PUBLIC ENTERPRISE INTERFACE

The ideal way in which the Government should interact with its enterprise is difficult achieve. But it should be attempted with all sincerity and seriousness. This ideal way is summed up in the following ten principles. These were stated by the Select Committee on Nationlized Industries (U. K.) nearly four decades back: 1) The Government should be concerned with securing that PEs operate in the public interest. And for this purpose, it should decide the broad policies to be pursued including their financial and economic obligations. 2) The Government should seek to ensure the efficiency of PEs by exercising a broad oversight over them, but should not become involved in their management. 3) The PEs should be left as free as possible to carry out the policies required of them as efficiently as possible. 4) There should be clear demarcation of responsibilities, both between Government departments and PEs. An important part of this principle is that if the enterprises are not able to deliver the goods, the Government would not do the enterprise job itself. 5) The methods of Government control should be mainly strategic rather than tactical PEs can have a clearer idea of what the Government requires of them, if they do not subject to frequent, ad hoc, tactical control.
6
6) The nature of government control need not be wholly formal. Although informality has its dangers, a close intimate and informal relationship cannot avoided, and is even beneficial.
7) The Government and PEs should be publicly accountable. It means that responsibility for actions, successes and failures should be publicly identifiable. 8) The measure of management should not be purely commercial successful or social achievement, but should be efficient with which the enterprises carry out the joint commercial/social duties given to them. The efficiency is compounded of two factors : success in giving customers the goods and services they want and success in minimizing the cost of doing so. 9) The ultimate sanction for bad management may be dismissal or nonreappointment in the post, but improvement of management should be the first objective. 10) Proper and fruitful exercise of Government control depends on the attitudes and ability of both the minister and his secretariat and the PE Board and its officials. The principle speaks for itself because If the men are wrong, nothing will be right. Though the above principles are sound and meaningful, they are generally not observed in practice. They often get distorted by the troubles of individual enterprises, and the governments disinclination for transparency in its relationship with PEs. The Parliamentary Committee on Public Undertakings of the eighth Lok Sabha in its 32nd report emphasized streamlining of the Government PE relationship. It is said that as against excessive control, the Government should restrict itself to issuing policy directives, exercising strategic control. It wanted the areas of power and authority between PEs and the administrative Ministries to be clearly delineated. The Committee felt concerned over the growing tendency on the part of the Ministries to interfere into the working of the enterprises and it wanted the ground rules to be laid down to restrict the Government directives only to maters of policy without transgressing into the sphere of detailed administration. But nothing has come out so far from these views. The Government continues to exercise a lot of unnecessary, and undesirable control over its enterprises.
6.7 REASONS FOR EXCESSIVE GOVERNMENT CONTROL

The main reasons why the government has not been able to maintain the required distance from its enterprise are : i) PEs are often centres of large power and authority;
ii) The socio-political content of their operations are high in many cases. iii) PEs are important and useful instruments of public policy. The Government therefore finds it difficult to keep away from PEs. PEs however greatly suffer in the process and get damned when they fail to show result in competition with private enterprise.
7
6.8
GOVERNMENT MACHINERY WHICH INTERACTS WITH PUBLIC ENTERPRISES
In the context of government PE interface, it is necessary to have an appreciation of the Government machinery which interacts with PEs. Some important organs of this machinery are discussed below : Administrative Ministry Every enterprise is attached to one ministry/department or the other. For example, the Department of Civil Aviation is the administrative ministry for the Indian Airlines and Air-India, and the Department of Steel is the administrative ministry for SAIL. Generally, two nominees of the administrative ministry are on the Board of directors of the enterprise, in providing finance, in policy formulation, and in overseeing the performance of the enterprise. This ministry also provides link for the enterprise with Parliament, with the Comptroller and Auditor General, and with other national and international agencies. (providing the link means that these bodies, interact with PEs via the administrative ministry. For example, if there is a question in Parliament, it is received by the administrative ministry which obtain the reply from the enterprise for the concerned minister). All policy and financial matters which need clearance from the Government have to be routed by the enterprise through the administrative ministry. For example, if the enterprise wants to raise money in the market by issuing bonds or it wants to enter into a foreign collaboration, it has to get clearance of its administrative ministry, which may also send the proposals to the concerned Government departments. It is the administrative ministry/department which is responsible for the performance of the enterprise. Therefore, the administrative ministries have a close and continuous interaction with their enterprises. There is much confusion about the division of responsibilities between the ministries and PEs. PEs also often play safe and refer many matters to the Government which may not be necessary under the rules providing them autonomy. But the PEs do so because in this way, the Government become a partner in the decision-making and PEs can pass on some responsibility of their decisions to the Government. Department of Public Enterprises (DPE) It is the co-coordinating agency for all Central Government PEs. It was set up in 1965, as a part of the Ministry of Finance. In 1985, it was transferred to the Ministry of industry. Some of the important functions of DPE are as follows : 1) To give policy guidelines to PEs in areas like industrial relations, wages and benefits, organization structure, administrative vigilance, sound management practices, etc. 2) To assist various ministries in floatation of new government companies. 3) To examine proposals of various ministries in regard to capital structure of PEs, and creation and upgradation of posts at the Board level. (if a Board level appointee in a PE is to be given a higher scale, the matter is also examined by the DPE.)
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Corporate 4) To organise training programmes for senior PE executive with the helpGovernance of and Corporate Social training institution in the country. Responsibility
5) To examine all cases of policy where decisions of one PE have repercussions on other PEs. 6) To act as a nodal agency for co-ordinating all activities relating to the Memorandum of Understanding which various ministries enter into with the PEs. 7) To prepare a comprehensive report on the working of PEs and to submit it annually to Parliament (this three-volume report is entitled Public Enterprises Survey). 8) To conduct in-depth studies to identify weak areas with the object of improving productivity and performance of PEs. Ministry of Finance Whenever PEs have to get funds for meeting their losses or for expansion and growth, the Ministry of Finance comes into the picture. All proposals for capital expenditure beyond Rs. 50 crore are cleared by the Public Investment Board, which is chaired by the Secretary (Expenditure) in the Ministry of Finance. PEs have to interact a lot with the Ministry of Finance whenever proposals sent to the Government have financial implications. Vigilance Agencies Both Central Bureau of Investigation (CBI) and the Central Vigilance Commission (CVC) are in regular contact with PEs were employees have been charged with corruption. According to a Government decision of October, 1986, the Board of the enterprise would function as vigilance body for employees below the Board level and the CVC would launch proceedings only for the Board level appointees. The CBI however has jurisdiction over all the employees of PEs. We will discuss CVC in Unit 8. Other Ministries and Departments PEs have to interact with the Planning Commission, if their expenditure proposals are to be included in the plant estimates, and they hold discussion with the Project Appraisal Division of the Planning Commission, if they submit proposals for clearance by the Public Investment Board. The Labour Ministry comes into picture in regard to labour polices, wages and incentives, and for schemes of employees participation in management, and voluntary retirement. The Home Ministry is concerned with reservations for various categories, vigilance, and industrial security. Activity 1 a) Briefly describe two dimensions of government- PE interface.
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b) State two factors which affect government PE relationship. Activity 2 State two ways in which Government exercises control over its enterprises.
6.9
SUMMARY
The Government controls, guides and finances PEs. A complaint often heard from PEs is that corporate business entities, they do not get adequate autonomy to show results. The Government has formal powers (i) to appoint the Board of directors (ii) to give approval for important matters, (iii) to issue directives, if and when the need arises, (iv) to guide PEs through office orders and circulars on various matters of policy and day-to-day operations, and (v) to receive the prescribed reports and returns from the PEs. The Government also has large informal powers over its enterprises. There is a need to be clear about the role of the Government in respect of its enterprises. The ten principles stated above may be a useful guide in this regard. Most PEs are important centres of power and authority and have important sociopolitical implications. This makes it difficult for the Government to distance itself from PEs. But it is necessary that PEs have adequate managerial autonomy to operate successfully. How can the requires autonomy can be secured ? It continues to be a big dilemma of PE management.
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Corporate All PEs are under one or the other ministry of the Government called the Governance and Corporate administrative ministry. In addition, PEs have to interact with the Department of Social Responsibility Public Enterprises, Ministry of Finance, Vigilance Agencies and various other departments.

Treat each of the objectives listed above as a question and write a few points for each one so that you may assess whether you can recall the main points discussed in the Unit.
6.11 REFERENCES AND FURTHER READINGS

Narain, Laxmi, (1995). Principles and Practice of Public Enterprise Management S. Chand & Co. , New Delhi. United Nations, (1974). Organization, Management and Supervision of Public Enterprises in Developing Countries, New York. Iyer, R. Ramaswamy, (1991). A Grammar of Public Enterprises, Rawat Publications, Jaipur, Chapter IV, The Relationship between the Government and Public Enterprises. Economic Administration Reforms Commission, (Chm L. K. Jha), (1984). Report No. 4 on Government and Public Enterprises : Autonomy and Accountability.
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UNIT 7 ACCOUNTABILITY TO LEGISLATURE


7.1 7.2 7.3 7.4 7.5 7.6 7.7
Understand the concept of accountability to parliament; Discuss the ways and extent to which PEs are held accountable through parliament; Understand the importance of different legislative committees.
Structure Introduction Accountability to Parliament Methods of Parliamentary Control Legislative Committees Summary Self Assessment Questions References and Further Readings
7.1 INTRODUCTION
Public enterprises are created and owned by the state and therefore in a democracy, parliamentary supervision and control are essential features (Mathur, 1999). With the growth of PEs in India, the significance of sufficient and effective accountability and control over these enterprises has increased manifolds. To have a check over PEs, different agencies are operating so as to ensure public accountability. Out of these agencies, parliamentary, ministerial, audit-control and control through Bureau of public enterprises seem to be more effective as compared to the other agencies. The crux of all this is that government agencies and public enterprises are accountable to the government, the legislature, in turn becoming accountable to the people. The existence of PEs, all along depends on the government and legislature being satisfied with their performance within the objectives set taking into consideration the public interest. In this unit we will confine our discussion to accountability to legislature, whereby we will discuss different aspects like legislative questions, legislative debates and legislative committees.
7.2 ACCOUNTABILITY TO PARLIAMENT

Legislature enjoys full powers to scrutinise the working of PEs in India (Batra & Bhatia, 1996). The legislature ensures that the financial and managerial policies followed by the PEs are sound and effective. Therefore, legislature control becomes one of the most important and effective method of enforcing accountability, especially in the Indian context. The role of Parliament could be that of either a trustee or custodian of the public money or that of a shareholder. The difference in these two roles is important because as a trustee, it would be more or less satisfied with seeing that the public
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funds are properly utilised, and from this standpoint, parliament should not be prepared to take any risk with the public money, but prefer safety and security. On the other hand, as a shareholder it can exercise all powers and privileges that vest in a shareholder. In this case, it should also be prepared to take all reasonable risks with its investments, if necessary even by increasing investment in a losing concern to enable the enterprise to become economically viable and to turn the corner. Therefore, it becomes important to understand these two roles of parliament, which are not necessarily conflicting. Another point about parliamentary control is that the more social or macro-economic the role of a public enterprise is, the greater is the need for parliamentary concern with its operation, and this concern is bound to end in control. Therefore, the question of parliamentary accountability must be considered with reference to the nature of the enterprise, and the social and public policy contents which go into the decisionmaking. Enterprises like LIC and the Food Corporation of India are likely to have more policy implications as compared to, say, enterprises like the Indian telephone Industries Ltd., and the Electronic Corporation of India Ltd. However the social content of an enterprise may change over a period of time and with the change of circumstances. Limitations of Parliamentary Accountability a) Parliament is very much hard pressed for time and it is often not able to devote the necessary attention to complex and important issues involved in the Management of PEs. b) Parliamentary review is not likely to be sufficiently detailed and thorough-going, as parliament does not always have the necessary expertise for the purpose. Need to Distinguish between Policy and Routine Matters The real problem of parliamentary control as of public accountability is how to strike a balance between the autonomy necessary for commercial operations and the right of parliament to discuss the working and performance of PEs. Theoretically, parliament will concern itself with matters of overall policy and achievement of broad general objectives, leaving the enterprises free to carry on their day-to-day operations. This however, does not work in practice because of the difficulty of distinguishing with any clarity between matters of policy and day-to-day operations.
7.3 METHODS OF PARLIAMENTARY CONTROL

By and large, PEs come in for parliamentary control in the following ways :
Legislative Questions; Legislative Debates; Legislative Committees.
Legislative Questions In a democratic set-up, the parliamentary questions is the most immediate and convenient way to open to MPs to obtain information about public matters. It broadly serves the following purposes : i) It enables the MPs to ventilate grievances against the working of PEs or obtain information which may not be available in the published documents and reports;
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ii)
It is an effective way to keeping the minister on his toes as regards his formal interventions as well as his informal contact with a PE, for which his responsibility is not apparent;
iii) It can have a desirable moral influence on PE managers; iv) It gives the Member of Parliament a quick opportunity to direct the government in the policy implementation. Rules Regarding Admissibility of Questions In accordance with the parliamentary procedure, questions relating to policy, to an act or omission of an act on the part of the minister or to a matter of public interest are ordinarily admitted, and questions which clearly relate to day-to-day administration are normally disallowed. The final admissibility of questions is a matter for the Speaker to decide, who controls the question desk. The following principles have been laid down by the Speaker as regards on PEs : i) Where a question (a) relates to a matter of policy, or (b) raises a matter of public interest (although seemingly it may pertain to a matter of day-to-day administration or an individual case), it is ordinarily admitted for oral answer, that is, as a starred question. A question which calls for information of statistical or descriptive nature is general admitted for written reply, that is, as an unstarred question.
ii)
iii) Questions which clearly relate to day-to-day administration and tend to throw work on the ministers and PEs incommensurate with the results to be obtained there from, are normally disallowed. iv) Questions seeking statistical information available in the published documents are normally disallowed. The Speaker, in his discretion, can admit a question involving a point of principle or matter of public importance, even if it concerns day-to-day administrative details. Efficacy of the Question Device A sample study of 141 question on the policy and overall working of PEs, answered by the Department of Public Enterprises, during March-September, 1990, found that the questions did not reflect any in-depth understanding of the problems besetting PE performance. In answering questions, the government adopted the line of least resistance. Questions such as number of quest houses hired by PEs and the rent paid, the amount spent on maintenance and fuel of cars could have been easily avoided, as they hardly serve any purpose from the stand-point of control and accountability. Another study of 151 question on SAIL, asked in the Lok Sabha during 1988, found that the questions covered most of the important dimensions of the working of SAIL. The problem however is of the large number of questions which pre-empt much valuable time of PE top executives. Further, the questions are against the principle of level play in field: for the enterprises in two sectors. It may be rightly asked why the public sector SAIL, which operates in competition with TISCO and other private sector firms, alone be subject to question in Parliament about its day-to-day working. One hopes that in the context of disinvestments of PE equity, the government will not allow routine questions, day-in day-out, on various aspects of PEs working.
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Legislative Debates Debates cover a wide range of matters including PE policy and performance. The debates, inter alia, may be on motion of Thanks on the Presidents address, at the time of amendment to an Act relating to a PE, or after the presentation of the budget. Debates are generally diffused and do not often contain constructive criticism except case of few members who take pain to study the problem. It is hoped that the committee system introduced in 1993 will take care for the situation and the problem afflicting PEs would get better attention. In addition to debates, matters to PEs are raised in many other ways including the Zero Hour. An MP may move a resolution relating to a Matter of General Public Interest involving a PE, PE problems are also discussed under rules which allow the Calling Attention Motion and Half-an-hour Discussion. Some occasions on which debates concerning pubic enterprises are held :
Half-an hour discussion Amendment of the statute Budgetary Demands Discussion on reports of the enquiry committee (if appointed) Annual reports The President Address Adjournment Motion Discussion on matters of urgent public importance for short discussion Calling attention to matters of urgent public importance.
The efficacy of such debates largely depends on their quality. The MPs are obviously more interested in issues of topical nature and those affecting their constituencies or State. Serious matter of policy hardly get attention of Parliament. The MPs, it seems are more concerned with the survival than long-term health of PEs. Most PEs have inherent strength to turn the corner provided the required autonomy and adequate and continuous top management is ensured by the government. Unfortunately, this dimension has been, more or less, ignored by the MPs.
7.4 LEGISLATIVE COMMITTEES

Legislative committees are one of the weapons to enforce the desired legislative accountability and control over public enterprises. Here, we are going to discuss the following three committees in brief : i) Public Accounts Committee (PAC) ii) Estimates Committee iii) Committee on Public Undertakings i) Public Accounts Committee (PAC)
Public accounts committee as the name suggest plays an important role in enforcing accountability over PEs. It is the oldest of the three committees and was the first one to raise the question of exercising parliamentary control over the accounts of PEs.
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Features of PAC
It was first set up in 1921 but was constituted from 1950; It functions under the direction and control of the speaker of the Lok Sabha; The chairman of PAC is monitored by the speaker and the secretarial assistance is provided by the Lok Sabha Secretariat.
Functions of PAC The functions of PAC are stated in Rule 308 of the procedure and conduct of Business in Lok Sabha (Shrivastava, 1992). The Following are the Main Functions of PAC :
To examine the appropriation accounts showing the appropriation of the sums granted by the parliament for the expenditure ; To satisfy itself that the money shown in the accounts as having been disbursed were legally available for, and application, to the service or purpose to which they have applied or charged; To satisfy that the expenditure confirms the authority which governs it; To examine the statements of accounts showing the income and expenditure of public corporations, government companies, trading and manufacturing schemes and reports of C & AG; To examine the statement of accounts showing income the expenditure of automounous bodies, the audit of which may be conducted by C & AG; to consider the report of C & AG, the President may have required to conduct and audit of any report or to examine the accounts of the stores and stocks; To examine the money spent on any service during a financial year in excess of the amount granted by the parliament for that purpose.
The PAC works on the report the controller and Auditor, General, who acts as its advisor/comptroller and expert guide. The approach and conclusion of the committee, are therefore not much different. ii) Estimates Committee
It was constituted on April 10, 1950 for examination of the estimates and the problems of the government companies. It was the most powerful committee to review the operations of most of the public enterprises before the establishment of CPU. Functions As mentioned in Rule 310, the function of the Estimates committee are as follows : To report what economies, improvements in organisation, efficiency or administrative reforms, consistent with the policy underlying the estimates, may be effected; To suggest alternative policies in order to bring about efficiency and economy in administration; To examine whether the money is well laid out within the limits of the policy implied in the estimates; To suggest the form in which the estimates shall be presented to parliament. Though the estimates committee does not enjoy the same authority as the PAC but its recommendations are the only source of objective and critical information about public enterprises.
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iii) Committee on Public Undertakings (CPU) The most effective and important instrument of parliamentary control is the Standing committee of Parliament, which comprises 22MPs, 15 from the Lok Sabha and 7 from the Rajya Sabha. Functions To examine the reports of accounts of PEs, To examine the report of the comptroller and Auditor General of India on PEs , To examine, in the context of autonomy and efficiency of PEs, whether their affairs are being managed in accordance with sound business principles and prudent commercial practices. The CPU shall not examine (i) matters of major government policy as distinct from business or commercial functions of PEs and (ii) matters of day-to-day administration. Working of the Committee The term of the Committee does not exceed one year, though the chairman, who is appointed by the Speaker from amongst the members of the Committee, in practice, is re-appointed for another term of one year. The Committee selects from time to time specific PEs or such subjects as it deems fit. The committee asks the ministry/enterprise to furnish necessary material relating to the subjects chosen. The Committee often visits the enterprises chosen for scrutiny. After the study tours, and after receiving memoranda and other information from concerned parties, witness from the Government and the enterprise are invited to give evidence at sittings of the Committee held at Parliament house, New Delhi. The Committee comments upon important aspects for the working of PEs with a view to making an evaluation of their performance. The reports of the Committee provide much useful data and analysis of the enterprises studied by it. The Committee makes recommendations which are replied by the Government. The replies along with the comments of the committee, if any, are published by the Committee in what is called Action taken Reports. A great advantage of these reports is that they commit the Government in respect of the action promised to be undertaken on a particular recommendations. All Central Government companies and statutory corporations established by Central Acts, e.g. Airports Authority, Food Corporation and Life Insurance Corporation, are covered by the Committee. Since its inception in May, 1964, till the end of the Ninth Lok Sabha, the Committee produced over 400 reports. Of these about half are action taken reports:. A new reports cover some specific aspects with reference to all PEs. These are called horizontal reports. Some examples of these reports are : Materials Management in PEs (40th Report, 3rd Lok Sabha), Financial Management in PEs (15th report, 4th Lok Sabha), foreign Collaboration in PEs (89th report, 5th Lok Sabha), Appointment of Auditors in Government companies (55th Report, 6th Lok Sabha) Productivity in 2Es (97th Report, 7th Lok Sabha) and Social Responsibilities of PEs (24th Report, 8th Lok Sabha). A Review of the Committee Role The CPU helps the PE system in many ways. It advises the Government to bring about the necessary changes in its policy. For instance, it recommended against the appointment of secretaries to the Government on the boards; for providing a minimum tenure of five years to full-time board members, for a successor for the top posts being designated well in advance; for avoiding frequent changes in the board
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membership; and for laying down of PE objectives with clarity. All these are critical for PE performance, and coming from a parliamentary Committee are of much value. The committee also provides counsel or advice to PEs on any matters including policies, programmes, and day-to-day operations. All extract from a report is illustrative : develop an efficient commercial culture the proposed incentive scheme should be introduced without further delay. Aim at complete customer satisfaction. Norms should be evolved for inventory holding and should be strictly enforced adopt a system for securing prompt payment of dues by customers and disincentive for delayed payment get over the losses by an imaginative market survey and sales promotion.. avoid building up of inventory charge interest at the market rate on outstanding. In a developing country with a serious shortage of managerial expertise, many obvious and important managerial issues do not often get adequate attention from those in charge of PEs and a reminder from a high powered body like the CPU is of great value. The CPU has not been able to cover every year more than 5 to 6 PEs, on an average. Thus, a large number of PEs remain unscrutinised or are covered very infrequently. This is a shortcoming of the system of accountability through CPU. It is difficult to say how far the CPU keeps PE managements on their toes or helps in preventing inefficiency, and whether PE behaviour pattern is influenced by the existence of the committee, A survey of 92 top and senior executives in 41 PEs found in 1991 that PEs consider the CPUs role as positive, and most of the respondents would like their PEs to be examined by the committee. But the committee has a long a way to go to achieve the objectives stated by the Krishna Menon Committee (1959), on whose recommendation it was established, namely, the committee should encourage both initiative and long-term planning in regard to which government undertakings are normally backward or very shy and it would take a long-term view rather than concern itself with the minutiae of administration.
7.5 SUMMARY
No empirical assessment has so far been made of the extent to which the public accountability affects PE performance. Accountability to Parliament through questions, debates and discussions provides a feedback to PEs on many matters of policy and operations. The questions also have a moral influence on PE managers in as much as any of their actions can be questioned on the floor of the House. But the serious problem is that much valuable time of the PE management is wasted in replying to questions which are routine, superficial and fall into the realm of day-today management rather than deal with matter of policy. Sometimes, motivated questions are also asked, PEs are not happy with the way the question device of public accountability operates at present. So far as the debates and discussions are concerned PEs are almost neutral to the situation. The accountability secured through CPU is useful and substantial. Many improvements have been effected by PEs based on recommendations of the CPU. But as the CPU is not able to cover more than 5-6 PEs in a year, a very large number of enterprises are either never covered or are covered only after a long time gap. To this extent, the accountability gets diluted.
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1. Comment on the effectiveness of the questions and debates as instruments of parliamentary control. 2. How is the CPU constituted ? How does it working affects PEs ? 3. Discuss the functions of PAC and Estimates Committees.

United Nations. (1974). Organisation, Management and Supervision of Public Enterprises in Developing Countries, New York. Narain, Laxmi and Murthy, B. S. (1984). Public Enterprise and Fundamental Rights, N. M. Tripathi (P) Ltd., Mumbai. Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises, Rawat publications, Jaipur. Standing Conference of Public Enterprises. (1990). Reports/Recommendations of various Committees on Public Enterprises, New Delhi, Chapter one : Recommendations of the COPU on Accountability and Autonomy of Public Undertakings Shrivastava, M.P. (1992). Parliamentary Accountability and Supervision over PEs. Deep and Deep Publications, New Delhi.
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UNIT 8 RELATIONSHIP WITH OTHER AGENCIES

Objectives After going through this unit you should be able to: ! Discuss the ways to which PEs are held accountable through Comptroller and Auditor General of India; ! Understand the concept of accountability through courts; ! Discuss the role of Chief Vigilance Commissioner. Structure 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 Introduction Accountability Through Audit Accountability Through Courts Central Vigilance Commission (CVC) Impact of Public Accountability Summary Self Assessment Questions References and Further Readings
8.1
INTRODUCTION
Accountability when studied in the context of public enterprises have many parameters. Accountability, thus can be of different forms like parliamentary accountability, ministerial accountability, audit accountability, social accountability, judiciary accountability. We have already discussed some of the accountability concepts. In this we would stress upon audit accountability and the judiciary accountability. Audit accountability or accountability through audit is important because it ensures that the expenditure of the government funds have been made according to the norms. Henceforth, the role of audit becomes increasingly important as control mechanism. Judiciary accountability or accountability through courts is also important as it takes into account all the legal aspects of the public enterprises. The judiciary may entertain suits, proceedings and can give remedial measures such as damages and injunction, under the ordinary laws. In this unit we will also discuss some aspects related to the Central Vigilance Commission (CVC).
8.2
ACCOUNTABILITY THROUGH AUDIT
PEs being owned by the nation have a much higher degree of accountability. Unlike private enterprise, they cannot get away just by earning adequate profits and distributing high dividends. Parliament has to be satisfied with their performance and the Comptroller and Auditor-General of India (C &AG) assists Parliament in this regard.
The PE audit by the C & AG can be considered under the following heads: Financial Audit The law requires the accounts of every corporate body to be certified by an independent authority. This authority is the C & AG for PEs. Auditors of all Government companies are appointed by the Government on the advice of the C & AG. These auditors are chartered accountants as in the case of private sector companies. But the similarity ends here. The chartered accountant of a Government company does not owe his continuance to the management as in a private enterprise. In the private sector, even though the auditor is supposed to be appointed by the shareholders in the Annual General Meeting of a company, for all practical purposes he is the nominee of the management. The board of directors of the company can change the auditor if he is critical of the behaviour of the management. This is not so for PEs, where continuance of auditors is beyond the control of the board of directors of the enterprise. This makes all the difference in the role which auditors play in securing public accountability of PEs. As a part of his financial audit, the C & AG reviews the report of chartered accountants which certify that the final accounts of a government company represent a true and fair view of its affairs for a given period. The government companies are unhappy about this double audit as this adds to their work and may hinder holding the Annual General Meeting of the Company in time. Under the liberalized dispensation, it would be unfair to PEs to have their accounts certified by the C & AG, which does not happen in case of equivalent private enterprises. Chartered accountants have been empowered by Parliament to certify the accounts. A check on their certification is uncalled for and unnecessary. For statutory corporation, e.g., Airports authority of India, where the certification of the accounts is done by the C & AG himself, the audit certificate is about the same as given by chartered accountants under section 277 of the Companies Act. All audit report along with the accounts to which they relate Parliament are as a part of the annual reports of the concerned enterprise. Efficiency Audit It may be noted that private sector enterprises are not subject to any efficiency evaluation by an external agency as in the case of PEs. PEs are accountable to Parliament and the C & AG assists. Parliament in evaluating PE efficiency. His reports relating to PEs, entitle Audit Report (Commercial), are presented to Parliament from time to time. On an average, the C & AG presents five to six reports on various PEs every Year. These reports stand referred to the CPU which is expected to judge efficiency and performance of PEs with reference to the information contained in them. The C & AG evaluate PE efficiency in many ways including effectiveness of : (i) utilization of man power, (ii) utilization and control over materials, and (iii) utilization of machines. The C & AG also reviews general management efficiency with reference to: (a) achievement of targets of physical production, (b) fulfillment of projections of commencement of production, (c) fixation of targets in terms of designed capacity, (d) comparison of various project cost estimates with the actual, (e) calculation of financial ratios showing profitability with reference to sales, gross fixed assets, capital employed, net worth, etc., over a period of time. The C & AG audit also refers to achievement of overall objectives for which an enterprise was set up. An argument against efficiency audit is that evaluation of performance is basically the job of management and an external agency would not generally be able to get
down to the grass roots where ultimately the inefficiencies thrive and where, in the last resort, the money is made or lost. However, for a PE, the public and parliament will not be satisfied only by the assertions of the management that is its operating efficiently. As efficiency is always comparative, some independent external public agency is needed to certify it with reference to inter-firm and intra-firm comparison of certain acceptable indices. As regards the point that the C & AG cannot evaluate efficiency because it does not possess other than the financial skills, it may be pointed out that most of the technical evaluation eventually gets reflected in financial and other statistical data which can be interpreted by an accountant with reference to the norms laid down by technical experts and management of the enterprise. This, to a large extent, is apparently being done successfully by the C & AG in his reports. Proprietary Audit This dimension of the C & AG audit extends beyond the formality of expenditure to its wisdom, faithfulness, and economy. Here the audit claims to ask every question that an intelligent tax payer, bent on getting the best value for his money, could ask. The proprietary audit is based on the assumption that the managers of PEs have no direct personal interest in the gainfulness or otherwise of their decisions, and either due to their indifference or inefficiency, the best decisions may not be taken. This audit raises two issues. One, whether the audit is competent to question, and also whether it is fair to question managerial decisions after the event, taking advantage of the hindsight, unless prima facie malafide act is involved. What is needed is an overall review of performance. Individual decisions should not be called into questions just because the PE manager has no direct personal financial stake. It is well known that all the world over, top professional managers do not have much personal financial stake in the companies they manage. What is at stake is their public position, respect, and ego. It may be noted that no separate reports covering propriety audit are prepared. The audit Report (commercial), referred to above covers both the efficiency and proprietary stand points. Audit by the C & AG is playing a useful role as an instrument of accountability and control on behalf of the legislature. However, it would serve a more useful purpose if the audit shifts its emphasis from methods, procedures or individual decisions to overall results, and to failures in achieving specified goals. Evaluation by the audit provides a picture of PE operations to Parliament, essential in a democracy. But in the process, the audit should not demoralize the PE manager nor spoil the PE image.
8.3
ACCOUNTABILITY THROUGH COURTS
It has been held by the Supreme Court in many cases that an autonomous PE would be considered as State and the courts can hold PEs responsible to observe fundamental rights through an order of the court called the writ. This has greatly enhanced public accountability of PEs. PEs are now open to scrutiny by the courts in regard to their routine activities like recruitments, promotions, terminations, etc. The courts can look into any decision of a PE if it is alleged that it affects fundamental rights of the employees or any citizen having dealings with a PE. This new dimension of public accountability of PEs which has come on the scene during the last 10 years, has affected their operations adversely. Some actual cases of the courts intervention are given below to illustrate the ways they affect PEs.
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It is important to note that here the courts intervention is through a writ petition, resulting in immediate action. This unlike a civil suit, which takes an indefinitely long time before the court issues an order. Recruitment Case A PE which wanted to recruit stenos, got names from the local employment exchange and along with a few other internal candidates conducted a written test. This was to be followed by an interview. But just before the interview, a stay order based on a writ petition was brought by an individual from the High Court directing the PE to give appropriate publicity of number of vacancies and eligibility criteria and give reasonable time to eligible candidates to apply for the post. The court felt that the way PE was filling the post did not give a fair opportunity to every eligible candidate to compete for the job. Promotion Case A writ petition was filed questioning managements policy of promoting purchase officers to the next higher post after five years if they were engineering graduates and after seven years if they were non-engineering graduates. The high court did not accept the managements argument that promotions in the enterprise were linked with qualifications and functions, and the classification to the engineering and nonengineering graduates was reasonable, and ordered parity of non-engineering graduates with those of engineering graduates. Service Conditions Case A PE manager who was posted abroad, resigned from his job about two years after his return to India. The companys regulation, inter-alia, provided that gratuity will be admitted to a manager posted in a foreign office who resigned during the period of his posting or within three years of his posting back to India. The High Court upheld the contention of the manager on a writ petition that the regulation was illegal and the manager was entitled on gratuity. Dealings with Supplier Case A PE suspended dealings with a supplier who tried to cheat the enterprise. The supplier got a court order stating that the PE could not stop dealings with him because he was not given an opportunity of being heard and that this violated Article 14 of the Constitution. Thus, PEs dealings with their suppliers, dealers and customers are open to scrutiny by the courts, which is not the case so far as private sector companies are concerned. Superannuation Case A PE employee went to the High Court a few days before his superannuation stating that the official record was incorrect and according to his birth horoscope he had five more years to go. The court granted stay against superannuation. The management had to fight the case for 5 months for getting the writ vacated and eventually had to pay salary for five months period to the employee. It would be seen that the courts put extra obligations on PEs in regard to the rights of the citizen because they treat PEs as State, against which all fundamental rights can be enforced. Further, action against PEs for the infringement of fundamental rights is through writ petitions and not through a civil case. As is well known, the remedy under a civil suit is expensive as well as very time consuming as compared to the writ. The courts feel that PEs are instruments of the State and should have all the obligations which the Government/State has in regard to its employees and citizens.
PEs rightly contend that it is discriminating to have two different sets of rules to the two corporate sector entities in similar manufacturing or trading activities. The freedom in commercial dealings and personnel matters available to private enterprise should also be available to PEs. Regarding the argument of special obligations for using the public funds, it may be noted that in most private enterprises, the funds belong either to the public financial institutions or to the public at large who have virtually no control over their use. Sometimes, it is argued that the cases of interference by the courts is sporadic and peripheral, not seriously affecting PE operations. This ignores the governments promise of a Level playing field to both the sectors. Further, even a few court cases are enough to cramp the managerial style, and thus affect the right decisions due to the fear of a possible writ which may be issued by the court. It is extremely difficult to make an assessment of the adverse impact on decision-making of this fear psychosis. It is therefore necessary that the central government amends article 12 of the constitution of excluding commercial autonomous corporations and government companies, from the definition of state. Alternatively, the Supreme Court may be approached to review the matter in the context of the liberalized economic policy and the decision to provide a level playing field to both the sectors.
8.4
CENTRAL VIGILANCE COMMISSION (CVC)
CVC as the name suggests, detects corruption and malpractices and decides the punishments. CVC is not an investigating agency but usually gets the investigation done through agencies like CBI or through the Departmental Chief Vigilance officers and orders investigation into cases of officials of Central Government. In case of PEs, the role of CVC is important as it keeps a check on the officials working in PEs. The commission is empowered to enquire or cause inquiries to be conducted into offences alleged to have been committed under the Prevention of corruption Act, 1988 by certain categories of public servants. The following categories of public servants are within the advisory jurisdiction of the commission (www.cvc.nic.in). a) Group A Officers of the Central Government; b) Such level of officers of the corporations established by or under any central Act, Government Companies, societies and other local authorities, owned or controlled by the Central Government, as that Government may, by notification in the official Gazette, specify in this behalf. Chief Vigilance Officers (CVO) CVC has CVOs as its extended hands and are quite higher level officers who are appointed in each and every Department/Organisation to assist the Head of the Department/Organisation in all vigilance matters. Role and Functions of CVOs CVOs detect and decide punishment for corruption but also take preventive measures at the post corruption stage and therefore their role and functions are bifurcated into two i) ii) Preventive; Punitive.
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Preventive Functions include taking preventive measures so as to minimize the scope for corruption or malpractices by maintaining proper surveillance. Punitive Functions include ensuring speedy processing of vigilance cases at all stages. It also ensures that charge-sheet, statement of imputations, list of witness and documents etc. are carefully prepared, sorted out and sent promptly. In all, the role of CVC is to detect and punish the guilty but as the saying goes Prevention is better than cure, the CVC takes pains to detect the corruption-prone areas and prevent malpractices.
8.5
IMPACT OF PUBLIC ACCOUNTABILITY
PEs accountability through the C & AG audit is useful, in as much as it improves financial discipline and instills consciousness about the proper use of public funds. But the adverse impact is not small. The audit discourages initiative and comes in the way of business like decision-making. The approach in PEs also becomes ruleoriented rather than result or performance oriented due to audit. So far as accountability through courts is concerned, it is a comparatively new phenomenon and its impact has not yet been assessed. The available data however shows that decisions of the courts to treat PEs as State would come in the way of their business-like operations. The court decisions infact go against the very purpose of PEs being established as autonomous commercial enterprises under the Companies Act or under special statutes. The impact of Parliament, audit and courts would obviously vary from enterprise to enterprise depending, among others, upon the personality of the chief executive and the success with which the enterprise is operating. Some PEs take the public accountability in their stride, many have learnt to live with it, but a good number of PEs feel demoralized in various measures due to what they think oppressive public accountability. Activity From your experience, give an example of public accountability through courts.
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8.6
SUMMARY
The C & AG audit covers financial, efficiency and proprietary aspects of PE working. The audit reports provide an in-depth analysis of PE operations. The audit is serving a useful role as an instrument of accountability and control over PEs. But it should shift its emphasis from procedures or review of individual decisions to failures to achieve specified goals. It is necessary to ensure that the C & AG audit does not demoralize PE mangers. The court is a new dimension to PE accountability. The courts consider PEs as extensions of the State, and the fundamental rights can be enforced against PEs through a writ petition. PEs are open to scrutiny by the courts for all their actions where infringement of any fundamental right is alleged. CVC also plays an important role in PEs as it keeps a check on the corruption and malpractices.
8.7
1. 2.

What is the nature of PEs accountability to the courts? Discuss the role of CVOs in PEs.
8.8
United Nations. (1974). Organisation, Management and Supervision of Public Enterprises in Developing Countries, New York, Chapter VII: Parliament and Public Enterprise and chapter VIII: Audit an Public Enterprise. Narain, Laxmi and Murthy, B.S. (1984). Public Enterprise and Fundamental Rights, N.M. Tripathi (P) Ltd., Bombay. Iyer, R. Ramaswamy. (1991). A Grammar of Pubic Enterprises, Rawat Publications, Jaipur. Chapter V: Public Enterprise and Article 1 of the Constitution, Chapter VII: Accountability and Evaluation, the Chapter VIII: Public Enterprise and the C & AG. Narain, Laxmi, (1995). Principles and Practice of Public Enterprise Management. S. Chand, New Delhi, Chapter VIII: Public Accountability. Standing Conference of Public Enterprises. (1980). Reports/Recommendations of various Committees on Public Enterprises, New Delhi. Chapter one: Recommendations of the COPU on Accountability and autonomy of Pubic Undertakings. www.cvc.nic.in (2004)
UNIT 9 CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

Objectives After reading the unit you should be able to:
Understand the meaning & scope of Corporate Governance, Social Responsibility & Scope of Social Audit of PEs; Appreciate the need and importance of Corporate Governance of Social Responsibility in the changes Scenario; and Discuss the Social Responsibility in PEs.
Structure 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 Corporate Governance: Concept Committee Recommendations on Corporate Governance Coporate Governance in Public Enterprises Social Responsibility Strategies Social Audit- Introduction What is Social Audit Social Audit in India Benefits of Social Audit Summary Self Assessment Questions References Further Readings
9.1 CORPORATE GOVERNANCE : CONCEPT

A code of corporate governance cannot be imported from outside, it has to be developed based on the countrys experience. There cannot be any compulsion on the corporate sector to follow a particular code. An equilibrium should be struck so that corporate governance is not achieved at the cost of the growth of the corporate sector. Sir Adian Cadbury What is Corporate Governance? Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of corporation and the welfare of society, in general. However, the concept of corporate governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of the corporate entities. As a result, different people have come up with different definition, which basically reflect their special interests in the field. The best way to define the concept is perhaps to list a few of the different definitions rather than mentioning just one or two.
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Definitions Adolf Berle has defined social responsibility as the managers responsiveness to public consensus (www.bharatpetroleum.com). Koontz and ODonnell have given the definition of social responsibility thus: The personal obligation of the people as they act in their own interests to assure that the rights and legitimate interests of others are not infringed (Hindu business line, 1998). Corporate Governance can be defined as a systematic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations. (Chartered Secretary, Oct, 1997).
9.2 COMMITTEE RECOMMENDATIONS ON CORPORATE GOVERNANCE

Cadbury Committee (1991) The Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set up by the London Stock Exchange in May 1991. The committee, consisting of representatives drawn from the top levels of British industry, was given the task of drafting a code of practices to assist public enterprise. In defining and applying internal controls to limit their exposure to financial loss, from whatever cause. Birla Committee (2001) The first formal committee was appointed by Securities and Exchange Board of India (SEBI), under the Chairmanship of Kumara Managalam Birla (known as Birla Committee). This was set up after the CII code on corporate governance was framed; to study the corporate governance from listed companies perspective and culminated when its recommendations were included in the listing agreement. The recommendations were applicable to listed companies; their directors, management, employees and professionals associated with such companies and other bodies corporate. The major recommendations of Birla Committee on corporate governance were:
The Board of directors of a company should have an optimum combination of executive and non-executive directors with not less than 50% of the Board consisting of non-executive directors. In case the company has a non-executive chairman, at least one-third of the board should consist of independent directors. Board meetings should be held at least four times in a year with a maximum time gap of four months between any two meetings. The Board should set up a remuneration committee to determine the companys policy on specific remuneration packages for executive directors. The Board should set up a qualified and independent audit committee.
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Companies should required to give consolidated accounts in respect of all their subsidiaries. A company having multiple lines of business should be segmental reporting. A management discussion and analysis report should form part of the annual report to the shareholders covering industry structure, opportunities and threats, segment wise or product wise performance, outlook, and risks. Companies should arrange to obtain certificates from their auditors regarding compliance of corporate governance provisions and the certificates should be sent to stock exchanges and all the shareholders.
As mentioned, these recommendations were incorporated in the listing agreement (Clause 49) and were sought to be implemented within a time frame of three years. Later, these recommendations got statutory recognition when they were introduced a provisions in the Companies (Amendment) Act, 2000. Naresh Chandra Committee (2002) Following the Enron fiasco and subsequent enactment of Sarbanes-Oxley Act in the US, Government of India [Department of Company Affairs (DCA)] had set up another committee to study corporate governance. This committee was formed under the Chairmanship of Naresh Chandra (known as Naresh Chandra Committee/NC Committee). This committee examined various governance issues, such as: a) Statutory Auditor company relationship including independence of Audit functions and restriction on non-audit services. b) Need for rotation of statutory audit firms. c) Advantages of setting up an independent regulator. d) Role of independent directors for their composition in Board. After discussions with trade associations and professional bodies the committee made the following recommendations.
Disqualification for audit assignments like prohibition of non-audit services and any direct financial interest or any other business relationship with the audit client by the audit firm. Prohibition of service during cooling off period i.e., no partner or member of the audit team can joint the audit client nor any key officers of the client can join the audit firm during this cooling off period (two years) Prohibition of undue dependence on an audit client; audit fee received from any one audit client and its subsidiaries should not exceed 25% of the total revenues of the audit firm. A special resolution should be passed in case an auditor is to be replaced, who is otherwise eligible for re-appointment and an explanatory statement should disclose managements reasons for such replacement. In case of all listed companies and companies whose paid up capital and free reserves exceeds Rs. 10 crore or a turnover of Rs. 50 crore, there should be certification by the CEO and the CFO to the effect that they have reviewed the financial statements and that these statements reflect a true and fair picture of the company. Independent directors should play a vital role in the board and all the committees should be constituted of independent directors.
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The minimum Board size should be at least seven, of which four should be independent directors. To specifically exempt independent directors from certain criminal and civil liabilities. DCA should encourage institutions to have regular training programs for independent directors and make it mandatory for such directors to attend these training sessions before assuming responsibilities.
Unlike the Birla committee, this committee focused on corporate governance from the perspective of companies in general, without bifurcating as listed or unlisted. Narayan Murthy Committee After this study, SEBI appointed a second committee under the chairmanship of N.R Narayana Murthy to analyze the compliances of clause 49. Narayana Murthy committee focused mainly on the role of the audit committee and the board composition, particularly independent directors. The objective of this committee was to examine and recommend amendments to the law in order to maintain high standards of corporate governance and also to ensure that corporate governance is looked beyond mere procedures and is implemented by companies to is protect the interests of shareholders. The recommendations of the committee, in short, are:
Audit committees should consist of members who are financially literate i.e., ability to read and understand basic financial statements. Audit committees of listed companies should review the financial statements and certify that they are true and report any material deviations from prescribed accounting standards if any. A statement of all transactions with related parties should be placed before audit committee for formal approval. Procedures should be in place to inform board members about the risk assessment and minimization procedures. To lay down the code of conduct for all the board members and senior management. Nominee directors, if appointed, shall be only by the shareholders and institutional directors shall be subject to same liabilities as other directors. Non-executive directors compensation should be fixed by the board and should be approved by the shareholders. Companies to frame policies, where by personnel who observe any unethical or improper practice are able to approach the audit committee directly. Further, companies should affirm annually that they have provided protection to such whistleblowers.
A close look at the amendments proposed in the Companies (Amendment) Bill, 2003 reveals that the changes proposed are based upon the recommendations of Naresh Chandra Committee and Narayana Murthy Committee. Hopefully, these recommendations when accepted in true spirit, should raise the standards of corporate governance in Indian firms and make them attractive for domestic and global capital and should form as base for further evolution of structure of corporate governance.
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9.3 CORPORATE GOVERNANCE IN PUBLIC ENTERPRISES

Public sector enterprises are generally autonomous bodies which are owned and managed by the government and which provide goods or services for a price. The ownership of the government extends to 51 percent, or more, in order to make it a public enterprise/entity. Public enterprises are considered as important instruments for self-reliant economic growth. They also help speed up economic growth, provide the required infrastructure, act as tools to achieve various social objectives like better distribution of income, expansion of employees employment opportunities, removal of regional imbalances, reducing concentration etc. From a paltry Rs. 29 crore in 195152, with 29 PEs the investment in the central public sector went up to well over Rs. 6,00,000 crores by 2000 with 240 PEs. Public enterprises have been organized in many ways as distinct autonomous units, with varying degrees of legal and operational independence. Where an autonomous legal entity is established by an Act of Parliament or legislature, it is called public corporation or statutory corporation. These are the principally chosen as instruments for the management of nationalized industries. The other popular method followed is forming government companies under the provisions of the Companies Act, 1956 (Sec. 617), in which not less than 51 percent of the paid-up share capital he held by the central or the state governments, or jointly by the central and state governments. A subsidiary of a government company is also a government company. The Board of Directors is the top management organ, and is responsible for implementing the objectives of an enterprise. The board members are nominated by the shareholders, i.e., government. Under the normal pattern, it includes the Chairman-cum-Managing Director, one or more full-time functional directors, officials representing and administrative ministry of finance, and sometimes one or two other relate ministries, and lastly, one or two non-officials, selected for their expertise and business experience. Under the trusteeship and entrepreneurial functions concept, the board looks after its various categories of functions establishment of basic policies including corporate strategies, decisions on major financial matters, selection of key personnel, receiving working reports and, reviewing and passing judgment upon them. The functioning of PE boards has been subjected to criticism on various grounds. The various practices followed, it is complained, do not facilitate the emergence of an autonomous enterprise management with initiative and operating effectiveness, and yet be responsible and responsive to the government guidelines and policies. The 40th Report of the Committee on Public Undertaking (73-74) regretted that the performance of public undertakings continues to be judged by a variety of vague objects and considerations. It recommended government presenting a white paper which can set out the framework of governments general, economic, financial and social strategy for public sector undertakings, micro-objects both financial and economic of each public undertaking and their review, and also qualification of their social objectives and obligations and the issue of government directives in appropriate cases. The nomination of government officials, according to experience, has also to be termed as superfluous and non-functional. The enterprises are also facing problems as the government is not strictly adhering to the policy that all heads of public enterprises will have a five-year tenure. This was accepted to improve the efficiency of top management.
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Obligation to the Public Sector Enterprise a) The role of the executives is to assist the PSE to achieve its objectives as spelt out in the charter constituting the setting up of the enterprise. b) It is the obligation of every employee of the public sector administrative ministry to uphold the Rule of Law and respect for human rights solely in the public interest while making recommendations or exercising administrative authority. He or she must maintain the highest standards of probity and integrity. c) In relation to the general public, the employees in the PSE and administrative ministries should conduct themselves in such a manner that the public feels that the decisions taken or the recommendations made by them are objective and transparent and are not calculated to promote improper gains for the political party in power or for themselves or for any third party. This would be particularly significant so far as the customers of the public service are concerned. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE. d) Employees of the PSEs/administrative ministries should not seek to frustrate or undermine the policies, decisions and action taken in the public interest by the management decision. Where following the instruction of the superior authority would appear to conflict with the exercise of impartial professional judgment or affect the efficient working of the enterprises, he/she should set out points of disagreement clearly in writing to the superior authority or seek explicit written instruction. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE. e) Where an employee of the PSE has reasonable ground to believe that he or she is being required by the superior authority to act in a manner which is illegal or against the prescribed rules and regulations or if any legal infringement comes to his or her notice, he or she should decline to implement the instruction, and would also have a right to bring the facts to the notice of the Chairman / Managing Director of the enterprise or the Secretary of the Administrative Ministry / the Cabinet Secretary to examine the issue carefully to concerned employees in the administrative ministry. Accountability and Responsiveness to the Public a) Consistent with accountability to the superior officers and the ministers in accordance with provisions governing PSE/administrative ministry, the employees in the public sector should practice accountability to the people in terms of quality of service, timeliness, courtesy, people orientation on readiness to encourage participation of and form partnership with citizen groups, for responsive management. b) Employees in the PSE/administrative ministry should be consistent, equitable and honest in their treatment of the members of the public, with particular care for the weaker section of society and should not even be or appear to be unfair or discriminatory. Decision in pursuit of discretionary powers should be justifiable on the basis of non arbitrary and objective criteria. c) Employees in the PSE/administrative ministry should accept the obligation to recognize and enforce customers right for speedy redressal of grievance and commit themselves to provide services of declared quality and standard to customers. d) Employment in the PSE/administrative ministry should respect the right of public to information on all activities and transactions of the organizations except where they are debarred in the public interest from releasing information by provisions of law or by valid instructions.
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Concern for Value of Public Assets and Funds The employees in the PSE/administrative ministry should avoid wastage and extravagance and ensure effective and efficient use of the public money within their control. Non Abuse of Official Position Employees of PSE/administrative ministry have a responsibility to make decisions on merits. They are in a position of trust. They must not use their official position to influence any person to enter into financial or arrangements with them or with any one else. They must not abuse their official position to obtain a benefit for themselves or for someone else in financial or some other forms. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE. Continuous Improvement through Professionalism and Teamwork It shall be the duty of every employees of the PSE/administrative ministry to continuously upgrade his/her skills and knowledge, strive for creativity and innovation and nurture the values of team working and harmony. He / she should promote and exhibit public and private conduct in keeping with the appropriate behaviour and standards of excellence and integrity. He / she should support the junior in the latters efforts to resist wrong or illegal directives and in abiding by the Code of ethics. At the same time, they should reward good work and publish any dereliction of duty and obligations based on objectives and transparent criteria. Public Accountability For accountability in the case of central government enterprises, the appropriate legislature is Parliament, and for state-owned enterprises, the respective state assemblies. The principle followed here is, as Mr Appleby observes: Parliament performs quite admirably when it debates the important questions of Policy. The wisdom of non individual is substitute for the general wisdom of society, and the general judgment of society is more closely approximated by a representative legislature than by any other entity. PEs come in for parliamentary consideration through debates, short discussion, questions, Committee on Pubic Undertakings, and also public inquiry recommendations made by COPU. The feeling is that MPs are mostly interested in raising issues of topical nature and those effecting their constituency / state and do not raise critical issues, such as the governments failure to fulfil promises made in various policy statements, eg., Policy Statement of July 1991. The COPU examines the reports and accounts of PEs, examines the Management Review and Responsibility Appropriate Governance Model for PEs In the literature on corporate governance a distinction is drawn between the insider model and the outsider model of corporate governance. The insider model is one in which a compact group of shareholders business families/houses in India and East Asia exercise full control over the corporate entity in such a way that the professional managers hardly enjoy any decision making powers. Overwhelming part of the Indian corporate economy has adopted the insider model of corporate governance. The board of directors of such companies are often rubber-stamping authorities with the boards concurring with almost all the proposals made by the controlling families. The outsider model of corporate governance is characterized by a separation of control
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from ownership arising separation of control from ownership arising from a widely dispersed equity ownership among large number of institutional and innumerable small shareholders. Consequently governance such corporate entities vests with professional managers and their board of directors. Growing importance of the economies of scale and scope has necessitated birth of the large firm with its necessitated birth of the large with its distant shareholders and professional managers who have to handle complex tasks and responsibilities. In the case of insider model, the debate on good governance is concentrated on ensuring that the controlling business family does not appropriate most of the gains. Several studies on the last East Asian Crises have highlighted that the insider model of corporate governance prevalent in these countries was largely responsible for aggravating the seriousness of this crisis. In the case of the outsider model, the main concerns relate to devising mechanisms to tackle what is known as the agency problem viz., how to ensure that professional managers function in the interests of shareholders and the stakeholders. In the case of PEs ascertaining wishes of the ultimate shareholders (Voters) is difficult since it is not a practical proposition to put board resolutions for voting at the AGME/EGM in the same manner as in the case of typical listed company. The common voters elect their representatives who in turn form a government in turn is supposed to ensure that voters wishes are translated into concentrate actions. In reality far more complex problems arise especially because the layered and hierarchical principal-agent structure that characterizes the public sector ownership. The ultimate owners of the public sector entities viz., the voters express their interests / objectives in a diffuse, indirect and cultured up manner. However, when the governments/ politicians act on behalf of the owners or the voters to crystallize owners/voters interests in terms of specific objectives, they are prone to could these objectives to the extent that their self interests influence interpretation of voters objectives. Since governments / politicians act as principals through civil service, another layer is added to the principal-agent chain. Civil servants too are liable to act as agents by allowing their own objectives to dominate their own actions during administration of public entities. One may argue that already we have eminent bodies like the Public Enterprise Selection Board (PESB). The PESB recommends personnel for the posts of Chairman, Managing Director, Chairman & Managing Director (CMD) and Functional Directors in PEs as well as posts at any other level. PESB is also expected to advise the government on such matters as (A) the desired structure of the boards, (b) performance appraisal system for both PEs and their managerial personnel, (c) build data bank on the performance of the PEs and their key personnel, (d) formulation and enforcement of code of conduct for PEs managerial personnel and (e) suitable training and development programmes for management personnel in PEs. Despite all these lofty goals placed before the PSEB, the matters have not improved much in regard to the PEs. Complaints about their performance in all the matters vested with the PESB continue to be voiced, sometimes loudly even in highly respectable and responsible quarters. Instances of PEs remaining headless for long periods of their boards not being constituted with adequate number of functional and independent directors continue to be frequent and numerous. Quite often the appointment process gets bogged down because of complaints with regard to integrity of the candidates being considered for the PEs boards. There are also instances of spurious complaints lodged by competing candidates, thereby necessitating vigilance inquiries. In many instances it is a hurdle race especially for competent and clean candidates, who often prefer to remain out of the race if they attack higher value to enjoying peace of mind.
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9.3 SOCIAL RESPONSIBILITY OF BUSINESS

The growth of large corporations with their professional managers has changed the nature of society through its effect on competitive forces and the ownership of private property. With their increases power in society, they are forced to concern themselves with the nature of social responsibilities. Management must take decisions involving moral issues and must adapt itself to the social forces that affect it. The idea of social responsibility of business is based upon the concept that business is something more than a purely economic institution. Public Enterprises operates within the precincts of the society. While its immediate society, where it operates, provides its environment, material, manpower, market etc. the whole global society provides for its global corporate citizenship and ensures its facilities in terms of environment, market, perspectives, exposure to technology and integration with priorities in the business scenario. The social responsibility of Public Enterprises consists of its responsibility to its consumers and customers, its prospects, its immediate society (community), its human resources (people), its society at large, ecological environment, the Government, and its business environment. Social responsibility of business is not new to our country. In the olden days, whenever there was a famine, the leading businessmen of the area would literally throw open their godowns and their treasure chests to provide food and other assistance to the needy. The history of every region of this country is replete with stories of the magnificent manner in which businessmen rose to the occasion in times of calamity. Even in ordinary times, it was the businessmen who looked after the welfare of the destitute, the goshalas, wells and ponds wherever what was difficult to get, the pathashalas and so on. So to accept social responsibility is no more than rededicating ourselves to the cherished values in the field of business. Gandhiji reminded of these values when he propounded the theory of trusteeship. India is a democratic welfare state. She wants to achieve welfare through democratic means. Business organization, which fit in with such a specification, would have a better scope to survive and grow here. In order to make them suitable for such a business environment, they should foster a corporate objective of maximizing social benefit. This must be considered as the social responsibility of business. It pertinently means that every business enterprise has a responsibility to take care of the societys interest. Though the fundamental purpose of Public Enterprises is to produce and distribute goods and services in such a manner that income exceeds costs, society expects that business is conducted in a socially responsible manner. Social responsibility embraces multitude of internal and external relationships of the firm. Business enterprises, conscious of their social responsibility, would seek to comply with the laws concerned with employment of women, non-discrimination in employment, ecological effects of production, consumers, and employee welfare, and in general they would think of the impact their action on the community. Social and ethical aspects of business impinge upon the choice of strategy. How societal values and expectations after business and how a firm perceives its social and ethical obligations are interactive in character and both of these may become constraints in strategy formation. That how consumerism, occupational health and safety, product safety, concern for environmental protection, nutritional issues, beliefs about ethics and morals and other for environmental protection, nutritional issues, beliefs about ethics and morals and other similar societal based factors impact upon the strategies have to accommodate these factors. Some instances can be cited. Most of the Public and Private Enterprises adopted the villages for development. Most of the Enterprises launched awareness camps about AIDS. Cigarette manufacturers have reduced the tar and nicotine content of cigarettes. Food processors have altered the use of preservatives in food products and have begun to promote nutritional content and natural flavours.
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The lending institutions have given up their overly concern with safety or security of money advanced and are now more concentrating on the competence of the entrepreneure and commercial viability of the project. All these instances demonstrate how business has adapted itself to changing social values and expectations. Running the enterprise in a socially responsible manner implies that the activities of the organizational are in tune with what is generally perceived as in the public interest. It also implies that the firm responds positively to emerging societal priorities and balances the interests of its various stakeholders. Further, it realizes the importance of being good citizen in the community and makes social and ethical obligations an explicit and high priority consideration in conducting its affairs. Being socially responsible has a positive appeal. The organization improves its standing in the public, which has the effect of enhancing its own performance opportunities. If the firms ignore the changing priorities and expectations of society, the result could be greater public criticism and more onerous regulation by government. Concern for social responsibility has led to the development of (more or less) formal procedures to monitor corporate compliance with changing demands. One such procedure is social audit. It is also common knowledge these days that business has attempted through advertising and public relations activity to explain and accentuate its consistency with various social objectives. Recognition of the need for social responsibility has also led several large enterprises to make intentional efforts to increase their sensitivity towards current and future pressures for changes in social expectations.
9.4 SOCIAL RESPONSIBILITY STRATEGIES

In view of the ongoing controversy regarding whether or not a business has social responsibility, it is not surprising to find a wide range of industry responses to the issue. Business responses to social responsibility tend to fall within four categories: (i) Social opposition, (ii) social obligation, (iii) social response, and (iv) social contribution. As illustrated in Fig. 9.1, these positions fall along a continuum, ranging from low to high levels of socially responsible behaviour.
Degree of Social Responsibility
Social Contribution
Social Response
So Oblig
Figure: 9.1: Approaches to Social Responsibility Source: Gene Burton and Manab Thakur, Management Today 45
Social opposition: This view is taken by the business which feel that they have no obligation to society in which they operate. When they are caught for any offense, their immediate responses is to try cover it up while denying it.
Table 9.1: Common Characteristics of Socially Responsible Firms 1. 2. 3. 4. 5. 6. 7. 8. 9. Initially founded by far-sighted people who visibly set the firms moral tone. Stuck to the basics and produced only high quality goods and services for specific market niches. Developed a public image that emphasized that commitment to quality and often used non-traditional means to promote it. Firmly practiced the dual principles of self-management and decentralization. Brought in outside people to provide needed talent and additional perspectives. Encouraged all employees to become part of the shared mission through full worker participation in decisions. Paid fairly and usually offered benefit packages exceeding the competition. Emphasized a democratic people orientation and did without executive perks. Constantly solicited feedback from customers on all subjects from product direction to corporate donations.
10. Top managers possessed an extensive knowledge of current events and took a wide-ranging interest in affairs outside their business. 11. Offered donations in cash or services to people in need of help. 12. Took an active role in the operations of their local communities. 13. Deal with like minded businesses and encourage their employers to do the same. 14. Constantly look to the future but always pay attention to the past.
Social Responsibility Towards Different Groups 1. In addition to making a fair and adequate return on capital, business must be just and humane, as well as efficient and dynamic. The modern business has manifold responsibilities (a) it self, (b) to its customers; (c) employees; (d) owners, shareholders and partners, (e) community and (f) the state. The task of management is to reconcile and harmonise these separate and sometimes conflicting responsibilities. 2. The S.R. of Business can best be assumed in an atmosphere of freedom with the least possible restraint on healthy competition. Concentration and monopoly have to be watched and guarded, and wherever necessary, dispersed. 3. Every business has an overriding responsibility to make the fullest possible use of its resources, both human and capital. Management has the responsibility to provide security of employment with fair wages and equal opportunity for personal growth and advancement within the business, which is a requirement of justice, and means of securing efficient management. 4. It highlights the respective roles of the enterprises, the shareholders, the workers, the customers, the management and the community. The responsibility of management is to fulfill the fair first needs of these claimants besides, providing consumer satisfaction.
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5. It laid emphasis on the reciprocal duties between business and the community through laying down of practical measures like reliable means of communication, better education of he citizens about civil responsibilities, local meetings and social audit. On the basis of the above seminar report, we may put down the social responsibilities of Business, in the Indian context in the flow chart given below We discuss, in the paragraphs that follow, the S.R. of business towards these different groups. The following flowchart presents businesss social responsibilities towards different groups.
Business Firms Responsibilities
Towards Owners/ Shareholders Fair Dividend Solvent and Efficient Business Optimum use of Resources Planned Growth Effective Communication
Towards Employees Meaningful Work Job Satisfaction Fairness Salaries & Benefits Best Quality of Work life Succession Planning and Development
Towards Customers Fair price Superior Quality Superior Service Superior Product Design Quick and Complete Information
Towards Government Payment of Taxes, Custom Duties etc Abide by the Laws
Towards Society Employment without Discrimination Employment to Disadvantaged Persons Community Welfare Services Business Morality Maintaining Pollution free Environment Maintaining Ecological Balance
Towards Inter-Business Fair Competition Cooperation for Sharing of Scarce Resources and Facilities Collaboration for Maximisation of Business efficiency
Observe the Policies
Maintain Law & Security
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Social Audit, which is a tool for evaluating, verifying and reporting the performance of the firm in the sphere of social responsibility. It will help a socially conscious organization to bring about greater strategic articulation and desirable modifications in its social policies and programs. In this unit the term social audit is defined and the desirability of undertaking social audit by a business enterprise is discussed. The various frameworks or methodologies for conducting social audit are explained. The potential difficulties that could be faced by an organization adopting social audit are discussed and critically evaluated. The status and the state of art of social audit in relation to India is examined and analysed. Finally, what looks like the future of social audit is explored.
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Case Study 1
SOCIAL RESPONSIBILITY OF BUSINESS: BHARAT PETROLUEM

Introduction Bharat Petroleum Corporation Limited (BPCL) is a downstream oil refining and marketing company. The company has its network spread over all the four regions in India and is represented in almost all markets. It caters to different petroleum sectors Liquefied Petroleum Gas (LPG) and Kerosene for domestic consumption, automotive fuels and lubricants for vehicles, and feedstock and fuels for industrial applications. The company also manufacture petrochemicals like Benzene, Toluene, Linear Alkyl Benzene feedstock etc. With a sales turnover of Rs. 25,650 crore and profits of Rs. 701.30 crore in 1999, BPCL is the 5th largest company by sales in India. Its strength lies in an efficient refinery and strong distribution network, which has given it a 20% market share in petroleum products in India. BPCL has a tie up with Shell Petroleum Co. of Netherlands to manufacture and market Shell lubricants in India. In a major expansion move, BPCL is increasing its refining capacity through 3 joint ventures and also adding on to its distribution strength by laying a similar number of pipelines. BPCL is also planning a foray into petrochemicals through a 1.8 million tonnes (mt) naphtha craker plant in Tamil Nadu for around Rs. 7,000 crore and this project is scheduled to go on stream by 2002. Ecological Concern BPCL has been continuously striving towards conservation and improvement of the environment by adopting new technologies. In March 2003, BPCL introduced low lead MS (with 0.15 gm of lead per liter) in the country. From April 1996, HSD with a maximum sulphur content of 0.5% by weight, was introduced in the metro cities and in the Taj Trapezium. From September 1996, HSD, with a maximum sulphur content of 0.25% by weight, was introduced in the Taj Trapezium. To meet the requirement of HSD all over the country with the revised specification of maximum sulphur content of 0.25% by weight, from April 1999, facilities for Diesel Hydro De-sulphurisation are being put up in the refinery. Distribution of other low sulphur fuels (which has maximum sulphur content of 1.8% by weight) was started in the National capital region from October 1996, which ended the use on High Sulphur FO and RFO. BPCL conducted two advertising compaigns of behalf of the industry the first on the importance of LPG conservation and the second on the introduction of low leaded petrol. On the pollution control front, BPCL has set up a special sophisticated plant to meet the stringent standards set by Minimum National Standards for Effluents from Oil Refineries (MINAS). BPCLs emission standards are far more stringent than the limits laid down by the Pollution Control Board. BPCL had also invested around Rs. 220 crore, in pollution abatement and energy conservation systems.
Contd....
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Contd.... Safety and Social Commitments. Safety continued to be accorded the highest priority in BPCL both in refining and marketing operations. In 2002-03, its refinery achieved 3 million man-hours without Lost Time Accident (LTA) on one occasion and one million man-hours without LTA on two occasions. The microprocessor based control system as its refinery monitors the operating conditions for safety hazards and the refinery is divided into three separate areas as high risk, low risk and medium risk. Each employee, irrespective of levels, is given fire-fighting training and mock drills are carried out at quarterly intervals for different range fires. Employees are given training on simulators so that they learn by committing mistakes on simulators and not in real conditions. BPCLs Mumbai refinery has a Mutual Aid agreement along with the neighboring 9 industries for fighting major fires. As a result of higher exposure to various safety awareness programs, there has been a reduction of injuries in BPCLs refinery by 34% for its own employees, and 43% for contractors employees, in 1996-97. Moreover the frequency of LTA has come down from 1.5% to 0.6% for its employees and from 5.6% to 1.7% for contractors employees. To enhance safety performance, BPCL introduced safety by walk-around concept wherein experienced officers were appointed as safety surveyors and safety sampling was done by senior management staff. It also organized a safety symposium at its refinery in which members from the oil industry, government bodies. Oil awareness on LPG safety, BPCL also screened one-minute films on the safe handling of LPG, on popular TV channels. BPCL sponsors many sporting events like Santosh Trophy, National Football Tournament, and also coaching camps for youngsters. Lifeline Express was contributed to social welfare a fully equipped train, which look the latest medical technology to remote villages of India. The company has also adopted 11 Scheduled caste/Scheduled tribes villages under the Component and Tribal sub-plan. The facilities provided by the company include community centers, tube/borewells, educational support medical facilities, vocational guidance and training to make villagers self-reliant and improve their standard of living. Achievements BPCL was adjudged the winner of the Oil Industry Safety Awards for its safety performance being the best among all the LPG Marketing Organization in 1995-96 for the fourth year in succession. BPCLs annual report for 199495 was selected by ICAI as the best presented amongst the public sector/joint sector companies for the second year in succession. The South Asian Federation of Accountants also adjudged the same as the second best presented in the non-financial sector in the SAARC region. BPCL received ISO-9002 certification from Bureau Veritas Quality International (BVQI) for 15 out of its 22 bottling plants. BPCL has also received ISO-9002 accrediation for its refinery, aviation service stations at Mumbai, Delhi, Calcutta and Bangalore depots at Miraj and Mysore and lubricants blending plant at Wadilube.
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Case Study 2
SOCIAL RESPONSIBILITY AFFLUENCE FROM EFFLUENTS

The Rashtriya Chemicals and Fertilizers Chembur plant is one of Bombays most well known cases of industrial pollution. The company, in the face of sustained public pressure, is making attempts to reduce environmental damage. When the World Bank instituted the Industrial Pollution Control Project (IPCP). RCF was one of the first to approach IDBI. In January 1993, RCF entered into an agreement with the financial institution for a DM 12.5 million (approximately, Rs. 45 crore) loan at 15.5 percent. RCFs problem was its two ammonia plants. These plants have been score spot for the company and have been shut down on more than one occasion. At the time the plants were setup, it was not mandatory, to include cost of pollution control equipment in the project cost. But as local residents started complaining about the pollution levels, RCF started looking for alternatives. There were modifications going on in both plants. RCF had to wait till these were complete to be able to estimate the volume of pollutants that would require treatment. Finally a Ministry of Environment notification in the late 1980s ordering them to clean up forced RCF into action. In the process of manufacturing ammonia, certain gases are accumulated which need to be removed by purging. Using cryogenic technology bought from a German firm, RCF decided to set up a purge gas recovery plant, which would in the process of treating ane-rich fuel, both of which can be sold commercially, thereby making pollution control not just pay for itself but also generate additional resources. And at the end of the process, the plant produces no effluents. RCFs choice of technology is determined by financial considerations. They had three options. In the first case, they could simply treat the ammonia, which is all they are required to do under the regulations. Their internal rate of return (IRR) for just ammonia recovery was an uneconomical 10.7 percent. Their second option was to choose ammonia and synthetic gas recovery, for which the IRR was 27 percent. The final option, the one they chose, includes the recovery of liquid argon and gives them an IRR of 46.3 per cent. Pay back period is a brisk 26 months. Whether RCF will actually earn its projected income is doubtful. Since the time the plant has come up, argon prices have crashed due to excess capacity and intense competiters are mainly the steel and automobile industry, which use argon for welding. RCF officials however, say they are safe, because even recovery to synthetic gas stage gives them an IRR of 27 percent, leaving RCF a comfortable profit margin.
Social Opposition: This view is taken by the business which feel that they have no obligation to society in which they operate. When they are caught for any offense, their immediate response is to try to cover it up while denying it.
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9.5 SOCIAL AUDIT : INTRODUCTION

It is generally believed today that it is the duty of the privately owned enterprise to ensure that it does not adversely affect the life of the community in which it operates. Though the duty is not clearly defined, it is usually thought that the corporate business should not cause pollution, should not discriminate in employment, should not make money from insavoury or immoral activities and should not withhold information from consumers about their products. It is also expected that they should make positive contribution to the life of the community. The corporate business has become an integral part of the functioning of any society. It is the recipient of the benefits and privileges of the State and society in which it operates. The society therefore expects the corporate business to assume responsibility towards it. Earlier it had been assumed that the vast material resources like water, land and air could absorb the wastes of production and neutralise any potential harmful effects. Man assumed that the natural environment would always renew itself. It is abundantly clear now that this is not so. It is common knowledge that society is being threatened by pollution of land, sea and air. To an increasing degree, business has been creating conditions that have resulted in many social ills, though the same may not be by design or choice. There are various social abuses, some germane to the profit persuit, some to the negligent and unscrupulous behavior of business leaders. Most would agree that if these conditions are permitted to continue it must inevitably lead to social suicide. Steps must be taken to correct the abuses. With changing social and economic values and with increasing expectations of society from corporate business, the companies that adjust to the rational changes and help in pioneering such changes are likely to survive and flourish and those which oppose, block or restrict the changes may find it difficult to survive in future. Economic goals or corporate business can no longer be separated from social goals. Firms have to recognize their due responsibilities and consider these in the planning and action stages. They must have a social policy which means that they must include in their accounting the direct costs to society of their operations to the extent possible. They should communicate their social policy not only to the members of the organization but also to outside groups. Social audit is a tool for judging how a corporate entity has implemented its social policy. The increasing demand for socially oriented programmes of one kind or another and for measurement and disclosure of environmental effects of organizational behaviour has created pressure for adopting some kind of social auditing procedure. This unit attempts to provide a general definition of social audit, discusses the various approaches or methodologies for conducting social audit and points out the difficulties encountered in measuring social performance etc.
9.6 WHAT IS SOCIAL AUDIT?

Social audit has been variously defined. As it happens with any new management technique, there is not yet any definition which has gained acceptance. Bauer and Fenn define Social audit as a commitment to systematic assessment of and reporting of some meaningful definable domain of a companys activities that have social impact. The authors emphasis is on the assessment and reporting of corporate social programmes.
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Dilley defines the social audit as investigation of an enterprises performance as a member of the community in which it has its primary impact: such investigations consisting of the preparation of an inventory of the socially relevant activities of the enterprise, qualification (to the extent possible) of the social costs and benefits resulting from those activities and compilation of the other quantitative information providing insight into the social performance of the enterprise (Hindu Business Line, 1997). Dilleys definition highlights the making of an inventory of the socially relevant activities and their quantification in terms of costs and benefits. Caroll and Bailer, describe social auditing as a form of measurement. According to them Social audit is a natural evolutionary step in the concern for operationalising corporate social responsibilities and, in its essence, represents a managerial effort to develop a calculus for gauging the firms socially oriented activities. That, it is an attempt to measure, monitor and evaluate the organizations performance with respect to its social programmes and social objectives (Chartered Secretary, Oct, 1997) Ahmed Belkaoui has attempted to collate the definitions by Bauer and Fenn, and by Dilley. He states that Social Audit much like the financial audit is an identification and examination of the activities of the firm in order to assess, evaluate, measure and report their impact on the immediate social environment (Reddy, 1999). The words in bold are important in this definition which require some elaboration. 1. Identification assures a tracking down and inventory of all the firms activities having potential impact on the firms environment identification will result in a definition of the social dimensions of the firms activities in terms of social costs or social benefits depending on the nature of their impact on the social environment. Assessment and Evaluation imply the categorisation of the firms impact on its environment as either positive social benefits or negative social costs. Measurement implies the assignment of a quantitative or qualitative score to the social costs and benefits identified in assessment and evaluation. Reporting assumes the disclosure of the firms performance as measured.
2.
3.
4.
Features of Social Audit The nature of social audit can be made more clear if we bring out its salient features. The areas for social audit include any activity (see Table 9.1) which has a significant social impact, such as activities affecting environmental quality, consumerism, opportunities for women and other disadvantaged people in society and similar others. The second feature about social audit is that it can determine only what an organization is doing in social areas, not the amount of social good that results from these activities. It is a process audit rather than an audit for results. Thirdly, social performance is difficult to audit because most of the results of social activities occur beyond the companys gate and the company has no means of securing data on the results. Even if data are available it is difficult to establish how many of them have occurred due.
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Table 9.2 Activities Covered by Social Audit A. Ecology and Environmental Quality: B. Clear-up of existing pollution Design of processes to prevent pollution Aesthetic improvements Noise control Dispersion of industry Control of land use Required recycling
Consumerism: Truth in labeling, in advertising, and in all business activities Product warranty and service Control of harmful products
C.
Community Needs: Use of business expertise to solve community problems Reduction of role of business in community power structure Aid with health care facilities Aid with urban renewal
D.
Governmental Relations: Restrictions on lobbying Control of business in political action Extensive new regulation of business Restrictions on international operations
E.
Business Giving: Financial support for artistic activities Donations to education Financial support for assorted charities
F.
Minorities and Disadvantaged Persons: Training of hard-core unemployment Equal employment opportunities and quotas for minority employment Operation of programmes for alcoholics and drug addicts Employment of persons with prison records Building of plants and offices in minority areas Purchasing from minority businessmen Retraining of workers displaced by technology
G.
Labour Relations: Improvement of occupational health and safety Prohibition of export of jobs through operations in nations with law labour costs. Provision of day-care centres for children of working mothers Expansion of employee rights Control of pensions, especially vesting of pension rights Impatience with authoritarian structures; demand for participation
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Contd....
Contd....
H. Shareholder Relations Opening of boards of directors to members of public representing various interest groups Prohibitions of operations in nations with racist or colonial governments Improvement of financial disclosure Disclosure of activities affecting the environment and social issues Economic Activities Control of conglomerates Breakup of giant industry Restriction of patent use
I.
Need for Social Audit Thus, social audit need be adopted by every corporation to apprise its shareholders, investors customers, government and the community of the social activities and financial results of its working. Such information should be disclosed, as mentioned by the National Association of Accountants Committee on Accounting for Corporate Social Performance in Canada, for four major categories as below: 1) Community Involvement: Socially-oriented activities that are primarily of benefit to the general public. Examples include : general corporate philanthropy, housing construction, and financing, health, services, volunteer activities among employees, food programmes and community planning and improvement. 2) Human Resources: Social performance directed to the well-being of employees. Categories in this area include employment practices, training programmes, job enrichment, working conditions, promotion policies and employee benefits. 3) Physical Resources and Environmental Contributions: Activities directed towards alleviating or preventing environmental deterioration (pollution). This category includes the adherence to the law and going beyond it in areas such as air quality, water quality. Also included is the conservation of scare resources and the disposal of solid waste. 4) Production or Service Contribution: Concerned with the impact of the companys product or service on society. This includes consumerism, product quality, packaging, advertising, warranty provisions and product safety. In India, the companies in general and the public sector undertakings in particular should make disclosure of information for the use of people outside the enterprise, which include: i) ii) financial institutions and creditors (who are interested in financial position, fundflow and debt-paying capacity of the enterprise); shareholders, academic institutions and consultants (who are interested in quantitative and qualitative information regarding proper utilization of resources transferred to the concern);
iii) the government (for knowing about financial and statistical information for planning and operating of those enterprises and initiating and administering financial and economic polices and programmes at state and national levels
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iv) trade unions, political leaders (require information for broad labour policy decisions, for etc); and v) environments (who need information regarding air and water pollution ecological imbalances, depletion of resources and conservation of energy). Disclosure of information should be thus financial and non-financial. Financial Information This includes the disclosure of financial position of the firm, the form of balance sheet, profit and loss accounts, special accounts, audit reports. Such information is mainly disclosed in quantitative form, such as income and expenditure of the company, sources and uses of funds, details about assets and liabilities, working capital, new capital investment, outstanding distribution of earnings, interest taxes paid, liquidity position and incentives. Financial information reveals the true position of a company regarding its liquidity and bankruptcy. Non-Financial Information This includes information relating to social performance, human resources, marketing activities, business environment, production etc. Such information may be disclosed in quantitative and qualitative terms, but the disclosure of information is to influence profitability in the long run and to build the companys image. Information on social performance generally includes various activities regarding employee welfare, community work and involvement, social cultural programmes, role of company in solving social problems of the area, programmes dealing with training and developing human resources etc. Social programmes are specified in annual reports. Information on human resources includes expenditure on recruitment, selection, training and development of employees, facilities for self-development in organization, special provision for development of hard-core unemployed persons, sponsoring executives for delivering lectures in universities, educational institutions and for foreign training. Such information is disclosed in the Directors Report and the Chairmans speech. Information on marketing includes sales figures product-wise and plant-wise, cash and credit sales, pricing and impact of competition on pricing, product innovations and development, quality of product advertising and promotional efforts for distribution of the products, selling commission traveling expenditure of marketing personnel, etc. Such information is disclosed in the Directors report. Chairmans statement or in advertisements etc. Environment information includes information about the political, economic, sociocultural and technological environment, especially on such items as inflation, unemployment, impact of changes on taxes, changes in legal requirements of business activities, contribution and participation in company in community development, technological development, pollution control measures, use of indigenous materials and efforts at conservation of natural and human resources. The disclosure of information finds place in the annual reports and chairmans speech.
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9.7 SOCIAL AUDIT IN INDIA

In India, the TISCO has been the first company to set up a Social Audit Committee for conducting social audit of its work under the chairmanship of Justice S.P. Kotwal, and Prof. Rajini Kothari and Prof. P.G. Mavalankar as members. This committee was entrusted with the task of examining and reporting whether, and the extent to which, the TISCO has fulfilled the objectives contained in Clause 3A of its Articles of Association regarding its social and moral responsibilities to the consumers, employees, shareholders, and the local community. The Committee opined, On an examination of all aspects, the company has fulfilled its obligations to all concerned. Started with TISCO the social audit has picked up. UTI, the premier financial institution has also planned for a social audit. In the report for 1993-94, the chairman of UTI has declared that to address the question as to what extent this unique organization has been able to fulfill its responsibilities vis--vis its various publics and society at large. And independent social audit committee of five eminent citizens has been setup.
9.8 BENEFITS OF SOCIAL AUDIT

The benefits of social audit are as follows: 1. Social audit enables the company to take close look at itself and understand how far the company has lived up to its social objectives. Related to the first benefit is the fact that social audit encourages greater concern for social performance throughout the organization. Social audit provides data for comparing effectiveness of the different types of programmes. Social audit provides cost data on social programmes so that management can relate the data to budgets, available resources, company objectives, and projected benefits of programmes. Social audit provides information for effective response to external claimants that make demands on the organization. News know what a business is doing in areas of their special interest, and a business needs to respond as effectively as possible. The social audit shows a business where it is vulnerable to public pressure and where its strengths lie.
2.
3.
4.
5.
Activities a) What activities of the organization in which you are working (or with which you have been associated) fall, in your view, in the area of social audit? ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ......................................................................................................................
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b) Discuss the social reporting done by your organization. ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ......................................................................................................................
9.9 SUMMARY
In recent times corporate governance and corporate social responsibility have become the talk of the day. In almost all business organizations, this concept is now being used formally. This has gained a wide recognition as it is important for the economic health of the organization and the welfare of the society at large. Since early 90s recommendations of different committees have been taken into consideration to understand the practical approach to the concept of corporate governance. Social responsibility in business or more popularly known as corporate social responsibility means that the organization has to work in tune with the public interect. This comprises of areas like social audit. This becomes a monitoring tool for the public enterprises so as to enhance the efficiency of these enterprises.
9.10 SELFASSESSMENT QUESTIONS

1. Define Corporate Governance? 2. Discuss the obligations of public enterprises? 3. How Corporate Governance is relevant in todays context? Explain? 4. Why Social Responsibility is important for the business? 5. What are your recommendations of social responsibility? 6. Explore one successful enterprise of your choice, which is society oriented? 7. Bring out the features and benefits of social audits?
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9.11 REFERENCES
www.bharatpetroleum.com The Hindu business line, (1997). Corporate Governance. (October, 1997). The New Paradigm, Chartered Secretary October. The Freedom to be Giants. (July 1997). in Leash, The Economic Times. Reddy, B. Rathan. (1999). Essentials of Business Environment. Institute of Public Enterprise. Mishra, R.K. (2002). Restructuring of State Level Public Enterprise. Institute of Public Enterprise. Mishra, R. K. & Reddy, Venugopal. (1995). Public Enterprises towards a White Paper. Corporate Governance Putting Investors First: Scott C. Newquist with Max B. Russel, Jaico books. www.jaicobooks.com Corporate Governance and PSU. Dec. 19, (1996) The Economic Times.. Committee on Financial Systems. (1998). (Narasimham Committee-part II).
9.12 FURTHER READINGS

Corporate Governance. October, 1997. The New Paradigm, Chartered Secretary. Reddy B. Rathan. (1999). Essentials of Business Environment, Institute of Public Enterprise. Mishra, R. K. (2002). Restructuring of State Level Public Enterprise, 2002 Institute of Public Enterprise. Mishra, R. K.& Venugopal Y. (1995). Public Enterprises towards a White Paper.
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UNIT 10
Objectives
APPRAISAL OF PUBLIC ENTERPRISE PERFORMANCE-I
Dimensions and Methods of Evaluating Enterprises Performance
After going through this unit you should be able to:
! ! ! !
10.1 10.2 10.3 10.4 10.5 10.6 10.7
Know about the magnitude and growth of CPEs; Understand the sources of funds, and financial performance of PEs; Get acquainted with the larger role of public sector after comparison with private sector; Learn about various reform measures of PEs.
Structure Growth of Central Public Enterprises Investment and Financial Performance in Central Public Sector Enterprises Comparison of Public Sector with the Private Sector Reform Measures and their Impact on Public Enterprises Summary Self Assessment Questions References and Further Readingss
10.1
GROWTH OF CENTRAL PUBLIC ENTERPRISES
The economy of India at the time of Independence in 1947 was an agrarian economy. Development of economy needed a planned and systematic approach. There were various problems faced by the Indian economy at this stage. Some of them are as follows: ! a weak industrial base;
! ! ! ! ! ! !
low level of savings; inadequate investment; lack of infrastructural facilities; widespread poverty; inequality in income and levels of employment; regional imbalances in economic attainments; lack of trained manpower.
The industrial Policies of 1948 and 1956 laid the foundation of a mixed economy in which both private and public enterprises would march hand in hand to accelerate the pace of industrial development. But the private sector lacked the following:
! ! ! !
necessary resources in terms of funds; managerial and scientific skill; will to undertake risks involved in large long-gestation investments; will to enter areas of social obligations and security;
Public sector was thus conceived basically as an instrument of social security, economic development, ensuring law and order and protection of individual property. This was particularly so, where governments assumed an obligation to:
! !
regulate private entrepreneurs tendency to make monopolistic profits; eliminate social, economic and regional inequalities;
1
Public Enterprise: Performance and Evaluation
! ! ! !
invest in socially profitable areas of industry and infrastructure; speed up rate of economic development and technological growth; achieve self-sufficiency and self reliance; become main instrument of entrepreneurial activity, etc.
Policy on public sector in India is guided by the Industrial Policy Resolution of 1956 which assigned the public sector a strategic role in the economy. The major objectives of setting up public enterprises in India are:
! ! ! ! ! ! !
to help in rapid economic growth and industrialisation; to earn return on investment and generate resources for development; to promote redistribution of income and wealth; to create employment opportunities; to promote balanced regional development; to assist the development of small-scale and ancillary industries; to promote import substitution and save foreign exchange.
According to the announcement in Industrial Policy Statement, 1991, in order to raise resources, encourage wider participation and promote greater accountability, the government equity in selected public enterprises was to be offered to Mutual Funds, Financial Investment Institutions, workers and general public. The main elements of this policy towards Public Sector Enterprises are:
! ! ! ! ! !
bring down government equity in all non-strategic PSEs to 26 per cent or lower, if necessary; restructure and review potentially viable PSEs; fully protect the interest of workers. To put in place mechanisms to raise resources from the market against the security of PSEs assets for providing an adequate safety net to employees. To emphasize increasingly on strategic sale of identified PSEs. To use the receipts from disinvestment and privatisation for meeting expenditure in social sector, restructuring of CPEs and retiring public debt.
The Policy in 2000-01 added the following objectives:
In 1956, there were 5 Central Government Enterprises. It grew to 179 in 1980. In 2001, there were 242 Central Public Enterprises according to the Public Enterprises Survey 2001, excluding 6 insurance companies and 2 financial institutions as shown in Table 10.1 Table 10.1 : Growth in number of CPEs Year 1951 1961 1980 1990 2001 2002
2
No. of Units 5 47 179 244 242 240
Source: GDI, Public Enterprise Survey, 2001-2002
The 240 Central Public Sector Enterprises of 2002 can be classified under following groups:
Group Total Enterprises (2002)
I. II. III.
Enterprises under Construction Enterprises Manufacturing / Producing Goods Enterprises Rendering Services Total
10 149 81 240
Source: GDI, Public Enterprise Survey, 2001-2002
The basis of grouping will be clear from the following examples of sectors included in the groups. The largest group is of the CPEs in the area of manufacturing and producing goods. Table 10.2 shows the various sector of public enterprises and their numbers in each group.
Table 10.2 : Sectoral Distribution of PEs
Group I. II.
Total Enterprises (2002)
Enterprises under Construction 10 Enterprises Manufacturing / Producing Goods 1. Steel 7 2. Minerals & Metals 11 3. Coal & Lignite 9 4. Power 4 5. Petroleum 13 6. Fertilizers 7 7. Chemicals and Pharmaceuticals 20 8. Heavy Engineering 11 9. Medium and Light Engineering 25 10. Transportation Equipment 10 11. Consumer Goods 11 12. Agro-Based Industries 4 13. Textiles 17 Total II 149 III. Enterprises Rendering Services 1. Trading and Marketing Services 16 2. Transportation Services 10 3. Contract and Construction Services 10 4. Industrial Development and Technical Consultancy Services 14 5. Tourist Services 10 6. Financial Services 8 7. Telecommunication and Information Technology Services 4 8. Section 25 Companies 9 Total III 81 Grand Total (I + II + III) 240
Source: GDI, Public Enterprise Survey, 2001-2002 3
10.2 INVESTMENT AND FINANCIAL PERFORMANCE IN CENTRAL PUBLIC SECTOR ENTERPRISES

Sources of Funds : The major sources of funds of PE finance are:
! ! ! ! ! ! !
Equity and loans from government Internal resource Capital market for equity Loans from public financial institutions Public deposits Bonds Foreign finance
Equity represents the interest free perpetual capital. The right to own and control the enterprise goes with the ownership of equity, which in PEs is held by the government or by holding or by apex body for its subsidiaries, or partly by public and financial institutions. A part of the capital, generally 50% is generated as long-term loans from government, whose rate of interest vary as per the loan period. The chief source of finance for a business enterprise should be its own resources. PEs are also expected to operate in a way so as to meet their full cost of production and make substantial contribution towards the cost of their capital development out of their own earnings. This will reduce the claim upon the nations savings and burden on the exchequer. After liberalisation, the government not only went in for partial disinvestment of equity in select PEs, it also allowed PEs to raise resources through the issue of equity in the capital market. Public deposits provide a good source of short and medium term finance. Public financial institutions were also allowed in 1971 to provide assistance to government companies. Similarly bonds and debentures are also a major source of finance for public enterprises. The Indian Railways Finance Corporation and Power Finance Corporation were set up in 1986 for the purpose of raising funds. Growth of Investment: The total investment in central government enterprises in shown in the table below. It has increased from a meager Rs. 29 crores to Rs. 3,24,632 crores in 2002 as shown in Table 10.3. Table 10.3 : Growth of Investment in CPEs Year 1951 1961 1980 1990 2001 2002
4
No. of Units 5 47 179 244 242 240
Total Investment (Rs. crores) 29 960 18,150 99,330 2,74,189 3,24,632
Growth of Inv 350000
300000
250000
200000
150000
100000 15534
169
0 1.4.1951 1.4.1956 1.4.1961 1.4.1969 1.4.1974 31.3-1966 31.3.1979 1.4.1980

179
29
21
81
47
948
73
2410
84
3897
Figure 10.1 : Growth of Investment in CPEs No. of PSEs Table 10.4 : Division of Investment Groupwise Group I. II. Enterprises under Construction Enterprises Manufacturing / Producing Goods 1. Steel 2. Minerals & Metals 3. Coal & Lignite 4. Power 5. Petroleum 6. Fertilizers 7. Chemicals and Pharmaceuticals 8. Heavy Engineering 9. Medium and Light Engineering 10. Transportation Equipment 11. Consumer Goods 12. Agro-Based Industries 13. Textiles Total II III. Enterprises Rendering Services 1. Trading and Marketing Services 2. Transportation Services 3. Contract and Construction Services 4. Industrial Development and Technical Consultancy Services 5. Tourist Services 6. Financial Services 7. Telecommunication and Information Technology Services 8. Section 25 Companies Total III Grand Total ( I + II + III ) % Share of Investment in 2002 3.19 7.25 1.75 8.40 14.17 11.32 5.58 1.84 1.25 1.53 0.92 0.99 0.04 5.77 60.81
122
6237
50000
18150
0.83 2.13 2.03 4.55 0.06 17.82 8.16 0.42 36.00 100.00
Investment is the aggregate of paid up share capital, share application money, pending allotment and long term loans. Due to the policy of encouraging public sector, heavy investment was made in this sector. The division of investment group wise (2002) is shown in Table 10.4.
! ! ! !
bulk of investment is in producing and selling goods (60.8%); in the producing / selling goods sector, the major investment is in basic industries like steel, coal, power, petroleum, fertilizers etc.; the investment pattern shows that the thrust was to create infrastructure of power, transport and electricity; the average rate of growth of investment was 16 and 19 per cent per annum except during 1968-74 when it was 10%.
The Central Government has contributed a major share of investment in public enterprises. Some State Governments, holding companies which are themselves public sector undertakings, financial institutions, banks and private funds (both Indian and foreign) have also contributed to the investment of these enterprises. Table 10.5 shows different sources of Investment. Table 10.5 : Sources of Investment
Year Control Govt. State Govt. Holding Company Foreign Funds FI / Banks + others Share Application Money 2,475 4,631 3,409 2,006 3,225 4,709 Total
1997 1998
94,470 99,954
540 785 981 1,111 1,389 1,494
18,198 17,748 20,252 20,704 23,049 26,333
4,499 5,852 6,569 8,001 4,513 6,844
93,428 1,02,054 1,04,907 10,981 1,20,283 1,42,047
2,13,610 2,31,024 2,39,167 2,52,745 2,74,198 3,24,632
1999 1,03,049 2000 1,11,112 2001 1,20,839 2002 1,43,205
Source: PE Survey, 2002-03
Long-term Funding: Public enterprises reliance on government funding is decreasing continuously. As against this, the non-government funding like foreign loans and deferred credits, loans from banks and financial institutions has been constantly increasing. In view of the present policy of non-availability of budgetary support, Public Enterprises would have to raise more and more long term finance on their own.
Internal Resources: PSEs have to generate resources internally to finance their developmental activities. They are also expected to generate surplus for financing the needs of priority sectors. It is worth while to note that the public enterprises have managed to increase their internal resource generation over the year. However the percentage of total internal resources available for utilization after repayment of loans, and internal use, is still very small in comparison to the extra budgetary resources raised by public enterprises, budgetary support received from the government and the total plan outlay. This is visible from Table 10.6.
Table 10.6 :Generation of Internal Resources by PEs During 3rd to 9th Plan Period (Rs. in crores) Plan III IV V VI VII VIII IX Amount 287 1,260 3,439 13,768 37,678 1,01,212 1,88,774
Share of Internal Resources in comparison to Extra budgetary, budgetary and Plan outlay. (Rs. in crores)
Plan Internal Resources Extra Budgetary support + Budgetary support + Plan Outlay 2,51,191 3,17,873
VIII IX
46760 98444
The top 10 Enterprises in terms of investment are listed below (Table 10.7). Table 10.7 : Top 10 Enterprises in terns of Investment (Rs. in crore)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Bharat Sanchar Nigam Ltd. National Thermal Power Corporation Ltd. Housing & Urban Development Corporation Ltd. Steel Authority of India Power Grid Corporation of India Ltd. Indian Railway Finance Corporation Rural Electrification Corporation Ltd. National Hydro-electric Power Corporation Ltd. Power Finance Corporation Indian Oil Corporation Ltd. 23,129 19,394 18,046 13,571 13,342 13,130 12,322 11,906 11,870 11,481 7
Certain Financial Parameters: The performance analysis done by the public sector enterprise survey indicates the following trends:
Fixed Assets Ratio: The ratio of fixed assets to long term funds indicates that how much long term funds have been utilised to finance the fixed assets. Fixed assets need to be financed through long term funds only and part of working capital should also be financed through long term funds. PEs have shown an increase in this ratio which is a healthy trend.
Year 2000-01 2001-02 Fixed Asset Ratio 0.57 : 1 0.60 : 1
Debt Equity Ratio: The ratio of total loans to shareholders funds is the debt equity ratio. This ratio indicates the dependence of the PSEs on borrowed funds viz--viz own funds. A decrease in this ratio indicates that PSEs are gradually moving towards internal resource generation.
Year 2000-01 2001-02 Debt Equity Ratio 0.021 : 1 0.952 : 1
Consistent Growth in the Turnover / Operating Income: The turnover / opearting income of PSEs have grown significantly as shown in figure 10.2.
2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95 1993-94 1992-93 0 27600 260735 226919 187355 158049 147266 50000 100000 150000 200000 250000 30000
Figure 10.2 : Turnover/Operating Income
Over the period 1992-2002, it has increased from Rs. 1,47,266 crore in 1992-93 to Rs. 4,78,728 crore during 2001-02. The increase in turnover during this period works out to be 258%.
Table 10.8 : Percentage Growth of Turnover

Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Source: PE Survey, 2002-03 Turnover / Operating Income 12.83 9.98 7.32 18.54 21.12 14.90 5.86 12.38 25.48 1.40 4.47
A group wise analysis done by Public Enterprise survey indicates that the growth of turnover is higher for enterprises rendering services as compared to the enterprises producing and selling goods (Table 10.8). Top 10 enterprises contribute 69.11% of the turnover of all enterprises (Table 10.9). Table 10.9 : Top Ten Enterprises in terms of Turnover
Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name of the Enterprises Amount Rs./crore 1,14,863.95 44,433.84 39,829.48 31,556.22 24,299.89 23,233.77 17,911.05 15,683.68 10,572.95 8,452.57 3,30,837.40 4,78,727.77 % of Total Turnover 23.99 9.28 8.32 6.59 5.08 4.85 3.74 3.28 2.21 1.77 69.11 100.00
Indian Oil Corporation Ltd. Hindustan Petroleum Corporation Ltd. Bharat Petroleum Corporation Ltd. Food Corporation of India Bharat Sanchar Nigam Ltd. Oil & Natural Gas Corporation Ltd. National Thermal Power Corporation Ltd. Steel Authority of India Ltd. Gas Authority of India Ltd. I.B.P. Co. Ltd. Total Total Turnover
Source: PE Survey, 2002
Dividend Declared and Export Earnings: Though PEs have shown an increase in the dividend declared by them in the last three years, the amount of increase has declined. PEs have also shown a decline in their export earnings (Table 10.10). Table 10.10 : Dividend Declared and Export Earnings of CPSEs
(Rs. in Crore) Year 1999-00 2000-01 2001-02 Dividend Declared 5,455 8,260 8,067 Export Earnings 19737 24772 20886 9
Source: PE Survey, 2002-03
10.3 COMPARISON OF PUBLIC SECTOR WITH THE PRIVATE SECTOR

Since independence there has been a progressive expansion in public sector. However, the role of public sector can be clearly envisaged when it is compared with private sector. This will help us to understand the larger role played by public sector in the Indian economy. Employment: Public sector has been employing the major chunk of the population. It has played the role of a social developer. Moreover, the employment in public sector has been increasing. The public sector account for about 70% of total employment (Table 10.11). Table 10.11 : Public & Private Sector Employment in India Year 1971 1981 1991 2001 Public Sector (in lakhs) 71 155 190 191 Private Sector (in lakhs) 121 74 77 87 Total 192 229 267 278 % of employment in public sector 55 68 71 70
Source: Economic Survey, 2002
Saving: The share of public sector to national savings is not very encouraging. It contributed only 5.63% in 1997-98 while the private sector contribution was about 94%. Further the share of public sector in total savings has been declining over the years (Table 10.12). Table 10.12: Share of Public and Private Sectors in Gross Domestic Savings Plan As % of GDP at Market Prices Public Sector I II III IV V VI VII VIII 1997-98 2000-01 1.7 2.0 3.4 3.0 4.6 3.6 2.3 1.4 1.0 1.7 Private Sector 8.7 10.4 10.9 14.4 17.0 16.5 18.1 21.9 22.1 25.1 10.4 12.4 14.3 17.4 21.6 20.1 20.4 23.3 23.1 23.4 Total
Source: CMIE, 2002 10
The basic causes for decrease in share of public sector in savings is rapid increase in state expenditure, excessive borrowings from the banking sector and less generation of internal resource. GDP: The share of public sector in Gross Domestic Product has grown, but it is very low compared to the private sector. This share has been rising since 1970 while that of private sector has been declining. However, since 1993-94, the share of both enterprises in GDP has remained more or less constant (See Table 10.13). Table 10.13 : Contribution to GDP Year 1971 1981 1991 1992 1993 New Series 1994 1995 1996 1997 1998 25.92 25.59 25.24 23.98 25.31 74.08 74.41 74.77 76.02 74.69 Public Sector % 13.84 19.74 26.31 27.24 27.32 Private Sector % 86.16 80.26 73.69 72.76 71.68
Saving-Investment Gap: The public sector has been generating low savings. But there has been an increase in investment over the years. This is just the opposite in the private sector. Thus there has always been a negative saving investment gap in the public sector. Profitability: Trend analysis of profitability of PSEs on the basis of financial ratios indicates an impressive trend of improvement in the financial performance. Financial Ratio Meaning Increase in % from 1991-92 to 2001-02
PBDIT PBIT NP
Profit before depreciation, interest and tax Profit before interest and tax Net profit
255.25% 296.42% 696.24%
Sector wise analysis of profitability indicates that profitability has declined over the years, in particular for the enterprises involved in manufacturing of goods. The sector-wise analysis of profitability indicates that gross profitability declined for various sectors except those for power as well as petroleum companies; agrobase and textile enterprises reported loss. Further, net profitability reduced over the years
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and turned out to be negative for engineering, fertilizers, chemicals and pharmaceuticals, textiles and agro-based industries. Power and petroleum sectors maintained their positive profitability. Comparison of manufacturing public sector enterprises with private manufacturing companies has shown that wage costs in public sector were far higher, and fixed costs were higher by an even bigger margin. However, it should be mentioned that public sector were charged with responsibility of developing capital intensive infrastructure and social sector. Figure 10.2 shows profitability in terms of PBDIT, PBIT and Net profit.
100000 90000 80000 70000 60000 50000 33384 27707 18556 40000 25227 15957 30000 20000 10000 0 1992-93 1993-94 1994-95 1995-96 1996-97 1 PBIT 40161 44457 53062 30915 9574 PBDIT 10186
22630
3271
4545
Figure 10.2 : Profitability in Terms of PBDIT, PBIT and Profit
Table 10.14 and 10.15 shows top ten profit making and low making enterprises respectively. Table 10.14 : Top ten profit making enterprises (2001-02) (Rs. in crore) Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9.
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Name of the Enterprises Bharat Sanchar Nigam Ltd. Oil & Natural Gas Corporation Ltd. National Thermal Power Corporation Ltd. Indian Oil Corporation Ltd. Nuclear Power Corporation of India Ltd. Mahanagar Telephone Nigam Ltd. Gas Authority of India Ltd. Northern Coalfields Ltd. Bharat Petroleum Corporation Ltd. Neyveli Lignite Corporation Ltd.
7178
27578
Net Profit 6,312 6,198 3,540 2,885 1,549 1,301 1,186 900 850 819
10.
Total
25,540
Table 10.15 : Top Ten Loss Incurring Enterprises (2001-02) (Rs. in crore) Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name of the Enterprises Steel Authority of India Ltd. Fertilizer Corporation of India Ltd. Bharat Coking Coal Ltd. Hindustan Fertilizer Corporation Ltd. Konkan Railway Corporation Ltd. National Jute Manufacturers Corporation Ltd. Hindustan Photo Films Manufacturing Corporation Ltd. Bharat Gold Mines Ltd. Eastern Coalfields Ltd. Indian Drugs & Pharmaceuticals Ltd. Total Net Profit 1,706.89 1,104.10 755.00 572.71 369.81 364.33 353.72 283.45 277.64 250.57 6,038.22
PSEs have been responsible for a considerable increase in internal resources generated in the post reform programme. These enterprises have also fulfilled their social obligations to the community at large by providing education, medical, recreational and vocational facilities to the people in the vicinity of their township. This is at a time when the budgetary support to PSEs has been considerably reduced and the number of industries reserved for the public sector reduced from 17 to just four. The public sector has the major role to play in strategic areas. Even today, power sector PSEs like NTPC, NHPC, Power Grid Corporation, PFC and state utilities continue to shoulder the increased burden to energise this sector. A large chunk of the Rs. 800,000 crore investment estimated by 2012 to add 1,00,00 MW capacity is expected to come from the public sector.
10.4 REFORM MEASURES AND THEIR IMPACT ON PUBLIC ENTERPRISES

Public sector reforms were introduced in India in 1991 as part of process of economic liberalisation. The Industrial Policy 1991, envisaged that, In order to raise resources and encourage wider public participation, a part of the governments share holding in the public sector would be offered to mutual funds, financial institutions, general public and workers. The Disinvestment Commission was constituted by the government in 1996 to advice the government on the extent, mode, timing and pricing of disinvestment. The commission submitted 12 reports to the government covering 58 PSUs. These reports contain specific recommendations, including disinvestment through strategic sale in 29 PSUs, trade sale in 8 PSUs, offer of share through GDR and domestic route for 5 PSEs, no disinvestment for 1 PSU, disinvestment deferred in 11 PSUs and closure in respect to 4 PSUs. The commission term expired in 1998 and the Department of Disinvestment (DOD) was constituted as a nodal department to streamline and speed up the process of disinvestment. This department has been
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made responsible for decisions on the modalities of disinvestment, including restructuring. The various reform measures initiated by the government after 1991 are being discussed below in short.
It was decided to review the portfolio of public sector investments with a view of focus on strategic and essential infrastructure. This policy pronouncement provided a forceful hint to public enterprises to review their activities with the objective of unloading non-core and peripheral functions. It was expected that the follow up of this measure would result in making public enterprises lean and mean. It would bring down the transaction costs, improve the quality of control and add to the efficiency of the public enterprise system. The public enterprise portfolio has not suffered any set back as the various governments in power have lacked willingness to divest themselves of certain public enterprises. However, public enterprises have indirectly benefited from this policy measure. A large number of public enterprises have been practicing cold privatisation. They are divesting themselves of unimportant activities such as maintenance of a fleet of vehicles, contracting out canteens, etc. A large number of public enterprises had become sick at the beginning of the 1990s. The government, therefore decided to use the BIFR route, which provided a fair opportunity to public enterprises to evolve suitable revival packages and implement them or else wind up with a social safety net. Each enterprise was directed to formulate its own social safety net comprising voluntary retirement, and retaining and redeployment schemes for workers. The government made an announcement to set up the National Renewal Fund (NRF), the finances for which had to be gathered from global agencies, while part of the proceeds were to come from disinvestments. The government decided to discontinue the NRF in its present form and place the funds required for retraining or rehabilitation of employees who had available VRS under the Department of Public Enterprises (DPE). In the budget 2000-01, the government decided to bring down its equity in all non-strategic PEs to 26 per cent or lower, if necessary. The government further made the announcement that the entire receipts from disinvestment and privatisation will be used for meeting expenditure in social sectors, restructuring of PEs and retiring public debt. The constant increase in social sector spending and the move to curtail fiscal deficits did not leave much scope for public enterprise to depend on the government for funding. The government permitted public enterprises to access international capital markets and make forays into the Indian capital market. The partial disinvestment in public enterprises was introduced. Under the new dispensation, public enterprises are reducing their dependence on government funding. Instead of assistance and budgetary support they are now approaching national and international capital markets. The infusion of government equity and debt add up to 4 per cent of the total investments in public enterprises as opposed to about 15 per cent earlier. The internal resources and the extra budgetary sources now fund about 70 per cent of the annual funding needs. For working capital support, public enterprises are reducing their dependence on the mediumterm loans from the government and approaching commercial banks and the AllIndia Development banks. Now more and more public enterprises are getting listed on stock exchanges. The governments new strategy of disinvestment centres around identifying strategic buyers who could eventually take over the ownership and control of public enterprises. For the introduction of the state-of-the-art technology, it was decided that public enterprises would be given a free hand and the funds for such upgradation would
!
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come from the disinvestment. To become global giants, it is necessary that public enterprises acquire new technologies and brands. One of the ways to keep upto-date with technology is to promote tie-ups and joint ventures with the technology leaders. BHEL has been trying to have such an agreement with leading technology firms concerning its various products.
Strengthening the institution of the Governing Boards was necessary in order to professionalise public enterprises and make them effective business entities. It was decided that the number of government nominees was not to exceed two. More room was made for the representation of professionals, who were excepted to provide sound business advice. The representation of different interest groups also received attention and the workers representation on the Boards was accepted in principle. Despite the governments announcement of its beset intention of according the rightful place to the governing boards. The several positions of the functional directors have remained awfully short. The boards in public enterprises have yet to provide any evidence that they realise the importance of corporate governance. No public enterprise board has presented so far an evaluation of its functioning by a third agency. In 1997-98, the government announced several initiates and reform measures to continue the process of changing public enterprise policy. In order to prepare giant public enterprises for global competition and enable them to assume the role of Indian multinationals, the government identified 9 enterprises as navratnas. Name of the Navratna PSUs: 1. 2. 3. 4. 5. 6. 7. 8. 9. Bharat Heavy Electricals Ltd. Bharat Petroleum Corporation Ltd. Gas Authority of India Ltd. Hindustan Petroleum Corporation Ltd. Indian Oil Corporation Ltd. Mahanagar Telephone Nigam Ltd. National Thermal Power Corporation Ltd. Oil & Natural Gas Corporation Ltd. Steel Authority of India Ltd.
Later the list of navratnas was extended from 9 to 11 to accommodate the following two PSEs. 10. Mahanagar Telephone Nigam Ltd. (MTNL) 11. Videsh Sanchar Nigam Ltd. (VSNL). 97 enterprises were listed as miniratnas but later it was scaled down to 42. The grouping of navratnas and miniratnas was based on their record with regard to constant profitability and size of capital. The rationale behind the identification of these enterprises as navratnas and miniratnas was to increase their economic and operational autonomy is proportion to their financial and commercial success, as also to provide them special leverage to face competition in Indian and global markets by freeing them from bureaucratic and procedural hurdles. The government appointed the Vittal committee to examine the guidelines issued to public enterprises from time to time. The profit-making public enterprises had to declare 30 per cent of the net profits as dividends as opposed to the earlier practice of capitalising profits. The government decided to prepare rehabilitation packages for sick public enterprises to give them a change of revival.
15
The government in its budget used the word privatisation for the first time in the 1990s. The government went all out to show its commitment to privatise public enterprises and initiated the process of evolving a competition policy. It exhorted public enterprises to be competitive. While accepting the Mohan committee report an wage revision in public enterprises, the government left it to each and every public enterprise to examine its paying capacity to meet the burden arising out of its implementation. The government emphasised the need for widening and deepening the concept of Memorandum of Understanding (MOU). It wanted the contracts to be negotiated well in advance and subsequent delegation and decentralisation of powers within the enterprise. It advocated sincere involvement of public enterprise in the formulation and implementation of MOU to thwart unnecessary public criticism on the count of public accountability, conferment of greater autonomy to these enterprises gradually over a period of time with regard to matters concerning capital expenditure, mobilisation of funds, formulation of incentive schemes, joint ventures, etc. Though, a large number of public enterprises have been awarded an A grade subsequent to the fulfillment of targets set out in MOUs, the total factor productivity has not registered any noticeable change. The various reform measures of the government after 1991 for public enterprises, can be summarised as:
! ! ! ! ! ! ! ! ! ! ! !
divestment programme launched with great expectations in 1991; reference of sick units to BIFR in 1991; declaration of indicative strategies related to core and non-core sectors; cessation of investment in the non-core sector; freedom to or insistence on access to open market; pursuit, with more vigour of the MoU system with some adjustments; remissions in the administered price regime; declaration of the navratnas and mininavratnas; relatively greater freedom to forge strategic alliances with foreign companies; appointment of Disinvestment Commission of Department of Disinvestment; pursuing the disinvestment programme; strengthening the governing boards.
10.5
SUMMARY
Public enterprises were set after the Industrial Policy 1948 and 1956. Our country needed various improvements in the field of infrastructure, social sector, economic development etc. after Independence. The public sector was conceived with this basic principle. There has been a constant increase in the number of CPEs. It has increased from 5 in 1951 to 240 in 2002. The Government also has changed its policy along with the growth of PEs to decrease the dependence of PEs and state funds and to increase the performance of these enterprises. Central Public Enterprises are grouped in Enterprises Under Construction, Manufacturing enterprises and Enterprises rendering services. The working of PEs depends on sources like equity and loans from the government, internal resources, capital markets, loans from public financial institutions, public deposits, bonds and foreign finance.
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There has been a content increase in investment of CPEs. The bulk of this investment (60.8%) is in producing and selling goods. The investment pattern of different groups showed that the thrust was to create infrastructure of power, transport and electricity. The Central Government has been the major contributor in investment of CPEs. However, long-term funding of PEs shows that their dependence on government funding is decreasing gradually. Public enterprises has managed to increase their internal resources but it is still small. Financial performance of PEs have shown some healthy signs like increase in fixed assets ratio, decrease in debt equity ratio, consistent growth in turnover/operating income. On the other hand, there is scope for improvement in the area of dividend declared and export earnings, both of which have been decreasing. Public sector has played a major role of social developer with employment of about 70% in comparison of private sector. However, the contribution of public sector in domestic savings and GDP has been very small. These has thus always been a negative saving investment gap in the public sector. Public sector reforms were initiated in India in 1991. The important reform measures are the divestment programme, setting of BIFR for sick units, withdrawal of budgetary support in phases, portfolio changes, access to open market, MoU system, declaration of navratnas and mininavratnas, strategic alliances and strengthening of governing boards. PEs have responded to varying degrees to various reform measures. Activity Public sector has played the role of a social developer. Justify ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................
10.6
1. 2. 3. 4. 5.
What was the need and objectives for setting of the public sector after Independence? Differentiate between equity and loans provided by the Government. Mention four improvement trends of investment in Public Enterprises. Do you think that there has been a change in the long-term funding pattern in PEs? How? Why is generation of internal resources necessary for PEs? Discuss.
10.7
Department of Public Enterprises, Public Enterprises Survey, Annual. Government of India, Economy Survey, Annual. Narain, Laxmi. (2003). PE Management and Privatisation, S. Chand, New Delhi.
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UNIT 11 APPRAISAL OF PUBLIC Evaluating Enterprises Performance ENTERPRISE PERFORMANCE-II

Dimensions and Methods of
! ! !
Evaluate the performance of state level public enterprises; Learn about the growth, investment and financial status of SLPEs; Get acquainted with performance of state electricity boards, railways, ports, postal system and transport.
Structure 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10 11.11 11.12 Role of State Level Public Enterprises Growth of State Level Public Enterprises Investment in SLPEs Financial Performance of SLPEs Performance of State Electricity Boards Performance of Transport Sector Performance Evaluation of the Postal System Performance of Ports Performance Evaluation of Railways Summary Self Assessment Questions References and Further Readings
11.1
ROLE OF STATE LEVEL PUBLIC ENTERPRISES
Public Enterprise System in our mixed economic system has been considered as an engine of development. It has a pivotal role to play in the attainment of the national objectives and the establishment of a socialistic pattern of society .The pre-eminent role for the Public Enterprises was assigned in the Industrial Policy Resolution, first enunciated in the year 1948. Eight years later, in 1956, a comprehensive policy document on Industrial Policy was adopted. Till date, inspite of certain changes in accent, the Industrial Policy Resolution of 1956, continues to be the cornerstone of the nations industrial policy. Unlike in the west, where the public sector has developed in phases, the public enterprises in India, particularly the Central Government Public Enterprises, are a result of a deliberate policy. Under this policy, all industries in strategic areas, and in the nature of public services, were reserved for the public sector. This policy also envisaged a commanding role for the state in certain other industries, while leaving the initiative to the private sector for the rest. But, it is not clear as to why the state governments are lagging behind in starting these major enterprises. In fact, most of the Central Public Enterprises were created with reference to this policy. In the case of SLPEs there is no such policy base. However, even given this constraint, there is room for the State Government to indicate its preference between the public and private sectors. Quite interestingly, in spite of differing political views of the various State Governments, one does not see the growth or reduction of the public enterprises as a direct result of political philosophy.
1
Public Enterprise: Need for SLPEs Performance and Evaluation
As already indicated, the Industrial Policy Resolution of 1956 continues to form the basis of public sector policy of the Government of India. It envisages them to play the role of nation building and the establishment of an egalitarian society. This ideological commitment can be realised more through the role of the State Level Public Enterprises (SLPEs). Public enterprises are the tested instruments for the socioeconomic development of any region. Balanced Regional Development has been the core consideration in the Industrial Policy Resolutions of the Government of India. This statement of Balanced Regional Development by the centre is a sort of a paternalistic overlord approach to issues and an effort of coordination in order to arrive at uniformity in development devoid of pragmatism. It is actually the Regional Development, balanced or not, that is the main concern of every state government, which is committed to its region and naturally interested in its development. An overview approach of Balanced Regional Development at best can be used only as a political lever to acquire control over the regions and influence the voters. All regions cannot develop equally, nor can the rate of development of the already developed regions be suppressed. All that can be done is to speed up the rate of development of the underdeveloped regions so as to raise them to the socio-economic standards conceived as a necessary minimum. The relationship between Public Enterprises and the regional development is that the former is an important agency of planned development and the latter is an important aspect of such development. Identifying the backward region means, infact identifying the locations for public investment, for no entrepreneur would willingly volunteer to invest in those regions. In such cases, it becomes inevitable for the Government to step in solely or through major participation by the Government in conjunction with private enterprises. The latter, thus, has a restricted or no opportunity in those fields and the prospect of regional development, depends on the floating of Public Enterprises. Since the economic activities, so nearly reserved for the state, are basic in stimulating regional development, SLPEs become pivotal as an agency. The state as a region for development assessment becomes relevant because of two main reasons. Firstly, statistical evidence, to the extent available is more reliably available in terms of states. Secondly, the states happen to be important Administrative Units for effectuating several programmes of development. Wide regions within state, whose level of economic prosperity is perceptibly poorer than else where in the same state, have the same significance of a problem as the underdeveloped states vis--vis the country. In terms of economic development through industrialization, contribution to the state could be from either the private sector or public sector or both. It is not logical, however, to conclude that where public sector was non-existent, Private sector must have had a hey-day or vice-versa. Industrialization of any region depends on the entrepreneurial bent of mind of the people of that region, risk taking capacity of the people and availability and easy accessibility to either raw material or the infrastructure for starting industries. The cultural background of the region also has an influence on this aspect. If outside capital is invited, there is always an apprehension that the profits may be taken away by those entrepreneurs for their use elsewhere, while at the same time, the very industrial activity in the state by anyone will produce certain other advantages like employment opportunities a number of ancillaries coming up and the whole thing accelerating more and more economic development. But for some reason if outside private investment is not encouraged and if local private investment is not forthcoming, then it becomes, the responsibility of the state Government to step into the field. It is also possible that the private entrepreneur may opt for a location of his choice and not necessarily a place which is backward and needs to be developed. Under 2 such circumstances, it becomes the responsibility of the Government to exercise
Dimensions and Methods some sort of regulatory control, so that the industry is steered to a specified location.of Evaluating Enterprises Alternately, the government may adopt a more positive stance and offer various Performance incentives to encourage industrialization at places, so earmarked. The government, therefore, has to play its part in different ways through different instruments at different times. Regulation of Industries Act 1951 and licensing procedures are tools for this purpose. While the licensing issuing authority is the central government, processing of the applications is done by the state government. The state governments opinion in this respect, therefore, carries considerable weight. However, the extent to which the state may succeed depends on its political relationship with the central government and the encouragement and guidelines given by the central government with regard to the state. But the very basis for all these is the Industrial Policy Resolution of 1948 which was revised and restated in 1956 and the subsequent modified statements.
The state government has a set of corporate reasons for entering into and encouraging Public Enterprises, some initiated by the Central Government constituting the Central Sector and the rest initiated by the state itself as state sector. In fact, Public Enterprises in India operate at the three levels of administration: central, state and municipal (or local bodies). The need for setting up SLPEs according to S. D. Sharma are: a) Development of basic infrastructure such as the construction of roads and bridges, the provision of electricity for the industry and for irrigation for agriculture; b) Exploitation of local resources and entrepreneurship; c) Promotion of balanced regional development; d) Upliftment of weaker sections of society such as the Harijans and Girijan society in general in the form of adequate efficient and economic road transport; e) Setting up of manufacturing corporations to take over and revive sick industrial units; f) Improving the health of citizens by the provision of safe potable water;
g) Provision of shelter to the needy; h) Protection of the agriculturists and the consumer from the middle men. From the above it is evident that social purpose is the main need for the setting up of SLPEs. Policy Determinants in SLPEs The first link in the development of SLPEs is to examine whether State Government has a clearly defined policy. Unlike private enterprises the establishment of SLPEs is not a market phenomenon but the outcome of deliberate policy measures. This necessarily implies that the State Government has enunciated clear policies on SLPEs defining the objectives to be fulfilled. The objectives can be both commercial and social. But a policy approach facilitates the definition of objectives in order to demarcate the areas for private investment and public. Further, distinction has also to be made between areas for investment by central PEs and those reserved for SLPEs. A policy is not a once-for-all document but subject to regular scrutiny and changes. The formulation of policy is not within a vacuum. It is the outcome of economic, social and political development in each state. State Government has a major advantage over the centre in being closer to the society. This advantage enables a quick recognition of the problems likely to come up and also the ability to tackle the problems more effectively. A policy approach can, therefore, be divided into shortterm policies and long term policies. Long term policies identify the means to achieve 3
Public Enterprise: this vision. The relationship between the two time policies is symbolic, where Performance and not Evaluation flexibility does mean generality. Clearly defined policies enumerate the objectives of SLPEs, policies and objectives are, however, not the same thing. Policy is broadbased and general but not ambiguous while objectives are specific and clear .The difference between policy and objectives has often led to confusion in assessing SLPEs.
While formulating the policies and objectives of PEs the following considerations are relevant: a) They should have a demonstrable link with the socio-economic mission which lead to the creation of the enterprise and / or other officially declared policies of the Government; b) They should be laid down clearly and communicated to the enterprise by the Government in writing and not unofficially or informally; c) They should be compatible with the basic socio-economic mission of the enterprise; and d) If the basic mission of the enterprise is predominantly social and is likely to make the enterprise financially unviable, this should be specifically recognised and provided for and the trade-off between social benefits and financial inviability delimited. Objectives of SLPEs The Central Public Enterprises have been set up in pursuance of an explicit public policy (Industrial Policy Resolution, 1956) to occupy the commanding heights of the economy, to fill the gaps in areas critical for the development of the country and provide wherewithal to finance its planned economic growth. The SPLEs owe their existence not so much to a coherent policy as to historical factors and pragmatic adjustments to demands of the environment. A large number of the SLPEs came into being on account of historical necessity, in that, the erstwhile princely states were owning them prior to the formation of the present states of the Indian Union. Some of the SLPEs were born on account of the decisions of the State Governments to wind up their departmental economic activities and instead organise them in the form of Public Enterprises so as to increase their commercial competence. A large number of these enterprises were set up as public organisation to take advantage of the funding from the financial institutions and development banks. These institutions as a policy measure do not extend financial support to the government departments. Many SLPEs were setup in pursuance of the enactments legislated by the central government to make the states of the union partners in propelling such activities, on the one hand, and evolving a uniform framework for the control and implementation of policies with respect to such sectors, on the other. Examples are Agro Development Corporation and Fisheries Corporation. Another type of SLPEs in this category is the Welfare Corporations, which have come up almost in all the states following the all-India pattern. Finally, a considerable chunk of the SLPEs have come into being on account of the decisions of the various state governments to assume the entrepreneurial responsibilities to commercially exploit certain local resources or to seed the industrial growth in some backward areas. Control of inflation, equitable distribution of scarce commodities, mopping up of monopoly profits, creation of job opportunities, exploitation of local resources extension of balancing facilities and intermediate inputs and raising of revenues have weighed heavily in favour of this entrepreneurial role. To sum up, there have been some very specific reasons responsible for establishing the SLPEs. The performance of these enterprises could be judged in terms of indicators having appropriate linkages with their objectives.
4
Dimensions and Methods of Thus, SLPEs, except the Electricity Boards are smaller companies set up for entirely Evaluating Enterprises different purposes. The growth of the SLPEs is the result of a mix of socio-ecomonic Performance and political reasons. The major ones are as follows:
a) To obtain external funds from the financial institutions and other agencies; b) To maintain control over the natural resources of the state and generate funds through exploitation of these resources. This has led to the formation of corporation in the areas like forests, minerals and fisheries; c) To intervene in some sectors to ensure availability of inputs and remunerative prices for products in the agricultural sector; d) To provide credit at reasonable rate without exploitative elements, which does not rule out due returns on investment; e) To develop an entrepreneurial class in the state; f) To take over sick units and check unemployment; g) To promote industrial development; h) To spin-off new companies from existing enterprises whenever new projects were conceived. This was done partly on the insistence of the financial institutions which were willing to loan further sums to a newly formed subsidiary company rather than to the existing loss making corporation; i) j) To satisfy the political pressure groups and lobbies; To decentralise some of the corporate activities. For example, some State Governments have further broken up the Industrial development Corporations into Regional development Corporations;
k) To ensure administrative convenience as corporate form provides flexibility in management of resources; and l) To create lucrative positions to accommodate politicians, administrators etc.
Classification of SLPEs Classification: The classification of the SLPEs is an onerous task. Their widely differing nature lack of commonality in objectives and disparate origins are the major contributory factors to the complexity of the task. Some efforts have been made to classify the enterprises. The State Bureau of Public Enterprises in Andhra Pradesh. Karnataka, Rajasthan, Kerala and Tamil Nadu, classify their enterprises in various categories. The classification of the SLPEs in Andhra Pradesh has undergone changes from departmental basis to the nature of activity basis. In the case of Karnataka and Tamil Nadu, the classification of the SLPEs has been attempted on the central pattern wherein the enterprises have been divided into two major categories: i) ii) Enterprises producing goods and services, and Enterprises engaged in trading and marketing.
In Rajasthan, the SLPEs have been categorised in terms of the form of organisations. The Capoor Committee Report on the SLPEs suggested a thirteen fold activity classification. The academic research on SLPEs has adopted the classification followed by the Central Bureau of Public Enterprises. Any effort to classify the SLPEs should have in the backdrop, the motive or objectives for making such an attempt. The purposes for classifying the SLPEs may range from suggesting the rate of return and the extent of subsidy to understanding their organisation and evolving of appropriate control structures. In each case the approach to the classification matrix will be different. As far as the rate of return is concerned, it seems appropriate to classify the SLPEs in the five-fold divisions. The Standing Group of Management of Public Enterprises in the state, which submitted its 5 Report in 1978, classified SLPEs into thirteen groups.
Public Enterprise: As state above, it is, however, possible to identify, for the sake of simplicity, the Performance and Evaluation SLPEs into five groups:
1. 2. 3. 4. 5.
Manufacturing Trading and marketing Financial Promotional Welfare
The merits of the proposed classification are many. Firstly, it keeps the basic purpose of the setting up the SLPEs in the various states at the centre of the classification system. Secondly, it presents a basis for comparing the inter-state performance of the SLPEs because of its broad based nature. Thirdly, it is very simple to understand and operate. Finally, it takes fully into consideration, the Public and enterprises elements of the SLPEs by dividing them into appropriate categories in terms of the precedence of one element over the other. On priority considerations one could expect that as we go down the classification hierarchy, the component of commercial objectives keeps reducing while the social objectives keeps increasing. Broadly the classification suggest that the enterprises involved in manufacture of products come under manufacturing sector .The enterprises like Handloom Development Corporations and Handicrafts Corporations can be brought under trading and marketing enterprises. The enterprises like Industrial Development Corporations and State Finance Corporations can be classified as financing institutions whereas enterprises such as Small Scale Industries Development Corporations, Mineral Development Corporations and Fisheries Development Corporations can be classified as promotional enterprises. The welfare enterprises are those which have as their mission the task of improving the welfare of some targeted group of people or area. Backward Classes Corporations and Scheduled Castes Corporations come under this category. Typology The SLPEs, for the purpose of studying their typology, could be divided into various forms of organisations and their sectoral pattern. These enterprises have been organised in the form of departmental undertakings, statutory corporations and boards, companies registered under the Companies Act and Cooperative Societies Act and Joint Sector Companies. The company form of organisation regulated by the Companies Act, 1956 dominated the scene. By 1977, almost 70 per cent of the SLPEs had the status of companies registered under the Companies Act. Approximately, 15 per cent of the enterprises are statutory corporations and the rest cooperatives and other societies. The departmental enterprises constituted a little less than 10 per cent of the total number of 588 SPLEs. In 1987, the percentage of government companies increased to 80 per cent. The statutory corporations and boards constituted 10 per cent of the total number of SLPEs. The departmental enterprises were reduced to 3 per cent of the total number of SLPEs. This shows that the State Governments, in principle recognised the need for greater autonomy to the SLPEs. The elimination of the departmental enterprises in Orissa and Bihar illustrates this case. The tendency to register the SLPEs under the cooperative societies act is gaining momentum in the agriculture related industries and welfare sector. The reason is not too far to seek. The SLPEs under this category besides discharging an economic activity, have to enlist the peoples cooperation in fulfilling their objectives. The sectorial pattern of the State Level Public Enterprises in India reveals that these enterprises are engaged in variety of activities ranging from industrial development 6 and financial promotion, trading and marketing, contract and construction services,
Dimensions consumer goods, engineering goods, development of backward regionsand and Methods weaker of Evaluating Enterprises sections of the society to agro-industries, minerals and metals, development of small Performance industries, and tourism. As on March 31,1986 the top five sectors in terms of number of the SLPEs, barring the other enterprises, were agro-based industries, engineering industry, trading and marketing, industrial development and financial promotion and consumer goods. These categories of enterprises had a lions share in the investment of all the SLPEs in the country and represented nearly sixty per cent of the total investment in the SLPEs.
Coverage and features of SLPEs There are some important features of the SLPEs in the country with a little or no difference between one state and the other as considered below: i) Novelty of State in Business: Public utilities in the field of electricity and road transport are the first state enterprises in almost all the states. State governments have entered into business more or less for the first time in a number of new fields, e.g., ceramic, alcohol manufacturing, handicraft and life insurance. Other examples are the manufacture of sugar, chemicals, fertilizers and minerals. Thus, all these are activities which are new to the state government and to their administration. Size of the Enterprises: State Electricity Boards and State Road Transport Corporations are large in terms of their area of operation, investment and number of people involved. There are also few major SLPEs which are comparatively little smaller than Electricity Boards and Road Transport Corporations in size, investment etc. belonging to other areas of operation like coal, minerals, cement etc.
ii)
iii) Period of Establishment: A large number of SLPEs have been established over a short period. This, combined with the novelty of the enterprises, the nature and extent of problems of organisation and management of SLPEs have attracted the attention of the state government and legislatures during the last one and half decades. Barring public utilities and a few other major enterprises (for historical reasons), most of them were established during the sixties. In the seventies they were multiplied. Perhaps, this is also a special feature of PEs organised by the Central Government. iv) Interface with the Government: Because of closer relationship with the state administration the SLPEs and their managements are bound to be influenced by the Government in ways different from the rest of industrial and commercial activities of the country. They are influenced directly by the policy of the state government and sometimes also by the policy of the central government. Besides the formal Industrial Policy, legislature enactments and the Resolutions of the government of India the state government influences directly the operational policy of these enterprises in such matters as appointments, pricing, location, expansion, distribution and helping certain sections of the society. Thus, in implementing the government policy certain social and political implications are involved. v) Financing Pattern of Enterprises: SLPEs get finances including working capital not only from the state government but also from different sources in the equity capital as given below: i) they have finances of central government and state government in a few enterprises; ii) they have finances from public with majority state government capital; iii) they have state government investment and other PEs investment; and iv) there are few SLPEs where there is more than one states investment involved. Loan capital is also obtained by these enterprises from state government public and various other institutions.
Public Enterprise: for Autonomous Corporations: One of the interesting features of vi) Preference Performance Evaluation SLPEs and is that in quite a number of cases activities performed by Government Departments were entrusted to new autonomous corporations. This was done in order to take advantage of the financial facilities which would not have been otherwise available as, financial institutions do not lend to departmental enterprises. Therefore, quite a few departmental activities were transferred to autonomous SLPEs. This is a special feature of SLPEs. Unlike the Central Government enterprises, the financing of SLPEs is done to a large extent, both in terms of equity and loan through institution funds.
vii) Bureaucratic Dominance: For management of their enterprises, state governments have to depend largely on their own civil service cadres particularly at the middle and higher levels. The increase in the number of SLPEs, the expansion of their activities, and paucity of managers increased this dependence. However, as there is no clear and well-defined policy for the development of managerial cadres, most of the SLPEs have gone outside the Government for technical personnel at different levels. It may be mentioned that for the middle and lower level posts, most of the staff is recruited by the enterprises themselves. The top levels are manned mostly by deputationsists resulting in bureaucratic dominance. In respect of the middle and lower level personnel, most of the SLPEs adopted the pay structures of the state Governments. viii) Political Leverage: Appointment of ministers, MPs, MLAs / MLCs other political party leaders as chairmen or members of the Boards of these enterprises, has been an important feature in almost all the states in the country. It is alleged that the top level posts are used as berths for active and defeated politicians. ix) Development of Backward Regions: An important features of SLPEs is that some of them are intended for the development of backward regions. The State Government of course, is obliged to sponsor industrial enterprises with a view to promoting regional development in the underdeveloped areas possessing too little initiative and capital. Specifically, Industrial Development Corporations, State Financial Corporations, Small Scale Industries Development Corporations, Rural Development Corporations and Land Development Corporations are playing an important role in this regard. x) Industrial and Infrastructural Development: Rapid industrialization and creation of infrastructure all over the state is yet another major objective of the State Governments. To achieve this, State Governments have established different corporations. Industrial Infra-structure Corporations, Housing Boards Construction Corporations, Electricity Boards, Transport Corporations and Irrigation Development Corporations, are intended to create the necessary infrastructure. State Industrial Corporations, Small Scale Industrial Development Corporations, State Financial Corporations, Khadi and Village Industries Boards play an important role in industrialization of state which is an important feature of SLPEs. xi) Utilisation of Local Resources and Distributions of Essential Commodities: An important feature of the SLPEs is that they have been created for exploitation and utilisation of the locally available resources such as minerals, water, forest wealth hides and skins, fisheries, diary etc. Some states have considered that distribution of essential commodities is the states prime objective. Therefore, SLPEs have been established with this purpose. xii) Employment as an Objective: Creation of more employment opportunities by expanding and increasing economic activities in the state is one of the major 8 objectives of the Five Year Plans of the State Governments. The best strategy to
and Methods of create more employment is through SLPEs. Therefore, Dimensions a special feature is Evaluating Enterprises provision of employment to various sections of the society, through various Performance SLPEs in the area of rural electrification, housing, construction, mining, transport, irrigation and dairy industry.
xiii) Development of Weaker Sections of Society: In recent years, the development of the weaker sections of the society is one of the major policies of the Government. In order to achieve it, State Governments have stated a variety of SLPEs to help backward classes, scheduled castes, scheduled tribes, women and physically handicapped. Many of SLPEs are small in size. The preference is for autonomous corporations. The SLPEs conform closely to Government policies. They cater to various development requirements of the state in so many ways. It is true that they are expanding very rapidly in terms of investment and size in all the states of the country.
11.2 GROWTH OF STATE LEVEL PUBLIC ENTERPRISES

Public enterprises in India function at the three levels of administration: Central, State and Municipal (or local bodies). Even though have an extensive survey and research has been conducted on the Central Public Enterprises, the enterprises pertaining to the other two categories have not been systematically examined. The Institute of Public Enterprise (IPE) at the instance of the Planning Commission is engaged in the task of developing the extensive data-base on the SLPEs. Development through SLPEs has been adopted as a policy by the State Governments in the country. Though no State government officially stated the aims and objects of this philosophy, it can be inferred that one important object is to attract funds from the financial institutions and banks to enable the states to undertake activities on a long scale. Another aim is to cut the red tape associated with Government administration and help expedite service and works. Yet another reason may be to keep the growth of these corporations on the lines of Central Enterprises. The organisations and forms of SLPEs broadly fall under the following categories: i) ii) Department Enterprises, like A.P. Government Text Book Press, Punjab Roadways and Government Silk Weaving Factory in Karnataka. Government companies like the Bihar Mica Syndicate Ltd., Kerala Tourist and Handicrafts Corporation Ltd. and Haryana Dairy Development Corporation Ltd.
iii) Public Corporations and Boards like Rajasthan State Road Transport Corporation, A.P. State Financial. Corporation and Orissa State Electricity Board. iv) Companies registered under Cooperative Societies Act, like Assam State Cooperative Marketing and Consumers Federation Ltd., A.P. Womens Cooperative Finance Corporation Ltd., Milk Producers Cooperative Ltd. in Gujarat. v) Joint ventures like Gujarat state Fertilizers Company Ltd. and Gujarat Narmada Valley Fertilizer Company. A large number of enterprises have been organised in the form of Government Companies followed by statutory corporations in almost all the states: This shows the clear-cut preference for Government companies and statutory corporations for 9 organising SLPEs.
Public There Enterprise: has been a massive growth in the number of SLPEs. From a mere 23 in the Performance and Evaluation First Plan period, the number of SLPEs shot up to 1993 during 1966-67. The number of SLPEs rose to 594 by the end of the Fifth Plan period. During the Sixth Plan period, the number of SLPEs increased to 777. During the Seventh Plan Period, the number of SLPEs further went up to 802. In terms of numbers there are approximately threefold of the Central Public Enterprises. The major expansion of Central Public Enterprises took place during 1955-65. The growth was most marked in the SLPEs during 1970-85. The Public Enterprise system substantially expanded during 1970-85 in Andhra Pradesh, Assam, Gujarat, Haryana, Himachal Pradesh, Kerala, Maharashtra, Orissa, Punjab, Bihar, Uttar Pradesh and Rajasthan. In many other states, viz. Assam, Nagaland, Mizoram, Manipur, Tripura and Arunachal Pradesh, the growth of SLPEs has been a more recent phenomenon. The State Governments have set up the SLPEs as a policy with the deliberate intention to use them, as an instrument of public policy to quicken the pace of development.
The rapid growth in the number of SLPEs in the various states has imposed a severe burden of effective management. This is visible from Table 11.1 and 11.2. Table 11.1 : State Level Public Enterprises (1990) Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.
10
State Assam Bihar Manipur Meghalaya Nagaland Orissa Sikkim Tripura West Bengal Atunachal Pradesh Mizoram Harayana Himachal Pradesh Jammu & Kahsmir Punjab Rajasthan Uttar Pradesh Chandigarh Delhi Andhra Pradesh Karnataka Kerala Tamil Nadu Pondicherry Gujarat Madhya Pradesh Maharashtra Goa, Daman & Diu Total
Registered Companies 25 39 6 8 6 45 1 7 40 3 1 20 14 14 45 13 83 10 5 42 46 71 68 3 37 29 45 8 733
Statutory Bodies 6 18 2 5 11 4 6 4 11 8 8 1 1 4 6 3 9 11 8 11 137
Total 31 57 6 10 6 50 1 7 51 3 1 24 20 18 56 21 91 11 6 46 52 74 77 3 48 37 56 8 870
and Methods of Table 11.2 : Number of SLPEs in 1990-91 Dimensions and 2000-01
State Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Manipur Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Others Total
No. of SLPEs 1990-91 46 43 47 48 21 17 14 58 92 34 54 08 33 36 39 45 83 51 26 802
Evaluating Enterprises Performance 2000-01
128 49 54 45 21 20 85 111 26 65 14 72 53 24 59 41 82 54 N/A 1003
So far as the sector-wise distribution of the SLPEs is concerned, the Report of the Seventh Finance Commission (1978) had made the estimates of investments of the state governments in their enterprises separately for 3 categories, namely, financial institutions, promotional enterprises and others. This was also accepted by the subsequent Finance Commissions, namely, Report of the Eighth Finance Commission (1984) and the Report of the Ninth Finance Commission (1989). The first includes the State Financial Corporations set up under the State Financial Corporation Act, 1951 as well as enterprises held eligible for refinance facilities by the Industrial Development Bank of India. The promotional category includes enterprises which are engaged mainly in promoting the development and other industries of all regions through providing infrastructural facilities, financial and managerial assistance, technical know-how etc. as well as through works of development for backward areas or other weaker sections of the population. This category, therefore, includes Small Industries Development Corporations, Industrial Development Corporations, Handicrafts and Handloom Development Corporations, etc. A statement giving the state-wise breakup of enterprises is given in Table 11.3. It is under the 3 categories 11 as mentioned above.
Public Table Enterprise: 11.3 : Breakup of State Level Public Enterprises under Three Categories Performance Evaluation (other thanand State Electricity Board and State Road Transport Corporations)
State Andhra Pradesh Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mijoram Nagaland Orissa Punjab Rajasthan
12
Financial 4 1 2 4 1 3 5 1 3 12 6 5 2 2 1 1 1 3 2 4
Promotional 10 1 7 8 2 8 10 6 5 11 12 6 15 3 3 1 3 8 11 5
Commercial 38 25 26 4 28 9 8 10 54 68 22 25 3 5 2 7 65 14 26
Total 52 2 34 38 7 39 24 15 18 77 86 33 42 8 9 4 11 76 27 35
Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal Total
2 4 2 5 5 78
2 9 3 24 12 186
Dimensions 6 and Methods 10 of Evaluating Enterprises Performance
40 38 32 43 563
53 43 61 58 827
Sources: First Report of the Ninth Finance Commission 1989-90. Ministry of Finance, Department of Economic Affairs, Government of India.
There is another set of data on sector-wise distribution of the SLPEs, prepared by the SLPEs Working Group, Institute of Public Enterprises, Hyderabad shown in Table 11.4. It shows that manufacturing and promotional enterprises dominate the scene followed by trading welfare and financial enterprises. This indicates the emphasis the various state governments have placed on the entrepreneurial and promotional role of Public Enterprises. Kerala, West Bengal, Karnataka, Bihar, Assam, U.P., Gujarat, Tamil Nadu and Punjab had a maximum concentration of the SLPEs in the manufacturing group. Andhra Pradesh, Maharashtra, Manipur, Orissa and Rajasthan set up more of promotional SLPEs. Table 11.4: Sector-wise Distribution of State Level Public Enterprises in India
State Manufacturing Trading Finance Promotional Welfare Total
Andhra Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh

Jammu and Kashmir
15 19 20 04 17 07 04 05 23 53
07 02 06 06 01 03 03 12 08
02 02 04 04 02 01 02 02 03
17 14 14 03 16 08 09 04 16 17
05 06 03 01 05 03 05 11
46 43 47 08 48 21 17 14 58 92
13
Karnataka Kerala
Public Enterprise: Madhya Pradesh
13 12 03 10 15 14 18 34 25 03 317
06 05 01 06 03 03 03 02 07 07 02 94
04 03 01 01 03 03 02 04 02 04 02 01 53
10 23 02 13 13 18 15 14 18 16 02 254
01 11 01 01 02 02 05 20 82
34 54 08 01 33 36 39 45 18 83 51 09 802
Performance and Evaluation
Maharashtra Manipur Mijoram Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Meghalaya Total
Source: State wise Study Report, SLPEs working Group, Institute of Public Enterprises, Hyderabad.
11.3 INVESTMENT IN SLPEs

From the above analysis it is quite clear that there has been a massive growth in the number of State Level Public Enterprises in India. Thus, it goes without saying that the SLPEs occupy a place of importance in the public enterprise in the country. They have become a vital instrument of public policy in spurring the overall economic development in all the states of the Indian Union. As a result, there has been a spectacular growth in the investment in the State Level Public Enterprises since the fifties. According to the ministry of Disinvestment, estimated total investment in State Level Public Enterprises was of the order of Rs 1,62,063 crores as on 31st March 2000. Six states, viz., Gujarat, Maharashtra, Karnataka, Uttar Pradesh, West Bengal and Punjab accounted for a total investment of Rs 1,03,084 crores, accounting for 63.6% of total investment in all SLPEs. The total investment of 19 states increased to Rs 2,52,045 crores in 2002-2003 as shown in Table 11.5. Table 11.5 : Investment in SLPEs, 2002-03 (Rs. in crores) State
14
No. of SLPEs
Estimated Total Investment
1. 2. 3. 4. 5. 6. 7. 8. 9.
Andhra Pradesh Assam Bihar Delhi Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka
128 42 54 15 50 45 21 20 85 111 26 66 14 72 53 28 59 41 82 1,012
Dimensions 48,794 and Methods of Evaluating Enterprises 3,732 Performance
8,169 10,964 25,758 443 4,731 1,948 27,813 16,429 7,923 20,855 81 7,297 13,384 11,576 6,192 17,773 18,183 2,52,045
10. Kerala 11. Madhya Pradesh
12. Maharashtra 13. Manipur 14. Orissa 15. Punjab 16. Rajasthan 17. Tamil Nadu 18. Uttar Pradesh 19. West Bengal Total
Source: Ministry of Disinvestment, 2003
The number of public sector undertakings run by the states has grown rapidly over the years. They vary widely in regard to size, activity and financial performance. The investments in SLPEs have been growing at a rate above 20 per cent during the past decade. The share capital investment of states in as many as 827 undertakings (other than State Electricity Boards and State Road Transport Corporations) is estimated at Rs. 5,164 crores at the end of 1988-89. During a period of twelve years the number of SLPEs has increased from 437 in 1976-77 to 716 in 1982-83 and finally to 837 in 1988-89, recording a growth of 66 per cent. The investment in these enterprises has grown at a higher rate and the paid up capital alone has gone up from Rs. 605 crores to Rs. 5,164 crores. The major states which have recorded a sudden massive growth in investments are Bihar (Rs. 203 crores), Assam (Rs. 60.51 crores), Gujarat (Rs. 209.25 crores), Kerala (Rs. 287 crores), Maharashtra (Rs. 386 crores), Uttar Pradesh (Rs. 1,790 crores) and West Bengal (Rs. 182 crores). The data on the SLPEs also indicate that majority of the SLPEs are involved in the manufacturing of industrial and agricultural products. As such many of them compete with the private sector companies in areas such as electronics, chemicals. Fertilizers, electrical and mechanical equipments and agricultural products. The institute of Public Enterprise (IPE), at the instance of the Planning commission, is engaged in the task of developing an extensive database on the SLPEs. As on March 31, 1986 the database includes information of the various aspects of functioning of 636 SLPEs in 24 states of the country. The investment in enterprises other than the State Electricity Boards and the State Road Transport corporations as on March 31, 1977 was on the order of Rs. 2,860 crores. The total investment rose to Rs. 10,000 crores as on March 31, 1986 while
15
Public Enterprise: inclusive of the State Electricity Boards and the State Road Transport Corporations, Performance and stood Evaluation the investment at Rs. 25,000 crores as on March 31, 1986. This shows that the investment in SLPEs other than electricity boards and road transport corporations had increased at an average growth rate of 39 per cent per annum during 1977-86. The average rate of growth of investment in the SLPEs inclusive of these two categories of enterprises was 20 per cent per annum, while the average rate of growth of investment for the central public enterprises during the this period was 30 per cent per annum. This is shown in Table 11.6.
Table 11.6 : Investment of State Governments in State Public Enterprises (Rs. in crores)
1976-77 State Capital No. Share 1980-81 No. Capital Share 1982-83 No. Capital Share 1988-89 No. Share Capital
Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Madhya Pradesh Maharashtra Manipur Maghalaya Kerala Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal Mizoram Arunachal Pradesh Goa Total
28 24 24 19 13 8 10 29 12 27 2 5 51 3 19 22 15 3 35 4 50 29 5 437
54 21 18 15 16 6 22 57 13 66 2 7 44 6 38 31 16 40 2 85 37 1
41 25 35 36 16 13 14 45 25 44 6 8 71 6 41 41 12 62 6 82 35 1 2 7 674
174 26 62 49 26 26 39 180 30 127 4 12 149 5 75 48 31 154 6 209 72 1 3
42 25 39 37 20 14 14 46 29 45 6 8 71 6 45 45 13 1 68 7 83 41 1 3 8 716
195.4 29.2 76.9 54.8 19.2 30.2 42.7 2113 39.3 139.2 4.6 12.9 171.5 5.4 87.6 3.2 39.4 0.6 225.0 6.2 271.6 71.7 0.5 1.2 8.0
52 34 38 39 24 15 18 77 33 42 8 9 86 11 76 27 35 10 53 8
313.9 60.5 203.0 209.2 77.0 57.7 66.1 259.4 318.0 386.0 5.8 24.7 286.9 21.3 249.9 178.4 124.9 7.9 292.3 16.3
61 1790.1 58 4 2 7 837 182.2 2.3 7.0 22.8
Source: Report of the Finance Commission
Electricity Boards and the State Road Transport Corporations, the investment stood at Rs. 25,000 crores as on March 31, 1986. This shows that the investment in SLPEs
16
Dimensions and Methods other than electricity boards and roads transport corporations had increased at an of Evaluating Enterprises average growth rate of 39 per cent per annum during 1977-86. The average rate of Performance growth of investment in the SLPEs inclusive of two categories was 20 per cent per annum, while the average rate of growth of investment for the central public enterprises during this period was 30 per cent per annum.
The investment in SLPEs almost doubled over the six period under reference as shown in Table 11.7. The growth in investment was more pronounced during 198283, 1984-85 and 1986-87. This might have had a linkage with the expenditure dimensions of the planning process in India which encourages higher expenditure immediately after the opening years of the plan and during its terminal year. In terms of sectors, the manufacturing, trading and service and financial enterprises took the lead. The promotional and welfare enterprises have lagged behind. Table shows the sector-wise investment in the SLPEs during 1981-82 to 1986-87. It is evident that investment has more than doubled in SLPEs over a span of six years. The years 1984-85 being the terminal years of the Sixth Plan, was the watershed in the growth of investment. Table 11.7 : Investment in SLPEs in Different Sectors
Sector Manufacturing 1981-82 1924.50 1982-83 2431.38 1983-84 3004.63 1984-85 3620.00 1985-86 4222.83 1986-87 4299.26
Trading & services
1049.62
1264.14
1647.49
2084.74
2297.47
2547.24
Financial
1864.22
2577.11
3040.43
3680.85
4309.03
4781.42
Promotional
719.23
884.83
1121.27
1472.49
1423.79
1323.28
Welfare
568.02
729.27
918.00
1375.35
1498.96
1373.09
Total
6125.59
7886.73
9731.82 12233.43 137523.08 14324.29
Sources: SPLE Working Group, State-wise Study Report Institute of Public Enterprise (IPE), Hyderabad
As on March 31, 1986 the top five sectors in terms of numbers of the SPLEs barring the other enterprises were agro based industries, engineering industries, trading and marketing, industrial development and financial promotion and consumer goods. These categories of enterprises had a lions share in the total investment of SLPEs. They represented about 60 percent of investment in the SLPEs, respectively. Thus, a large number of states have given a boost to the growth of investment in the SLPEs. The states in which the investment has grown about three-fold and more during 1987-86 include Uttar Pradesh, Orissa, Bihar, Andhra Pradesh, Himachal Pradesh, Nagaland, Goa, Manipur, Tripura, Meghalaya, Pondicherry, Madhya Pradesh, Tamil Nadu and West Bengal. The states in which investment has increased almost two-fold and more are Punjab, Rajasthan, Mizoram, Jammu & Kashmir, Assam and Gujarat. There has not been an appreciable growth of investment in SLPEs in Haryana, Maharashtra and Kerala. Besides direct investment by the government there has also been a huge increase in implied subsidy to State Level Public Enterprises.
17
Public Enterprise: Implied subsidy denotes excess of subsidy enjoyed by the PSUs out of government Performance and Evaluation investment either directly or indirectly. This constitutes cash losses, fiscal benefits and a notional 15% return on the investment made by the state government in the form of equity, preference shares and accumulated reserves, if any. The summation of all less the dividend (if any) paid back by the SLPEs to the State government constitutes implied subsidy. Thus, presence of implied subsidy means a burden on the State exchequer. Table 11.8 gives a detailed view implied subsidies to SLPEs.
Table 11.8 : Implied subsidies to SLPEs (Rs. in crore) State Implied Subsidy 99.00 175.36 Financial/Year Implied Subsidy Financial Year
Bihar Karnataka
(1985/6) (1985/6)
318.00 (1994/5) 1339.00 (1997/8)
Kerala Madhya Pradesh
100.00 165.89
(1985/6) (1985/6)
498.00 (1996/7) 1474.93 (1997/8)
Maharashtra
54.00
(1985/6)
1140.00
(1997/8)
Rajasthan
69.18
(1985/6)
1256.76
(1997/8)
West Bengal
199.00
(1985/6)
674.00 (1997/8)
Source: Ministry of Disnvestment, 2002
The States Can Ill Afford to Maintain Their SLPEs In recent years in addition to the investment in the SLPEs, which have proved a drastic drain on state resources. The Governments have been forced to put in more money into running these enterprises. In six States alone, the budgetary outgo has been to the tune of Rs. 1961 crore in the year 2000-01. This amount can well be spent to health and education, which will to a long way in improving the lot of the general public. Table 11.9 illustrates how State resources are going into unproductive ends. Table 11.9 : Budgetary Outgo, Grants/Subsidies, Guarantees, Waiver of Dues and Conversion of Loans into Equity (Amount Rs. in crore) State Assam Haryana Karnataka Kerala Orissa
18
1998-99 155 694 1341 371 336
1999-2000 92 848 1717 269 279
2000-01 117 1206 3974 211 98
West Bengal Total
1797 4694
1447 4652
Dimensions and Methods of 2355 Evaluating Enterprises Performance
7961
Source: Ministry of disinvestment, 2000
19
11.4 FINANCIAL PERFORMANCE OF SLPEs

In the States, nearly Rs. 75,000 crore has been invested in statutory corporations and nearly Rs. 42,000 crore has been invested in the government companies. Together, investment in public enterprises amounts to about Rs. 3,50,000 crore. On this investment, the rate of return generated by the State level public enterprises is nearly zero. It is difficult to obtain a firm figure of the rate of return in the aggregate, because the State level public enterprises are heavily in arrears in finalising their accounts. Whatever accounts are available show that the rates of return of most of the PSEs of the States do not cover even a fraction of their cost of funds. Data compiled in the Planning Commission show that the average rate of return on capital invested in State Electricity Boards (SEBs) that account for the bulk of the States investments in PSEs has been persistently negative. Far from yielding the 3 per cent rate of return on their net fixed assets as stipulated in the Electricity (Supply) Act, 1948, the SEBs registered a negative return of 18.7 per cent on their capital in 1998-99, revealing a steady deterioration over the nineties. State road transport undertakings (SRTUs), the other major enterprise of the States, also has been a drag on their budgets. During 1997-98, the losses of all the SRTUs taken together were reported to be Rs. 1,282 crore, reflecting organisational inefficiencies on the hand and the uncompensated burden of social obligations on the other. While there has been some improvement in their physical performance of late, the loss per bus per day has increased from Rs. 425 in 1997-98 to Rs. 565 in 1998-99. In several States the SRTUs are in extremely bad shape, with the bulk of their fleet of buses off the road and employees going without pay for years. About 11,00 autonomous SLPEs in 28 states and 7 union territories, are poorly managed and most of them are making losses. The electricity boards and road transport corporations dominate the State Level PEs both in terms of investment made and number of employees. There are very few, if any, large or medium industrial enterprises in the states. SLPEs are mostly developmental and promotional and a few are financial and welfare. The table 11.10 shows a sample of 747 enterprises, with an investment of Rs 1,18,548 crore (equity Rs. 33,293 crore plus long term loan Rs. 85,255 crore). State governments prefer loan to equity to finance their enterprises as dividend earned on equity by the state government is after tax which goes to the central exchequer. The figures in respect of 577 enterprises show a profit of Rs. 1817 crore and a loss of Rs. 3,095 crore (1998-99). The state of affairs of SLPEs is reflected in a large number of enterprises not finalising their accounts within the time limit. The fact is that some enterprises never took off or became defunct after some years. Delays in finalisation of the accounts so common for SLPEs come in the way of assessing their financial health. The range of delay in Orissa is from 1-37 years, followed by Punjab (4-25 years) and Bihar (1-22 Years). 305 SLPEs, out of 747 in 12 states, had an accumulated loss of Rs. 7,534 crore, which is 2-76 times of their paid-up capital of Rs. 2,732 crore. In 2002-2003, the net accumulated loss of SLPEs of 18 states amounted to Rs 43,498 crores. There were approximated 491 loss making SLPEs and 204 non-working SLPEs out of a total of nearly 1000 SPLES.
20
Dimensions and Methods of Table 11.10 : Financial Data of SLPEs (2002-2003)
State
Net Accumulated Loss (Rs. Crores) 2919 2885 5060 6774 384 605 587 1888 3510 600 1775 N/A 2372 1435 315 N/A 5327 7062
No. of Loss-making SLPEs 62 36 12 24 10 13 16 30 52 08 44 10 22 25 11 33 21 62
Evaluating Enterprises Performance
No. of Non-working SLPEs 09 10 28 10 04 02 01 07 13 15 18 N/A 24 28 08 N/A 19 08
Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnatka Kerala Madhya Pradesh Maharashtra Manipur Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal
Source: Ministry of Disinvestment, 2003
Most State level public enterprises are running at a loss. Therefore, they are unable to pay any dividends. State Electricity Boards and State Road Transport Undertaking are chronic drain on State budgets. The performance of Electricity Boards is critically affected by the following factors:
! ! !
Structure of tariffs involving and excessive cross-subsidisation; High unit of cost of supply due to old plants and bottlenecks in availability of inputs like coal; and Technical inefficiencies resulting in high cost of generation, and sometimes camouflaged as theft.
The strategy of unbundling the SEBs into separate units looking after generation, transmission and distribution, is presently being tried out in some States. Such unbundling is possible with or without privatisation and States may select a suitable option depending on their circumstances. However, the determination of proper tariffs reflecting costs and keeping subsidisation and cross-subsidisation implicit in the tariff structure should be rationalised and kept at minimum levels. State level tariff commissions need to look at the issue of revision of electricity tariff structure keeping in perspective the interests of different categories of consumers, changes in cost structure, the functional implications for the SEBs, as also for the State governments.
21
Public Enterprise:Undertakings (STUs) are also running in losses in many States. Poor State Transport Performance Evaluation productivityand combined with subsidised tariffs, concessions, and higher share of low profit routes keep the STUs in the red. Key elements of reforms in this sector are tariff revisions in line with input costs, elimination of concessions, suitable mix of profitable with non-profitable routes, and improvement in efficiency parameters, including lowering of the staff-bus ratio.
Most other SLPEs, subject to exceptions, are in the doldrums. They need to be sold off. Closure, disinvestment of equity, merger of SLPEs operating in the same products and services where horizontal/vertical integration may lead to economies and externalities, and voluntary retirement schemes may help reduce the fiscal burden. Table 11.11 : summarises disinvestment transactions till February 2002.. Table 11.11 : Disinvestment Transactions Completed Upto February 2002 Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 No. of Companies in which Equity Sold 47 35 13 5 1 1 5 2 4 10 Target Receipt for the Year (Rs. crore) 2,500 2,500 3,500 4,000 7,000 5,000 4,800 5,000 10,000 10,000 12,000 Actual Receipts (Rs. crore) 3,038 1,913 Nil 4,843 362 380 902 5,371 1,829 1,870.53 5,632
Source: Ministry of Dininvestment, 2002
11.5 PERFORMANCE OF STATE ELECTRICITY BOARDS

Power industry in India is in the concurrent list. The responsibility lies both with the central and state government. The supply of electricity commenced in the India in the 1880s with the commissioning of a small 130 KW hydroelectric plant at Darjeeling. A thermal power plant based on coal was set up in Calcutta in 1897. Till Independence, the supply of electricity was confined mainly in and around urban centres. Most of the ventures were due to the initiatives of the private players. However, the enactment of electricity supply Act (1948) changed the scenario. This resulted in the establishment of the state Electricity Boards (SEBs). SEBs took over the operating private players and enlarged the customer base and made the electricity available to the rural areas. The SEBs generates, supply and distribute electricity within a state. The ESA Electricity (Supply) Act, also permits them to undertake activities related to the electrical equipment business such as leasing out its generating stations, conducting investigations and granting loans to licensees. An SEB enjoys all the powers of a licensee under the Indian Electricity Act of 1910.
22
Dimensions and Methods Until 1991, only central generating companies were responsible for supplying power of Evaluating Enterprises to the grid without power of distribution. The major players are NTPC, NHPC & Performance NPCIL. Since 1991, now independent power producers (IPPs) also fall under this category. Besides SEBs & central generating companies, the power industry also includes the licensees. The licensees are private players licensed by the government to generate and supply power within an area e.g. Total Electric Company (TEC), Bombay Suburban Electric Supply Limited (BSES), Gujarat Industrial Power Corporation Ltd. (GIPCL) and Central electricity Supply Corporation (CESCO). The state government has the authority to grant licenses for 30 years, renewable for a further 20 years after the expiry of the renewal or license.
Performance of SEBs in generating capacity has been quite reasonable. The installed generating capacity was about 10,000 Mw in 1951 and it increased to more than 75000 MW in 1995. However the cumulative average growth rate has declined from 12.7% in the 1960s to 7.3% in the 90s SEBs are present in all the three segments of power industry generation, transmission and distribution. But the financial performance of SEBs has deteriorated due to several factors.
Gap between tariff and lost: The average unit cost of supply of utilities has been progressively increasing over the years. During the last one decade the increase in the unit cost supply has been steep and reached the level of 327 paise per unit in 2000-01 (ER) as compared to 108.6 paise/KWh in 1990-91. The increase in the total cost of supply could be attributed mainly to the increase in the cost of fuel, establishment & Administration cost, interest payment liability and the cost of power purchase. Though the average tariff has increased substantially during the past few years, the increase has not been commensurate with the increase in the cost of supply. As a result, the gap between the cost of supply and average tariff has been widening over the years. This gap has increased from a level of 50 paise in 1996-97 to about 110 paise in 2001-02. The level of recovery, therefore, has declined from 77% in 1996-97 to 69% in 200102. Though the number of consumers and the quantum of sales have increased in this period, the number of consumer has been mainly in the domestic and agriculture sectors, who are getting power supplies at subsidized rates. This could be one of the reasons for the widening gap between average cost of supply and average tariff. Commercial losses: The commercial loss of a SEB is the gap between the total revenue receivables and total expenditure in a given year. The commercial losses (without subsidy) of the SEBs increased from Rs 4560 crore in 1992-93 to Rs 25259 crore in 2000-01. Subsidy: Gross subsidy on energy sales has been increasing over the years because of the policy of some of the states to provide electricity at subsidised rates to agriculture and domestic consumers. The gross subsidy per unit (kWh) of energy sold during 2000-01 works out to 126.62 paise. The SEBs make an effort to recover the losses due to the subsidised power supply to domestic and agriculture consumers by way of cross-subsidisation mainly to the industrial and commercial consumers. Rate of Return: The return on assets employed by SEBs has been turning more and more negative because of growing level of commercial losses. It was (-) 12.7 % in 1992 93 and increased to (-) 44.1% in 2001 02. Adverse Capital Stricture: The entire capital structure of most of the SEBs is being financed through interest bearing loans. Very few SEBs could convince the government to convert the loans into equity. As a result of the lopsided capital structure, the interest burden is increasing over the years. This has an adverse affect on the finances of SEBs. 23
! !
Public Enterprise: ! Plant Load Factor: The average PLF at present is around 63 %. The same for Performance and Evaluation the SEBs is 58 % whereas
for the private sector it is 73 %. The cost of energy from the IPP power stations corresponds to a PLF of 68.5 % and above. Such high PLF is not possible in Indian context due to the changing pattern of demand in Faber of peaking requirements. This leads to the inflated cost of power. Thus SEBs have to pay such high cost of power. Investment: In order to reduce the TD losses and increase the generating capacity, there is need for investment. Neither the Central nor the State Governments have such money for investing in the power sector. Net Internal Resources: It refers to the surplus left with the SEBs after meeting the revenue expenditure and loan repayment obligations. It includes depreciation etc. as the SEBs function on commercial lines, the IR would have been positive. However, IR have been negative in all the years except in 1995-96.
! !
The unsatisfactory and deteriorating financial health of SEBs has acted as a constraint not only for adding new capacity, improving the transmission and distribution system, carrying out renovation and modernisation programs, but also for carrying out much needed reforms in the electricity utilities. Presently, restructuring and regulatory reforms are contemplated with a view to bring about reforms in the SEBs through establishment of State Electricity Regulatory Commissions. The establishment of Regulatory Commissions, as provided by the Act passed by the parliament, would lead to rationalisation of tariff and also provide for transparency in provision of subsidies, wherever required. The State Government can exercise the option of providing subsidies, over and around those recommended by the Regulatory Commissions, on condition that the State Governments Compensate the SEBs by providing adequate budgetary support. When tariffs are rationalised and budgetary support is provided, SEBs are expected to improve their financial position. Reform of the Power Sector would be greatly aided by the establishment of independent regulatory agencies responsible for setting tariffs and regulation power purchase agreements. Accordingly, the Government of India has enacted Electricity Regulatory Commission Act, 1998 for setting up of independent regulatory bodies viz. The Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs) at the Central level and State level respectively. These regulatory bodies would primarily look into all aspects of tariff fixation and matters incidental thereto.
Reform State Path Date of Instituting Reform Act Regulatory Commission Established Utility Unbundled Process Stage Orissa April 1996 Yes Haryana March 1998 Yes UP Sept. 1998 Yes AP Oct. 1998 Yes Karnataka Raj June 1999 Yes June 2000 Yes Delhi March 2001 Yes
Yes
Yes
Yes
Yes
Yes
Yes
In the process stage In the process stage No process
Separate Distribution Companies Established
Yes
Yes
No
Yes
No
Yes
Distribution Privatised 24
Yes
No
No
No
No
No
stage
The reform in power sector in Orissa is of particular country for the following reasons:
Dimensions and Methods of Evaluating Enterprises interest to the rest of Performance the
! ! !
It is the first State to start the reforms in the power sector. It has used the full package of reforms from Unbundling, Corporatisation and Privatisation. It is supported and financed by both World Bank and DFID.
11.6
PERFORMANCE OF TRANSPORT SECTOR
Worldwide, transport growth has been consistently higher than the economic growth due to specialisation, sourcing of material on a wider scale, the use of just-in-time strategies, increase and dispersal of retail and wholesale activities etc. prices of transport service have also been falling as a result of increased productivity due to competition among suppliers of transport services as well as pressure from users. The transport system in India has not been able to keep pace with these developments and considerable effort is required to correct the shortcomings. An efficient transport system is a prerequisite for sustained economic development. It is not only the key infrastructure input for the growth process but also plays a significant role in promoting national integration, which is particularly important in a large country like India. In a liberalised set-up, an efficient transport network becomes all the more important in order to increase productivity and enhancing the competitive efficiency of the economy in the world market. The transport system also plays an important role of promoting the development of the backward regions and integrating them with the mainstream economy by opening them to trade and investment. Indias transport system comprises a number of distinct modes and services. These include railways, roads, road transport, ports, inland water transport, coastal shipping, airports and airlines. The sector has expanded manifold in the first fifty years of planned development, both in terms of spread and capacity. Along with the increase in quantity, there have been several developments of qualitative nature, such as emergence of a multi-modal system in the form of container transport, marked reduction in the arrears of obsolete assets, improvement in the self-financing capacity of the sector and the establishment of new centres of excellence for manpower development. Impressive as this progress is, the countrys transport system is far from adequate both in terms of spread and capacity and suffers from a large number of deficiencies and bottlenecks. The quality and productivity of the transport network and resources also needs improvement. It emphasised the need for improving the capacity and quality of the transportation system through technological upgradation and removing distortions in the intermodal max by evolving a rational tariff and investment policy. It also laid stress on improvement of the self-financing capacity of this sector and on the need for ensuring an improved transport system to provide speedy, efficient, safe and economical carriage of goods and people. While the achievement of objectives and targets set for some subsectors, particularly roads and ports, have been encouraging, the progress in the case of others has not been as good. This is particularly true of railways where shortfalls in achievement of physical and financial targets as well as policy objectives are anticipated. While capacity shortages on both the main road and rail links continue to be a serious constraint to overall growth, even the existing infrastructure is inefficiently utilised.
25
Public Enterprise: This is because over the years, a large number of distortions have appeared in the Performance and Evaluation transport sector because of a deliberate policy or lack of it. Another reason for this state of affairs is inadequate maintenance of the existing assets. The condition is pervasive across various modes of transport. The productivity of freight trains is constrained by the condition of tracks and rolling stock. Though the Indian road network appears and only 20 per cent of paved roads are estimated to be in good condition. The average productivity of a truck is 200 Km a day against a potential of 350-400 Km that could be possible through reduction of road congestion. Although, various productivity indices in the ports sector have been looking up including reduction in the waiting period for the ships, increase in the turn time etc., there is still scope for further improvement. The delay in the installation of modern instrument landing or traffic control facilities have constrained the capacity of our major international airports while inadequate draft in our waterways limit the use of inland water transport.
Some of the demand for transportation is due to administrative policies that are often at variance with the pattern of demand that would emanate from the market economy. Presently coal and POL together constitute around 55 per cent of total rail traffic. The movement of coal by railways is mainly for power generation. This is the result of the insistence by State Electricity Boards on locating power plants within the geographical boundaries of the State regardless of the distance from the source of fuel supply. The problem was redressed to some extent by the creation of the National Thermal Power Corporation. It may diminish further with the onset of reforms in the energy sector, the emergence of strong grid to transfer power from one location to another, development of mechanism that will permit the trading of power across State boundaries etc. As a result, in the near future, there may be change in the pattern of setting up of power plants. This would create an opportunity for the transportation sector, particularly for the railways to move towards more high, having cargo traffic such as container traffic. Creating transport infrastructure and operating transport services have major implications for the environment. With rapid economic growth, increase in population and increasing integration of the economy, the demand for transport services is rising at a fast pace. This is, however, leading to the use of scarce land and contributing to the atmospheric pollution in a big way. Sound pollution, road congestion, etc., are other environmental hazards due to transport. Water transport, in addition, leads to pollution of sea and coastal waters and also endangers marine life. While steps are necessary to minimise the environmental impact of transport infrastructure and services in general, priority attention needs to be given to the road transport sector, particularly in large cities, where the adverse impact on the environment is maximum. All major projects, including those in the transport sector require environmental clearance before they are taken up. In large cities like Delhi, initiatives have been taken to enforce Bharat Stage II norms for vehicular emission. Stricter norms conforming to Euro III-IV are also under consideration. However, what is required is a nation-wide policy on the use of clean fuel and phasing out of old vehicles. There is also need to improve the quality and efficiency of the public transport system in order to reduce dependence on private vehicles. In the larger national interest, it is also important that rail transport, which is a cleaner and more fuel-efficient system vis-vis road transport is accorded higher priority. Safety of operation is an area of concern in all modes of transport. Though the accident rates have come down over the years, the number of fatalities remains high. In the road sector, the sheer magnitude and severity of road accidents require immediate attention increased to over 70. The Indian economy is going through structural changes. The share of value added by the primary sector is constantly declining while the share of non-primary sector has been increasing.
26
Dimensions and Methods The demand for transport is influenced by these structural changes. For example, a of Evaluating Enterprises decline in the share of agriculture and increase, the share of manufacturing may lead Performance to an increase in demand for transport. Shower growth in population, however, may reduce demand for transport, which may partly be offset by the fact that the share of mobile population (ages 15-60) is likely to increase. Taking all factors into account, it is expected that traffic elasticity with respect to GDP will continue to decline in line with the past trends but will still be around 1. This growth in transport demand has to be met by expanding domestic supply as transport infrastructure is non-tradable. Investment in transport must, therefore, reflect the need to make up for existing capacity shortages and also to allow for growth in demand.
Budgetary resources for the transport sector are likely to be limited, especially when fiscal prudence is the overriding consideration. However, within the budgetary constraints, transport infrastructure development needs to be treated as a high priority area for continued resource requirement and would greatly exceed the capacity of the budget to meet the costs of maintenance and expansion. Internal generation of resources through rational pricing and user charges is, therefore, essential for the successful development of transport infrastructure. Increasing participation of the private sector would also be necessary to augment the resource base and increase competitive efficiency. The major thrust of policy or transport sector is needed in the following areas:
! ! ! ! ! ! ! !
Meeting the transport demand generated by higher growth of gross domestic product (GDP). Ensuring transport growth in a manner that all regions of the country participate in the process of economic development and is paid special attention to integrating remote regions such as the North-East into the economic mainstream. Capacity augmentation, quality and productivity improvements through technology up-gradation and modernisation. Emphasis on higher maintenance standards so as to reduce need for frequent reconstruction of capacity. Higher generation of internal resources and increased private sector participation in providing transport services. Increase in overall economic efficiency by bringing in competition into the provision and maintenance of transport infrastructure and services wherever possible. Higher emphasis on safety, energy efficiency, environmental conservation and social impact. Developing an optimal inter-modal mix, where each mode operates efficiently and according to its comparative advantage and complement services provided by other modes of transport.
11.7 PERFORMANCE EVALUATION OF THE POSTAL SYSTEM

India has one of the most extensive networks of postal service in the world. A basic profile of the postal sector of India is given below:
! !
The Indian postal system is the largest in the world, with the number of post offices/outlets numbering 1,54,919 as on 31 March 2001. The permanent post offices, called Departmental Offices, number 26,037. Of these, 1,28,882 (83 per cent) are in the rural areas and are called Extra
27
Public Enterprise: Branch Departmental Performance and Evaluation
Offices (EDBOs).
! ! ! ! !
The total manpower under the Department of Posts is about 6,00,000 almost equally divided between permanent employees (who number 2,94,301) and extra-departmental employees (numbering 3,09,649). The total revenue expenditure of the Department in 2001-02 was Rs. 5,210.83 crore, with a revenue deficit of Rs. 1,458.37 crore. The plan outlay constitutes a very small fraction of the total expenditure and was Rs. 135 crore for 2001-02 or 2.59 per cent of the revenue expenditure. The entire Plan outlay is funded through budgetary support. There are no externally-aided projects. The total expenditure as percentage of receipts for the Department of Posts was 160 per cent in India as compared to 101 per cent in the United Kingdom, 102 per cent in the United States, 99 per cent in Brazil and 138 per cent in Sri Lanka in 1998. Except courier services, postal operations are still a State monopoly.
The Indian postal system currently provides 38 services which can be broadly divided into three categories of activities:
! ! !
Communication letters, postcards, newspapers. Transportation parcels money orders etc. Other services resource mobilisation, postal life insurance.
Postal finances have deteriorated sharply over the last decade. Postal deficit is an open ended subsidy and forms part of the general budget. The deficit has shot up almost 16 times. This has serious implications for resource availability for other needy sectors like infrastructure and social development. The trends of postal deficit are shown in Table 11.12. Table 11.12 : Trend of Postal Deficit (Rs. in Crore)
Year 1992-1993 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002

Source: Tenth Fine Year Plan
Deficit 91.81 993.43 1590.97 1740.53 1576.35 1458.37
Postal services in India have been highly subsidised, as part of Government Policy. While subsidy on a few items covered under the Universal Postal Service Obligation
28
Dimensions Methods (UPSO) may be justified, the pricing of non- UPSO services need to beand fixed on of Evaluating Enterprises commercial principles. The projections are shown in Table 11.13.
Performance
Table 11.13 : Subsidy on Services Rendered Through the Postal Network (Projections 2002-03) Service Subsidy per unit (Rs.) 6.70 1.73 4.79 18.93 29.61 8.54 14.39 10.44 3.37 N.A. N.A. Traffic (in million) 193.30 93.49 329.48 196.08 106.73 73.09 18.06 25.90 64.29 1996.13 3,096.55 Total deficit (Rs. in crore) 129.59 16.16 157.66 371.28 316.05 62.44 26.00 27.03 21.65 185.27 1,313.13
Post Card Printed Post Cards Letter Cards Registration Money Order Reg. Newspaper (Single) Reg. Newspaper (Bundle) Printed Books Parcel Others Total
Source: Department of Posts
The postal department should endeavour to achieve self sufficiency and consolidation. Various steps necessary in this sector are mentioned below:
There does not seem to be any justification for subsidizing services like registration, newspapers, postal orders, money orders etc. Only Insurance, Speed Post and Foreign Mail are yielding a surplus. This policy of blanket subsidy needs to be reviewed and replaced by a policy of pricing the services appropriately, keeping the UPSO in mind. The steering committee on communication and Information for the Tenth Five year Plan has recommended inclusion of postcard, inland letter, and money orders upto a certain limit to be under UPSO. Price of other services should be determined on commercial basis. Under the Indian Postal Act, 1898, the central Government fixes the tariffs for various postal articles and these are approved by the Parliament. Due to various reasons, tariffs have not been revised at reasonable intervals. Revision of postal tariffs has not been keeping pace with the increase in operational costs. The present system of tariff fixation needs to be replaced by a more dynamic, objective and transparent mechanism. The Indian Post Office Act, 1898 is totally archaic and obsolete. It does not meet the requirements of changed circumstances. It needs to be replaced with a forward looking legislation to take care of new developments. The present scheme of opening rural post offices (EDBOs) has a large element of inbuilt subsidy of 67 per cent in normal areas and 85 per cent in hilly and tribal areas. This is not sustainable in the long run. Two feasible options that must be explored are converting extra department employees into franchisees of the department for providing postal services in rural areas and reactivating the scheme of licensed postal agents. To take advantage of the emerging scenario of convergence, post offices need to be developed as multi product and multiservice delivery centres in which delivery of postal services would only be part of the job. The Government is now moving towards consolidation and integration of the steps taken in the part for 29 computerization and modernization of the postal system in harnessing the
! !
Public Enterprise: emerging technologies to improve the services offered through the network. Performance and Evaluation About 2 crore postal transactions are done through the network. About 2 crore
postal transactions are done through computers every month. A VSAT network for prompt transmission of money orders with 150 micro earth stations capable of linking about 5000 post offices has been established.
So far 192 mail offices have been modernized. The field formations are also restructuring the delivery arrangements in the post offices keeping in view the requirements of customers in specially new colonies in urban areas. To meet the challenger of changing market demand, a member of new services have been introduced, such as speed post, business post, express parcel post, media post, greeting post, data post, passport services and satellite post. In order to bridge the digital divide, e-Post, for delivering e-mail at the doorstep of the citizens, is running in the five states namely Andhra Pradesh, Goa, Gujarat, Kerala & Maharashtra. To provide the facility of paying all types of bills at one window, e-Bill post, an internet based utility bill collection was launched in the post offices. Generation of substantial additional revenue through nontariff methods like commercial exploitation of land and introduction of IT based financial services are the two other important components of the strategy for making the Government run postal services selffinancing. Except courier services, the postal services are still a state monopoly. To ensure efficiency and improved quality of service, it may be desirable to open up selected postal services to private entrepreneurs. This will ensure flow of required funds into the sector, bring in new technology and also enable the department to pay greater attention to its main activity i.e. carrying of mail. To ensure competition and a level playing field, the establishment of an independent regulatory authority may be considered.
11.8
PERFORMANCE OF PORTS
There are 12 major ports and 184 minor / intermediate ports along the 5560 km coastline of India. The major ports are Kolkata / Haldia, Mumbai, Jawaharlal Nehru Port Trust (JNPT) at Nhava Shewa in Mumbai, Chennai, Kochi, Vishakhapatnam, Kandla, Mormugao, Paradip, New Mangalore and Tuticorn. A new major port, Ennore port, has started functioning near Chennai from 2001. The major ports handle about 15 per cent of the countrys port traffic of the country, with the minor / state ports handling the remaining 25 per cent. Ports are a key component of infrastructure. Recent policy initiatives have ushered in new institutional arrangements and have yielded results in terms of measurable outcomes such as the delay at ports. However performance lags international standards. Private investment in the sector has been mainly from captive users. The performance of ports has shown the following improvement over the years:
! ! ! !
There has been an improvement in terms of total cargo handled at major ports. There has been an impressive growth of container traffic in the last few yearswith growth rates of over 10 per cent per annum over the last three years (20022003). There has been an improvement at major ports in the principal indicators of port efficiency (Average turn-around time, average output per ship-berth-day, average per-berthing time)
Productivity indicators vary widely from ports to ports. This may suggest that 30 there are institutional innovations at better performing ports, such as JNPT,
Dimensions and Methods of Evaluating Enterprises The major initiatives taken for improvement in performance of ports can be Performance
which could be adopted in other ports.
summarised as follows:
Corporatisation of Major Ports: The functioning of major ports under various port trusts is operationally inflexible, and they are unable to respond quickly to changing market situation due to delays inherent in the decision making process. Steps are thus being taken by the Government towards corporatisation of major ports. Private sector participation: The areas identified for private participation in ports are: Leasing out assets of ports; construction and operation of container terminals, multiple cargo berths etc; leasing of equipment for cargo handling; pilotage; captive facilities for port based industries. Joint ventures: The objective of setting up joint ventures is to attract new technology, introduce better managerial practices, expedite implementation of schemes, foster strategic alliances with minor ports and enhance confidence of private sector in funding of ports. Tariff policy: Currently, the tariff stricture is determined by the cost-plus approach, which is not an appropriate pricing mechanism for cargo services. While fixing tariff, the improvement in productivity and efficiency needs to be taken into account. It needs to be ensured that the users do not pay for the inefficiencies of the ports. Development of Hinterland / port connectivity: the lack of proper connectivity with hinterland has hampered the development of ports. Hence, the development of other modes of transport-railways, highways, inland, water transport and even pipelines is essential.
11.9 PERFORMANCE EVALUATION OF RAILWAYS

Railways is a massive organization in India that carries more than 10 million Passengers and a million tones of freight each day. There are about 14,000 odd trains including about 8500 passenger carrying trains. For the past few years however, the Indian Railways have not performed well. The topmost problem has been to find funds for even essential investments. The causes of this grave situation are:
! ! ! ! ! ! !
Shrinking of central budgetary support Limited scope for infernal generation of resources Own tariff policies Fall in share of rail in land transportation Huge surplus staff Impact of pay commission Griming number of pension beneficiaries
Under such limitation of resources, careful planning of investment is required. But large part of the resources has been thinly spread across several hundreds of works like including a huge shelf of new line and gauge conversion projects with little prospect of early completion. Line capacity is quite short in areas of heavy traffic, speeds do not improve and safety is allays a nagging concur. An appraisal of the Railways has reference in the report of the Railway Expert croup (July 2001) set up in 1998, with Dr. Rakesh Mohan as chairman. The report notes that the Railways is on the verge of a financial crisis, and suggest fundamental
31
Public Enterprise: changes in order to farce the emerging competitive pressures. The group considers Performance and Evaluation that the Railways has to make a deliberate choice it can opt for the strategic High Growth scenario that has the Potential to double the rate of growth, and emerge as a strong, modern system, or allow this fine institution to wither. The causes of performance of Railways can be evaluated as follows:
Investment in the transport sector, including the Railways, was a priority in the initial phase of Indias planned development. In the first three, five year plans Railways received adequate budgetary resources for their strengthening and modernization and facilitate industrial and economic development. But thereafter, a decline of budgetary support started and became a major cause of the situation to day. A plan outlay for Railways is shown in Table 11.14. Table 11.14 : Plan Outlay for Railways Plan Up to 4th 5 6 th 7 th 8 th 9 th
th
Railways (Rs. in crores) 3200 1523 6555 16549 27202 45413
Railways outlay as % of Total Plan Outlay 10.3 5.3 6 7.6 6.3 5.3
Source: Status paper on Indian Railways: 2002
! ! ! !
In terms of revenue performance, the Railways enjoyed fairly satisfactory results during the first three plan periods. But in the twenty years that followed, it defaulted several times on payment of dividend to general revenues and resorted to loans from general revenues for the Development found (used for financing an remunerative but essential works, passenger amenities and staff welfare. During the seventh plan period (1985-90), there was a fairly balanced increase of tariffs of both passenger and freight traffic. The year 1989-90 was significant for the raised level of freight tariff. It was however, the starting point of a relentless trend of freight increases over almost a decade. Diversion to roads-the high freight charges led to a steady loss of traffic to the roads, aggravating the trend that had set in after the deregulation of trucking in the 1980s. Delays and losses in transit added further to the loss of revenues and downturn of financial performance. Returns from the growing levels of passenger traffic, accounting for nearly 60 per cent of the transport output, were wholly inadequate to meet its costs, mainly because of a continuous policy of tariff restraint. The year 1997-98 marks a precarious phase for Railway finances with the implementation of pay commission recommendations, which put up staff costs by a third. Freight traffic also dropped by 29 million tones below target. Table 11.15 shows the financial status of the Railways. Table 11.15 : Trend of Railway Finances
% Staff costs Traffic receipts Ratio of (1) & (2) Railway Fund Balances Plan expenditure 1996-97 100 100 41.7 3370 100 1997-98 1998-99 1999-00 2000-01 2001-02 135 118 47.8 3564 99 156 122 53.3 1253 107 162 135 50.0 149 10.9 176 143 51.2 359 113 185 155 49.8 994 131
32
UNIT 12
SICKNESS AND PUBLICEvaluating Enterprises Performance ENTERPRISES AND TURNAROUND STRATEGIES
! ! !
Develop the concept of sickness; Know about the magnitude of sickness prevalent in India; Understand the remedial measures that prevent sickness.
Structure 12.1 12.2 12.3 12.4 12.5 12.6 12.7 Concept of Sickness Growth and Magnitude of Sickness Causes of Sickness Remedial Measures and Prevention of Sickness Summary Self Assessment Questions References and Further Readings
12.1
CONCEPT OF SICKNESS
Sickness is defined under Law-Sick Industrial Companies (Special Provisions Act, 1985 (SICA). According to this act a company is termed as sick, if; i) ii) it was registered for at least seven years; it incurred cash losses for the current and the preceding year;
iii) its net worth was eroded. Initially only private companies were covered under this Act. But in 1991, public sector companies were also brought under the purview of the Act. The act was amended in 1994 and the criterion of cash losses for two successive years was eliminated. Firms only need to be registered for five years. A sick industrial unit redefined means a company registered for not less than five years and which has defaulted in payment on due dates of debts (including interest due) to any creditor for atleast four quarters, continuous or not, in a block of two consecutive financial years. It also requires the Board of Directors of any company to inform BIFR, if at the end of any financial year erosion of 50 per cent or more of its peak net worth has resulted during the immediately preceding four years. Basically sickness refers to continued sub-normal standards of performance eroding capital or denying return to the investors. The two questions which need to be addressed are; what is continued and what is normal standard. One option is to define normalcy by an established benchmark. No universally applicable benchmarks are easily accessible or could be fruitfully applied to Indian conditions which were characterised for a long time by a regulated, protected, constrained framework. One could maintain that sub-normal performance, leads to a loss-making state, but one does not necessarily follow from the other. Moreover, loss generation does not capture sub-standard performance, in a specific area. Loss-making state of an enterprise is a cumulative result of several functions.
1
12.2
GROWTH AND MAGNITUDE OF SICKNESS
Industrial sickness has grown in magnitude over the years. A large number of industrial units in the small-scale sector and non-small scale sector are affected by it. The small-scale sector accounts for 99 per cent of sick/weak units as on March 2001, its share in total bank credit outstanding was only 17-5 per cent. Table 12.1 : Magnitude of Industrial Sickness No. of Sick Units Year 1980 1990 1998 1999 2000 2001 Large and medium 1401 2269 2476 2792 3164 3317 Small 23,149 2,18,828 2,21,536 3,06,221 3,04,235 2,49,630 Total 24,550 2,21,097 2,24,012 3,09,013 3,07,399 2,52,947
Outstanding Bank Credit (Rs. in crore) 1980 1990 1998 1999 2000 2001 1,502 6,926 11,825 15,150 19,047 21,270 306 2,427 3,857 4,313 4,608 4,506 1,809 9,353 15,682 19,463 23,656 25,775
Source: Economic Survey, 2002-03
From the data on magnitude of sickness, one can draw the following conclusions (see Table 12.2):
! ! ! !
the total number of sick units increased more than 10 times in a span of 10 years; the increase in sickness of small sector units was very large as compared to large and medium enterprises; the outstanding bank credit of large and medium enterprises is higher than small units; there has been a decrease in number of small-sector sick units after 2000.
A large number of sick units project another serious problem. About 90 per cent of small sector sick units are non-viable. The extent of industrial sickness varies by sectors and across regions. In the category of large and medium sick units, textile and engineering industries accounted for about 27 per cent total credit outstanding (1998). Among the states, Maharashtra and West Bengal accounted for about 27.2 per cent of the total credit outstanding and 26.2 per cent of the number of total units in the category of large and medium sick units. To a large extent, this regional concentration of sickness corresponds with the historical pattern of industrialisation of India, also, these regions are characterised by the presence of industries in textiles, engineering goods and jute which happened to be the sectors afflicted with industrial sickness, especially in the category of large and medium sick industrial units.
2
12.3
CAUSES OF SICKNESS
The analysis of causes of sickness is very broad. The factors could be as varied as the problems of industrial management. The causes of sickness faced by public enterprises are often of the following two types:
! !
exogenous or external endogenous or internal
However, such classifications assume that the causes are known and what needs to be done is the action which again appears to be too obvious. But the fact is that the causes of sickness can be of very different kind. The discussion below will help understand some basic causes of sickness. In the classification of causes of sickness into exogenous and endogenous factors the different types of each group needs to be discussed. Some important exogenous causes of sickness are:
! ! ! ! !
irregular availability of inputs; changes in demand of product; availability of credit to purchaser; irregular and less supply of power; changes in government policy relating to imports, exports, taxation, licensing etc.
Endogenous or internal causes of sickness can be listed as:
! ! ! ! ! ! ! ! ! ! ! !
faulty locational decision leading to lack of infrastructural facilities; absence of market analysis before finding out potential of their product; an unbalanced capital structure; underestimation of project cost; increasing operational cost may be due to increase in salary structure without increase in productivity; very low productivity level; lack of new and appropriate technology; entrepreneurial incompetence; management problems leading to faulty management decisions; labour problems like lock-outs, strikes and closure; no improvement in quality of product; lack of inadequate long term strategy.
To understand the causes of sickness as witnessed in public enterprises, sickness may be classified into five distinct types. The broad types of sickness based on different causes are:
! ! ! ! !
Genetic sickness Structural sickness Operational sickness Policy-linked sickness Exogenous sickness.
3
Public Table Enterprise: 12.2 shows the different types of sickness, when they occur (time frame) and Performance and Evaluation their causes. Table 12.2 : Types of Sickness and Their Causes
Type Genetic
Time Frame Historical
Basic Causes Varied-technological, economic or management related Decisions on locations, technology, product etc.
Structural
Launch or Later
Operational
Any time
Management failure, lack of leadership, emergence of competition Conditions imposed by policy decisions Industry location specific, policy specific.
Policy-linked Any time Exogenous Any time, Unpredictable
Some enterprises are genetically sick. Among the public enterprises, there is a large number of cases of historic or genetic sickness. Several enterprises were taken over as sick from the private sector to prevent unemployment. Some corporates, outside the public sector are sick structurally. They represent some basic and serious deficiency in their conceptual visualisation. The structural sickness could be due to an uneconomic location, obsolete or inappropriate technology, over-capitalisation, faulty product mix or uneconomic size. Some enterprises become sick after some change in a basic parameter of operation. While it is true that every enterprise has to face change and manage change, some managements respond to change feebly. Operational sickness could also occur because of management failures without the occurrence of any change. It could be a case of management fatigue or lack of leadership. Policy-linked sickness and sickness owing to exposure to change is fairly common. Exogenous sickness occurs due to any of the factors affecting the unit from outside.
12.4
REMEDIAL MEASURES AND PREVENTION OF SICKNESS
Consequences of Industrial Sickness: India is a developing country with surplus of labour. Industrial sickness, therefore, has many adverse impacts on the labour economy of our country. India has a limited opportunity for its surplus labour. Closure of sick units adds to the woes of unemployment. Since large units employ large number of labour, closure of such units, leads to unsatisfaction and unrest among the labour class. This may lead to strikes and increase trade unionism. An industrial unit often has close linkages with other related units. Therefore closure of an unit effects the linked units also. This adverse effect may take large proportions and can damage the economy of a country. Sickness is not healthy for the industrial environment of a country. Closure of units discourages other entrepreneurs to set up industrial units. It also causes harm to the investors who had invested large sum of money in that unit. Sickness and closure of industrial units also cause loss of resources which were utilised in setting up that unit. Since resources are scarce, this is a very harmful consequence of sickness. The loss caused to banks and financial institutions due to closure of sick units is quite obvious. The various consequences of sickness can now be summarised as follows:
! !
4
increase in unemployment; unhealthy industrial environment;
! ! !
loss of resources; loss to investors, banks and financial institutions; unhealthy effect on entrepreneurs and related units;
Warning Signals of Sickness: To prevent sickness, it is necessary to identify the early symptoms which lead to sickness. These symptoms may be listed as:
! ! ! ! ! ! !
increase in inventories raw materials and finished goods; a firm operates below its break even point volume of production or salaries not adequate to cover the fixed costs and variable cost; shortage of funds to meet short term obligations like salary to labour, purchase of raw materials, interest on loans, payment of tax etc.; decrease in net profit; unhealthy financial ratio; like debt- equity ratio and ratio of current assets to current liability less than 1:1 (1977) by adding section 72A. This section allows for grant of tax benefit to healthy units when they took over the sick units provision of margin money to sick units at soft terms scheme for grant of excise loan not exceeding 50 per cent of excise duty actually paid for 5 years;
Concessions by Banks and Financial Institutions: Various concessions were announced by banks and FIs for revival of sick enterprises.
! ! ! ! ! !
grant of additional working capital; recovery of interest at reduced rates; freezing of a part of out standing loan; setting of a special cell on sick units in the RBI to monitor the performance of sick unit to suggest corrective measure with regard to rehabilitation; setting of regional monitoring cells by RBI for better coordination between the banks, state government financial institutions; establishment of IRCI Industrial Reconstruction Corporation of India with functions like providing financial assistance, managerial and technical assistance, consultancy services etc.;
Establishment of BIFR Board for Industrial and Financial Reconstruction: The government established the BIFR, Under the SICA Act of 1985. The Board has various power to tackle industrial sickness. The Board has the authority to enquire and determine the sickness of a company. It can give time to a sick company to make its net worth positive. It can also devise measures like change in management, reconstruction of share capital, sale of part or whole of the unit or merger with a healthy unit. BIFR can also direct banks and financial institutions to-not-to extend any financial assistance for a period of ten years if the Board finds that the sickness is due to a person or partner of a company. Goswami Committee on Industrial Sickness and Restructuring: The committee submitted its Report in 1993 with the following main elements;
! ! !
It recommended a change in the definition of sickness to default of 180 days or more on repayment to term lending institution and irregularities in cash credits or working capital for 180 days or more. To avoid delays in the BIFR process, the committee recommended that BIFR should use the winding up provision more frequently not only to expedite the sale of economically unviable firms. Financial institution could increase monitoring so that they could take corrective
5
Public Enterprise: measures, at the time Performance and Evaluation
of flow.
! ! !
take over of the management of a sick undertaking with the clear understanding that the units will not be handed back to the same management; merger of the sick unit with a public sector undertaking could be considered; Amendment of Income Tax Act Remedial Measures: Public sector has long been considered a social obligation of the government. Thus the sickness of this sector was regarded as a social problem of our country. Cosequently various measures were taken by the government, banks and financial institutions to ruin sick enterprises. The various steps are discussed below.
4.
Government Policy: The government made a policy statement on industrial sickness (1978) and laid down guidelines for various measures to deal with this policy and these measures are as follows:
! ! ! !
arrangements for monitoring and detecting industrial sickness early; administrative ministries in the government were given responsibility to coordinate action for revival and rehabilitation; setting up of five fast- track winding up tribunals and fine recovery tribunals at Mumbai, Chennai, Kolkata, Delhi and Bangalore; giving choice of voluntary reference to BIFR instead of mandatory reference so that many cases could be speedily settled outside BIFR.
However the latest steps of Finance ministry are the repelling of the SICA 1985. The immediate effect of that would be the winding up of BIFR. In its place a National Company Law tribunal will be set up. The role of this Tribunal will be to serve as a liquidator rather than a rehabilitator. Turnaround Strategies: Sick enterprises demand changes in their treatment and approach, revival and other strategies for sick enterprises range from simple management intervention like a change in leadership to complete restructuring, final closure or management transfer in case of public sector, the turnaround strategies which aim at course correction are of the following types. Often more than one strategy is required to be used depending on the situation. Strategies of management interventions are:
! ! ! ! ! ! ! ! ! ! ! ! ! !
6
Corporate planing HRD intervention (for skill development and attitudinal changes) TQM/IOS 9000/ 14000 certification Change in product mix Changes in marketing strategies Market and marketing research Delayering Downsizing Capital restructuring Cost reduction Benchmarking Participative management Transparent communication IT- based intergrated management such as ERP (Enterprise Resources Planning)
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
Recourse to domestic captive market Recourse to foreign capital market. Customer-orientation
Strategies of basic corporate management are: Business process re-engineering Functional redesign and delayering Induction of new technology Strengthening the Boards through induction of professional Directors Reappraisal and change in operating strategies Streamlining corporate governance Change in corporate leadership
Strategies of corporate restructuring are: Mergers or amalgamation Focus on competency and hence hiving off non-core areas Reappraisal and changes in strategic alliances Major expansion or diversification Forward or backward integration Establishing new strategic alliances Joint ventures
Strategies of governmental policy formulation are: Redefining policies Laying down guidelines for performance Debottlenecking and streamlining Procedures Limiting points of ministerial intervention Designing information system and monitoring for governmental intervention Establishing sickness signals for governmental intervention Formulating policy governing revival and closure Setting norms of budgetary support and issue of guarantees Setting up norms for access to capital market and foreign markets
Ronald R. Dalesio (1998) has identified some best practices which in the public sector environment were overlooked in the past. Moreover they are always missing from sick enterprise. What was considered more important was growth in investment not real growth in output and value addition. Management initiatives were rather discouraged. Complacency and adherence to predetermined procedures was followed. Managers of today cannot ignore the best practices listed below though some of these are not directly measurable. These practices have to be followed and operationalised in an effective manner.
! ! ! !
Goal sharing Quality upgradation (in product or service) Worker satisfaction Decision-making quality
7
Public ! Enterprise: Productivity enhancement Performance and Evaluation
! ! ! ! ! ! ! ! ! !
Information accessibility (horizontal and vertical) Reward system with sharing of value addition Dynamic HRD system Empowerment Communication systems Job enrichment Quality circles Self-managing work teams Attitudinal work change Technology adaptation and assimilation
The key to sickness prevention is to create competitive advantage. The PSEs did not have to bother much about competitive advantage because of the protected environment in the past. The creation and maintenance of competitive advantage demands focussed strategies. Each product and each market has its own competitive advantage which has to be explored and operationalised. The task before the public sector management in relation to sickness is to:
! !
Turnaround the reviable sick enterprises. Become proactive in preventing sickness.
Survival and revival strategy cannot be done without financial reconstruction. Units must have a financially viable debt equity ratio. Most PEs in trouble want to convert their government loan capital to equity to avoid interest cost. However, this is not a healthy sign. There should be a mechanism by which restructuring of capital is taken up judiciously. Merger or joint venture option has been approved by the government in the past. The strategy is to revive these companies so that they would be able to support, but would be able to sustain on a long-term basis. Some public enterprises have made large effort in developing plans of revival. But many of them remained unimplemented due to lack of confidence lack of new approach and lack of authority. Such cases need the help of an external agency. This out sourcing must be designed effectively with a time bound approach, quick evaluation and decision. One of the major causes of sickness is the over staffing in public enterprises. The strategy adopted to turnaround form this ailment is the adoption of VRS packages with high compensation. Public sector enterprises will not be able to survive besides their best effort and initiatives of government. They require a state of robust health with an optimal resource mix of capital, manpower, management, marketing and technology. A correct combination of these strategies is necessary for survival in this world of global competitiveness. Examples of Turnaround Strategies in India :
Vishakapatnam Steel plant made a comeback from being almost a BIFR case in 1998-99 to a profitable enterprise in 2002-03. The plant which took over 21 years to be commissioned since it was first conceived in 1971, faced many challenges from the world go. The slowdown in 1998 only made things worse. But a collective approach, a change in focus from result orientation to process orientation, innovative and customer concentric strategies, total employee involvement, technology upgradation and managing external environment helped the company tone up its bottom-line and top-line. Electronics Corporation of India is another turnaround story. Though it scored
!
8
Dimensions and Methods of several first by developing various complex products without any external Evaluating Enterprises technological help, it suffered the crisis of a slowdown due to globalisation and Performance economic liberalisation. Apart from the stress of competition which led to the company posting its first loss in six years in competition which led to the company posting its first loss in six years in 1997-98, the problem was accentuated when ECIL. Was named by the us Department of commerce for export embargoes on all items of US origin, a move followed by several western countries.
In the year, ECIL suffered a loss of Rs.60 crore and had to be reported to the BIFR. Since then a careful restructured turnaround strategy, encompassing employee motivation financial discipline, performance monitoring mechanism, business development through bidding and forging partnership even with competitors and improving technical base through relationship with universities, BARC and DRDO has paid rich dividends. The turnover of the company jumped four times since 1998-99 to touch Rs.1005 crore while profits that stood at Rs.150 crore have climbed to Rs.250crore. Activity List the major causes of sickness in public enterprises. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................
12.5
SUMMARY
The Sick Industrial Companies Act (SICA) were enacted in 1985 for identification of sick units. A sick unit has been defined as a unit registered for not less than five years and which has defaulted in payment on due dates of debts to any creditor for at least four quarters, continuous or not, in a block of two consecutive financial years. Causes of sickness can be grouped for simplicity as exogenous and endogenous factors. Exogenous factors may be the irregular availability of inputs, changes in demand of product, less supply of raw materials etc. Similarly endogenous factors are unbalanced capital structure, increasing operational cost, lack of new technology and no improvement in quality of product. The main cause of sickness helps to identify four types of sickness genetic, structural, operational, policy linked and exogenous. Major consequences of industrial sickness are setback to employment, fear of industrial unrest, wastage of resources, adverse impact on related units, adverse effect on investors and entrepreneurs losses to banks and financial institutions etc. Various remedial measures have been taken by the government in the form of policy formulation and concessions. Banks and financial institutions have also given assistance in revival and reconstruction of sick units. Setting up of IRCI and BIFR are the steps in this direction. Some turnaround strategies for survival of sick public enterprises are management intervention, corporate restructuring joint venture 9
Public Enterprise: options, VRS package and developing competitive advantage. Sick unit survival lies Performance and Evaluation in an optimal use of capital, manpower, management, marketing and technology.
12.6
1. 2. 3.
Define sickness. What are the reasons for the changing concept of sickness Industrial sickness is threat to a developing labor surplus economy. Justify. Discuss the main turnaround strategies followed for revival and reconstruction of sick enterprises. Do you agree that sickness can be prevented? What are the preventive steps?
4.
12.7
REFEENCES AND FURTHER READINGS
Reserve Bank of India (2001-2002), Report on Currency and Finance. Economic Survey, (2000-01), (2001-02) Lal, Sudarshan. (1979). How to Prevent Industrial Sickness. Srivastava, S.S. and Yadav, R.A. (1986). Management and Monitoring of Industrial Sickness.
10
UNIT 13 DIMENSIONS AND METHODS OF Evaluating Enterprises Performance EVALUATING ENTERPRISE PERFORMANCE
! !
Learn about objectives of performance evaluation; Know the various models of performance evaluation.
Structure 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 Performance Evaluation of PSEs Factors and Agencies Objectives of Performance Evaluation in PSEs Criteria for Evaluation of Public Sector Availability of Data on Performance Evaluation of PSEs Country Models for Performance Evaluation of PSEs Summary Self Assessment Questions References and Further Readings
13.1 PERFORMANCE EVALUATION OF PSEs FACTORS AND AGENCIES

There is a need for proper performance evaluation system for public enterprises as they continue to play a dominant role in most developing countries. There has been an ongoing debate over the management of public enterprises their rationale, growth, successes and failures and their relevance in the socio-economic philosophy of a country. Performance evaluation should be intended for further improving the performance of these enterprises, and evolving a proper system of performance evaluation. Various performance evaluation systems argued whether the objectives of public enterprises should be financial or social. However, public enterprises will have to satisfy both these objectives. Several attempts evolving models for performance evaluation include the breakeven approach, total performance approach, constrained output model, total factor productivity approach, omega sigma, optima approaches. But none of these approaches is easy to implement and hence their utility remains minimal. These practices and concepts are not entirely satisfactory in that the problem of social profitability and its quantification, and its being included in performance evaluation exercise is still unsolved. Though some make a mention about negotiating these social costs and social benefits with the government, the success of such an exercise depends upon the negotiating skills and the bargaining power of an enterprise. Several factors have to be taken into account while trying to develop models / approaches to evaluate the performance of public enterprises. These factors are enumerated below 1. Environmental Factors
Governmental interference for location, size, technology, appointment of chief executive, functioning of Board of Directors, pricing etc.;
1
Public ! Enterprise: Lack of political and administrative will; Performance and Evaluation
! ! ! ! ! ! ! ! ! ! ! !
Lack of objective specification; Lack of suitable performance criteria; Non-availability of data on actual performance.
2. Operational Factors Evaluation of enterprise level, sectoral level and national level. Purpose of evaluation to-learn, control, motivate, indge, identify areas for improvement. Evaluation of controllable factors as well as uncontrollable factors. Evaluation by an insider or an outsider. Evaluation of total performance. Evaluation of individual factor performance. Mechanics of evaluation simple or elaborate. Comparable basis for evaluation with previous performance, with similar organisation, with set standards. Evaluation should lead to rewards or punishments.
There are several agencies involved in performance evaluation of public enterprises. These agencies can be divided into two broad Categories External agencies and internal agencies, Different agencies have different objectives. The evaluating agencies and their main objectives are listed as below: Agencies a) External Agencies 1. Parliament 2. Minister 3. Administrative Ministry National, political and socio-economic Short term optimisation of political goals To provide assistance in fulfilling ministries objectives, to provide assistance in fulfilling budgetary objectives, to perform the control function To achieve favourable trade-offs To ensure compliance with national budget Ensure fulfillment of the plan objectives Objectives
4. User Ministries 5. Finance Ministry 6. Planning Ministry b) Internal Agencies Governing Board Unit Public Enterprise
Specified corporate objectives Specified unit objectives
Manage Micro Level objectives the above listing shows that it is very complex to attempt a single model or approach that satisfies all objectives and agencies. Performance evaluation at the level of parliament requires broad judgement of issues like investment, returns, import substitution, employment creation, regional development etc. In contrast, performance evaluation at the enterprise level requires identification of units objectives and the extent of achievement, identification of areas for further improvement, identification of control inputs and so on. Thus it becomes necessary to develop alternative approaches to performance evaluation.
2
13.2
OBJECTIVES OF PERFORMANCE Evaluating Enterprises EVALUATION IN PUBLIC ENTERPRISES Performance
The evaluation of public sector enterprises have to be related to a complex set of objectives. There are more dimensions to the problem of performance evaluation in public enterprises than in private enterprises. The principal objective of a private sector enterprise is maximisation of profit. In case of public enterprises, the objectives are multiple and cover different aspects of its operations like earning of surpluses, equitable distribution of its products and services, etc. The major objective, whether immediate or ultimate, in case of a private enterprise is profit. Other objectives like location, choice of technology, composition of workforce, capacity utilisation becomes secondary until it adds to the ultimate goal of profit maximisation. Public enterprises are controlled by the parliament through its associated agencies like the Committee on Public undertakings, Audit Board, the concerned department of the Administrative Ministry along with the Finance Ministry and the Bureau of Public Enterprises, Board of Directors of the respective individual enterprises. Various conflicting interests arise between them and the enterprise which is under diverse controlling units is pushed to a stage in which the enterprise cannot show good performance. Often, these conflicting interests lead to decisions which are not intended to better the performance of enterprise as a whole but satisfy one control unit or the other. However, many of these decisions are crucial in affect very important strategic and operational areas. They have a long-term impact on the performance of the enterprises. Examples are decisions affecting location, capacity, technology, pricing, appointment of chiefs etc. It has not been possible for the Government to come out with a list of specific economic and non-economic objectives for public enterprises. There are as many objectives as there are people who are concerned with public enterprises. Commercial and non-commercial objectives Different public enterprises give different emphasis on their social obligations while earning a reasonable rate of return. For example, reduction in cost in certain fields may come in conflict with some of the non commercial objectives a reduction caused by retrenchment or quality reduction. It may not be in the national interest if a drug manufacturer goes in for profit maximisation. In reality, however commercial and non-commercial objectives are complementary to each other, and not conflicting and confronting. Commercial success should enable a public enterprise to fulfil its non-commercial obligations in a better way. Similarly, non-commercial objectives should pave the way for further success in commercial terms. The real success of a public enterprise lies in balancing these two different objectives. Long-term and short-term objectives-objectives of an individual enterprise level need also be classified as long-term and short-term. It is necessary because some public enterprises may have to plan for commercial losses in the short-term in preference to the fulfillment of social obligations. An organisation like ONGC operates in a high risk environment in that it may or may not succeed in identifying oil reserves immediately on a short term basis, but it will have to invest heavily on this identification process on a continuous basis. Objectives at each Individual Enterprise Level Instead of looking at the objectives of Public Enterprises in general, objectives of specific groups of enterprises may be considered for evaluation purpose. There are public enterprises that develop or promote industrial growth (Development Corporations), Public enterprises that
3
Public Enterprise: provide basic materials like steel, coal, chemicals etc; to other industrial units (Basic Performance and Evaluation Industries); Public enterprises that provide infrastructural communication, transport, etc facilities (Service Organisations); Public enterprises that provide trading facilities (Trading Corporations); State Trading Corporations and Minerals and Metals Trading Corporations are examples. Defining objectives of each of these groups of public enterprises is easier than defining the objectives of public enterprises as a whole.
A story with reference to financial ratios is the starting point for a meaningful performance evaluation of a public enterprise. The Comptroller and Auditor General of India in his Review of Accounts published in the annual reports of most central government companies, provides the following financial ratios for a 3-year period. But the absence of analysis based on them makes it difficult to draw conclusions about financial health of Public Enterprises
! ! !
Liquidity ratio current assets to current liabilities. Debt equity ratio. Profitability ratio: i) Percentage of profit before tax to Capital employed / Net worth/ Sales.
ii) Percentage of profit after tax to equity
! ! !
Percentage of working capital to sales, Inventories and Capital employed. Finished goods at the year end as represented by number of days sales. Inventories at the year end as represented by number of months consumption requirements.
13.3 CRITERIA FOR EVALUATION OF PUBLIC SECTOR

The general criteria used for evaluation of performance of the public sector enterprises can be listed as
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Return on investment Total contribution to the state Treasury (Interest + Divided + Taxes + Savings in Foreign Exchange) Total factor productivity (value-added) Employment criterion (number employed) Self reliance in technology Environmental protection Furtherance of industrial activity Benefits of Society.
The application of these criteria depends on the specific objectives of an enterprise.
13.4 AVAILABILITY OF DATA ON PERFORMANCE Evaluating Enterprises Performance EVALUATION OF PSEs

Availability of data on actual performance on all the performance criteria is very important in carrying out a meaningful evaluation. The Public Enterprises survey presented to the parliament annually by the Department of Public Enterprises gives a number of financial ratios for all central public enterprises. These ratios provide a measurement of efficiency.
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The first ratio percentage of sales to capital employed shows the overall productivity or effectiveness of the resources available to the firm. The limitation of the ratio is that it only indicates the turnover. The second ratio PBDIT to capital employed indicates the beneficialness of the capital employed. The PBDIT figure is before deprecation, interest and other appropriations, all of which would vary from firm to firm, it is argued that it is a better indicator of comparative efficiency as compared to net profit. The third ratio, the percentage of cost of sales to sales indicates the profit or loss per hundred rupee of the sales effected. Cost of sales includes all expenses on or production including depreciation, interest charges, write off of deferred revenue expenditure and plus and minus depletion / accretion to the stock.
13.5 COUNTRY MODELS FOR PERFORMANCE EVALUATION OF PUBLIC ENTERPRISES

There are various models in practice in different countries for the performance evaluation of public sector enterprises. United Kingdom In UK, financial discipline in case of public sector was brought about by various measures, the prominent among these being the while papers of 1961, 1967 and 1978. Since then performance is sought to be evaluated by the extent to which public enterprises are operating within the set external financial limits and achieve the required rate of return. France the contract system is followed in France for the performance evaluation of public sector enterprises. The system is meant to increase both the autonomy and accountability of an enterprise. The contract is between enterprise and government Land covers a period of three to five years. Performance is evaluated against the agreed targets under these contracts. Argentina The Argentina model looks at performance of public enterprises at three levels namely X , X and X , denoting macro, sectoral and enterprise levels.
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Morocco Performance evaluation of public sector enterprises in Morocco is also done at three levels the government, the enterprise and the citizen levels. USSR The soviet system uses two ratios for evaluating the enterprises performance. They are the ratio of general profit to the average value of assets and the ratio of accounting profit to the average value of assets. The purpose of such evaluation is to see that these enterprises do not become a burden on the exchequer and become self-sufficient. India Performance of public enterprises is looked in by several agencies like the parliament, the Bureau of Public Enterprises, the administrative ministries, the Audit Board, the Reserve Bank of India, the Planning Commission.
13.6
SUMMARY
Performance evaluation of public sector enterprises is necessary for their improvement growth and accountability. There are various models developed from time to time for the performance evaluation of PSEs but none of them are easy to implement and hence their use is very little. Various factors that have to be taken into account while attempting an evaluation like environmental factors, operational factors, etc. The evaluation of public sector enterprises are related to a complex set of objectives. On the other hand the private sector has the ultimate motive of profit maximisation. Therefore, alternative evaluation models are required for these complex set of objectives. The objectives of PSEs vary from financial and social to long term and short term. However, the evaluation at each individual level appears to be more relevant because of their specific objectives. The other two important aspects for performance evaluation of PSEs are criteria for evaluation and availability of data for the purpose of evaluation. Various countries have different models for performance evaluation of public sector. In India, the evaluation is done by several agencies like the Parliament, the Bureau of Public Enterprises, the Ministries, Audit Board, RBI and Planning Commission. Activity List the factors that affect the performance evaluation of public sector enterprices.. ............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. ..............................................................................................................................
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1.
Mention the two broad groups of agencies that undertake the performance evaluation of public sector enterprises. Describe their objectives. Do you think that performance evaluation is easy for private enterprises than public enterprises. What are the various objectives that affect the performance evaluation of public sector enterprises. Discuss the various criteria for evaluation of public sector evaluation. Give examples of any four countries and their system of performance evaluation of public sector enterprises.
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13.8
REFERENCES AND FURTHER READINGS Evaluating Enterprises
Dimensions and Methods of Performance
Dholakia, Bakul. (1980) The Changing Efficiency of Public Enterprises in India, Somaiya Publications, Bombay. Saytery, K.S. (August 2, 1986). Performance Evaluation in Public Enterprises; Chartered Accountant, Vol. XXXV No.
UNIT 14 BOARD OF DIRECTORS : CONSTITUTION AND FUNCTIONING

Objectives The objectives of this unit are to:
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Understand the organizational structure of public enterprises and its significance in management of PEs; Describe the types and composition of the Governing Boards of PEs and their functions; Describe the composition of the Public Enterprise Selection Board and its role in management of PEs.
Structure 14.1 14.2 14.3 14.4 14.5 14.6 14.7 Introduction. Organisational Structure of PSEs Composition of the Board Public Enterprises Selection Board Summary Self Assessment Questions References and Further Readings
14.1 INTRODUCTION
Historically, Public Sector in India has played a unique role in the fortunes of the country. At the time of independence, it was realized that political freedom without economic self-reliance would be detrimental to the countrys sovereignty and integrity. Hence, public sector came to be charged with objectives which were primarily economic but contained a heavy dose of social and political ingredients. For instance, building of infrastructure for economic development was an economic objective which also had social connotations, creation of employment could be said to be a social objective and prevention/reduction of private economic power could be best described as socio-political objective. Hence, public sector had a multiplicity of objectives and acquired characteristics which are different from other organizations.
14.2 ORGANISATIONAL STRUCTURE OF PSEs

Managing public sector efficiently in order to deliver these objectives could itself be a very onerous task. Hence, the organizational structure of the public enterprises had to be designed in a suitable manner, which could enable the public enterprise to perform under the overall guidance and patronage of the government, while at the same time be autonomous enough to carry out activities which would ensure that the economic goals set for it could be achieved successfully. As time went on, public sector enterprises increased in number and took on more and more responsibilities. Sick private industries were also taken over by Government and converted into public sector enterprises, obviously to safeguard employment. This increased the role of the public sector from managing infrastructure industries which
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Organisation and Management
had virtual monopoly to managing industries which were sick and in the competitive fields. Hence, the organizational structures for public sector enterprises underwent changes with changes in portfolios. Since 1991, when the liberalization movement started in India, areas reserved for the public sector have come down drastically. Prior to July 1991, 17 industries were reserved for the public sector. After July 1991, this list had been pruned to merely 8 and from December 2002, only three industries are reserved for the public sector. Hence, this measure has consequently opened up erstwhile reserved areas for competition and caused challenges to the public sector competence/performance. After 1991, disinvestment of government equity in selected public sector enterprises has also brought in a certain amount of fiscal discipline in these enterprises. Listing in stock markets has also brought about changes in the way the public sector managements think. From the year 2000, offloading of major portion of equity to private entrepreneurs has brought in a totally new dimension to public sector management. All these changes have been reflected in the organization structure of these enterprises and their ability to face competition. Experience of industrially developed countries has shown that performance of an organization, whether in the public sector or private sector, has largely dependend on the leadership of the chief executive officer and he, in turn, cannot be successful unless he is backed by a very professional and competent board of directors. Since public enterprises have to deal with delicate questions of policy which affect the stability , self-reliance and integrity of the country, their boards of directors play a very crucial role. Unless the governing board has several members who are not only competent but also wise, the organization is bound to suffer. The effectiveness of the management board of directors is crucial not only to the success of the public sector enterprise but also to the future of the country. Effectiveness of the management boards depend not only on the competence of the members but also on the extent of trust reposed in them by the owner of the enterprise, viz. the government. This is ensured by adequate delegation and decentralization of authority and non-interference in the day to day affairs of the company by government. There should be clear enunciation of the level of authority that the board would have along with accountability for their performance. Frequently, Government has been seen to interfere in petty matters such as postings and transfers of staff of the enterprise, grant of licences/sanctioning of tenders etc. Government nominees on the boards of public sector enterprises attend meetings without adequate brief and frequently stall decisions in the board or get the matters referred to government for decision. Many public enterprises have suffered since timely decisions could not be taken in the board meetings. Functions of Board of Directors of Public Enterprises Public Enterprises in India are managed by the management boards. The board is the top management organ responsible for implementing the objectives of an enterprise. The Board is required to formulate policies for running the enterprise with a view in achieving the given objectives. The Board is responsible for all decisions of policy and administration. The functions of the Board include appointment of the Chief Executive and the principal officers, the drawing up of programmes, plan for development and reorganization, policies regarding finance and expenditure, price fixation, staff matters such as incentives, allocation of funds and management of reserves, adoption of new methodologies to improve production, processing or marketing, training, education, etc, research and development.
14.3 COMPOSITION OF THE BOARD

The management of administration of public enterprises has been entrusted to governing boards, which enjoy wider responsibilities than the boards of private sector enterprises. For instance, they are entrusted with responsibilities towards consumers, employees, Government, Parliament and the Nation. These boards are expected to formulate policies for running the enterprise and to work towards the achievements of objectives that have been laid down by various statutes from time to time. The boards also ensure that the policies of concerned public enterprise conform to the overall government approach and policies in various matters. Hence, the success or failure of an enterprise depends upon the proper and careful composition of the Board. Shri A.D. Gorwala has rightly observed that whatever the form, without suitable men at the highest level of management-the governing board or board of directors the likelihood of success is very little.Negatively, the composition should not be such as to obscure the essential condition of autonomy. It should not give rise to overlapping of responsibility or lead to introduction of control and interference by the back door. Positively, the composition of the Board should be such as to subserve only one purpose, that is, good and efficient direction in the public interest. Mr. Herbert Morrison had also rightly observed that the Board should be composed of the best brain that we can secure and for this we must insist upon all the members being persons of business ability and capacity. In India, there is generally a paucity of competent managerial personnel. Therefore, there is a tendency to appoint civil servants as members of the boards of public enterprises. In addition, certain non-officials drawn from different walks of life are also given representation on the management boards as they bring in vast experience of business, accounting and management. The Estimates Committee has criticized the practice of appointing civil servants as official members, since the agenda is run through each officer giving his departments point of view and then hurrying back to the post of duty. This bureaucratic approach to the organizational and functional problems defeats the very purpose of constituting a company. The Estimates Committee, therefore, recommended that keeping in view the tasks to be performed and the requirements thereof, members of the Board of Directors might be drawn from a wide sphere than that at present and more technical experts, experienced men from public life and from various non-official sources be appointed on the board, though care would have to be taken that no one with a direct interest in the same industry in private sector is appointed. Mr. Khera, who had a long experience in civil as well as industrial administration, has, however, been in favour of the appointment of official directors on the boards of public enterprises. According to him the appointment of officials on the board of directors tends to secure for Government companies the same control and community of interest which private companies attain through the appointment of members of the family on their boards of management. The presence of official directors on the board provides the vital link between the Government, which is responsible for the overall performance of the enterprise, and the management, which is responsible for running the enterprise and dealing with its day-to-day administration. This arrangement also ensures coordination between the Government and the enterprise. This link can be used as a two way communication channel in explaining the policies of the Government to the Board and conveying to Government the problems of the Board and its requirements. Many such official members also facilitate horizontal coordination between several such enterprises by virtue of their being a member on these enterprises. Prof. Robson is not particularly enthused with members of the board being drawn from various interest groups. He observes A director who thinks that he is on the Board to represent a particular interest is bound to consider that he is an advocate of that interest and this cannot but affect adversely the harmonious functioning of the Board.
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Qualification of Board Members It would be desirable that board members possess certain qualifications either in terms of industrial experience or in terms of professional experience. The qualification provisions should be clearly mentioned in the Statute or Act under which the enterprise has been established. In the absence of clear-cut qualification provisions, there is a possibility of Government misusing their power to appoint their favourites on the board. The Indian Companies Act, 1956, does not prescribe any statutory qualification for a director except that he should hold the prescribed number of shares. The Directors of Government companies, however, are exempted from this shareholding qualification also. In the case of statutory form of enterprises, in some cases, qualification provision has been mentioned. In Damodar Valley Corporation, the Act provides that a member must have; (1) highest integrity and incorruptability; (2) high intelligence; (3) clear concept of economic development of India on modern scientific lines and (4) fairly wide experience of men and affairs. Similarly, in the State Electricity Board, there is express provision in the Electricity Supply Act 1948, that (a) one shall be a person with experience of commercial matters and administration; (b) one shall be an electrical engineer with wide experience; and (c) one shall have experience of accounting and financial matters in public utility undertakings preferably an electricity undertaking. The sitting members of state legislatures and parliament are barred from being appointed members of the Board. This disqualification continues for one year even after a person ceases to be a member of the legislature. Size of Boards There are no hard and fast rules on the size of the boards. The size of the board will depend on the size of the industry or enterprise and on other factors. Care should be taken to ensure that the Board is neither too small to be dominated by a single individual nor too large so that its members feel that they dont count. A Board should not have so many directors as to make free discussion impossible nor so few that the necessary breadth of viewpoint is not obtainable. (Conference Board ReportsThe Corporate Directorship, National Industrial Conference Board, Inc. New York, April 1953, p.4) The Estimates Committee had advocated for a Board of 3 to 4 members, one being the chairman. The Krishna Menon Committee also favoured a small Board consisting of 5 to 9 members depending upon the size and nature of the enterprise. A large board makes it possible for Government to appoint vested interests. The Indian Railways is the largest enterprise in India. If it can do with 6 board members, other enterprises which are smaller could do with smaller number of board members. A smaller board with 3 to 7 members is likely to feel an adequate sense of responsibility which may make for quick disposal of business and harmonious working of the enterprise. (Om Prakash, Theory and Working of State Corporations, Orient Longman, 1971, p.173.) Tenure of Board Members The tenure of board members would depend upon whether the board is that of a Statutory Corporation or of a Government Company. Statutory Corporation: Statutory Corporation are established under special acts enacted by Parliament or State Legislatures. Members of these boards have fixed tenure which is clearly mentioned in the Act.
For example, in the LIC a non-official member enjoys office for a period of 2 years unless a shorter period is specified in the Order of the Government (Rule 3(1) and (2) of LIC Rules of 1956). In the State Bank of India, the Chairman and the ViceChairman hold office for a period not exceeding years (Section 20(1) of the State Bank of India Act). In the IFCI Act an elected Director holds office for a term of 4 years [Section 11(2) of IFCI Act]. In the case of Railway Board no period is fixed. Company Form: Whether the enterprise is in a company form and all directors except full-time director retire at the Annual General Meeting. In some companies, tenure of part-time director has now been extended to 3 years under Section 225 of the Indian Companies Act 1956, there is a provision that all the part-time directors are appointed for a period of at least 3 years, 1/3rd of whom would retire every year by rotation. Experience has shown that unless the tenure of members are for sufficiently long period, members are not in a position to take concrete decisions. The tenure of the appointment of full-time chairman and functional director should normally be for a minimum period of years, whereas the tenure of a non-official member should be for at least 3 years. Types of Boards: There are broadly 3 types of boards in public enterprises. They are: (i) Policy Board, (ii) Functional Board, and (iii) Mixed Board. Policy Boards consist of part-time members such as executive head of departments, none of whom is responsible for specialized functions. A large number of public enterprises in India have policy boards, which however, include the full-time Managing Director/Chairman-cum-Managing Director of the public enterprises. Functional Boards are composed entirely of full-time members incharge of particular branches of the work in the enterprises such as production, finance, personnel, marketing and such other allied functional activities. Members are chosen on the basis of their indepth knowledge of the enterprise operations in selected fields. A Railway Board in India is a good example of Functional Board. Mixed Board provide for both part-time and full-time directors, the latter having specific responsibility of some of the subjects. After a detailed study of various public enterprises, the Estimates Committee in its 52nd Report stated that On balance of advantages, the Committee is inclined to view that it would be better to have a Mixed Board consisting of some full-time and some part-time Directors : The Administrative Reforms Commission (ARC) have suggested that in the case of smaller public enterprises there is perhaps an advantage in having a policy making boardexcept for the very small enterprise, a few functional directors must be included in every board. The ARC favoured policy board for smaller enterprises and functional boards for large enterprises. Public enterprises in India, by and large have policy making types of boards. Chairman of the Board: The management/governing boards of companies/corporations are headed by a Chairman. In many enterprises a full time Chairman is also the Managing Director. However, there may be cases where the Chairman is only a part-time one. In such cases, there should be full-time managing director who would be taking all the full responsibilities for the Organisation.
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Structure of Board of Directors of PSEs The Department of Public Enterprises (DPE) formulates policy guidelines on the Board structure of public enterprises and advise on the shape and size of organization structure of PSEs. Public Enterprises in India are categorized in four Schedules, namely A,B,Cand D based on various quantitative and qualitative criteria. The criteria for categorization of PSEs have been reviewed and revised guidelines have been issued on the subject in October 2000. The present criteria include quantitative factors like investment, capital employed, net sales, profit before tax, number of employees, number of units, value added per employee and qualitative factor like national importance, complexities of problems, level of technology, prospects for expansion and diversification of activities and competition from other sectors, etc. In addition, a criterion relating to the strategic importance of the corporation is also taken into account. The pay scales of Chief Executives and full time functional Directors in PSEs are determined as per the schedule of the concerned enterprise. As on 31.3.2002, there were 51 ScheduleA,88 ScheduleB, 63 ScheduleC and 10 ScheduleD enterprises. The details of the Board level posts (whole time) are given in Table 14.1: Table 14.1 : Details of Board Level Posts
Schedule Chief Executive 31.3.2001 Schedule A Schedule B Schedule C Schedule D Total 46 89 67 11 213 31.3.2002 51 88 63 10 212 Whole time Director 31.3.2001 175 194 61 430 31.3.2002 179 206 67 452
Proposals received from the administrative Ministries/Departments for categorization of PSEs, upgradation of the Schedules of PSEs and creation of the new posts at the Board levels are examined in DPE in consultation with PESB. During 2001-02, DPE examined 30 proposals relating to categorization, creation of posts, etc. As a result, 6 posts of Chief Executives and 18 posts of functional directors were created, 6 PSEs categorized in the appropriate schedule and 9 PSEs were upgraded to the next higher schedule. In addition, CMDs of two PSEs were granted higher schedule on personal basis and two posts of functional Directors were revived. Professionalisation of Boards In pursuance of the public sector policy being followed since 1991 several measures have been taken by the Department of Public Enterprises to professionalise the Boards of public enterprises. The guidelines issued in 1992 provide that outside professionals should be inducted on the board of PSEs in the form of part-time non-official Directors and that the number of such Directors should be at least 1/3rd of the actual strength of the Board. The guidelines also provide that the number of Government Directors on the Boards should be not more than one-sixth of the actual strength of the Board subject to a maximum of two. Apart from this there should be some functional Directors on each Board whose number could be upto 50% of the actual strength of the Board, in case of listed PSEs headed by executives Chairman the number of non-official Directors (independent Directors) should be at least half of the strength of the Board.
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Appointments of part-time non-official Directors on the Boards of PSEs are made by the administrative Ministries/Departments from the panel prepared in consultation with the Department of Public Enterprises. During 2001-02 various proposals for appointment of non-official Directors are considered and 40 names were recommended to various Ministries Departments for obtaining approval of ACC. In so far as Navratna/Miniratna PSEs are concerned the panel of non-official Directors are prepared by the Search Committee consisting of Chairman, PESB, Secretary (DPE), Secretary of the administrative Ministry/Department of the concerned PES, and other non-official Members. According to the Navratna/Miniratna package, the Board of these companies should be professionalized by including a minimum of 4 non-official directors in the case of Navaratnas and 3 non-official Directors in the case of Miniratnas before the Boards exercise the enhanced powers.
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14.4 PUBLIC ENTERPRISES SELECTION BOARD

Background The Public Enterprises Selection Board (P.E.S.B) is a high powered body constituted by Government of India Resolution dated 3.3.1987 which was subsequently amended from time-to-time, the latest being on 19.4.2000. It functions under the administrative control of the Department of Personnel and Training in the Ministry of Personnel, Public Grievances and Pension. The P.E.S.B has been set up with the objective of evolving a sound managerial policy for the Central Public Sector Enterprises and, in particular, to advise Government on appointments to their top management posts. Functions of P.E.S.B Specific functions assigned to the P.E.S.B include the following : i) To be responsible for the selection and placement of personnel in the posts of Chairman, Managing Director or Chairman-cum-Managing Director (Level-I), and Functional Director (Level-II) in PSEs as well as in posts at any other level as may be specified by the Government; To advise the Government on matters relating to appointments, confirmation or extension of tenure and termination of services of the personnel of the above mentioned levels;
ii)
iii) To advise the Government on the desired structure at the Board level, and, for senior management personnel, for each PSE or group of PSEs; iv) To advise the Government on a suitable performance appraisal system for both the PSEs and the managerial personnel in such enterprises; v) To build a data bank containing data relating to the performance of PSEs and its officers; vi) To advise the Government on formulation and enforcement of a code of conduct and ethics for managerial personnel in PSEs; vii) To advise the Government on evolving suitable training and development programs for management personnel in PSEs. Constitution of the Board The P.E.S.B consists of a full-time Chairperson and three full-time Members. The Chairperson and Members shall be persons who have had a long and distinguished career in management of public or private corporations or public administration and
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have a proven record of achievements, preferably, in the field of personnel, finance, production or marketing. The three full-time Members of P.E.S.B shall be: a) A distinguished serving or former Chief Executive of a Public Sector or Private Sector or Joint Sector Enterprise. b) A distinguished person with experience in selection of Top Management personnel. c) A distinguished serving or former Civil servant with experience in management of PSEs or in areas of finance, industry or economic affairs. Tenure and Age Limit The Chairperson/Members of P.E.S.B shall hold office for a term of three years from the date on which he assumes charge or until he attains the age of 65 years whichever is earlier. He shall be eligible for consideration of reappointment for a second term subject to the age-limit of 65 years. Pay and Allowances Terms and conditions of appointment: i) The appointment of the Chairperson and the Members shall be made by the Appointments Committee of the Cabinet (ACC). ii) The pay of the Chairperson and the Members shall be the same and equal to that of Secretary to Government of India in the revised pay scale. iii) Dearness Allowance and other relief on account of increase in the cost of living shall also be admissible at the rates determined from time to time by the Government. iv) The other conditions of service including allowances and benefits shall be as determined by the Government from time to time. Governments Selection Policy for Board Level Appointments in PSUs The P.E.S.B is not a mere Interview Board and it also constitutes itself into a Search Committee to look out for and identify suitable persons who can be appointed to Level-I and Level-II posts in PSEs. The policy of Government is to appoint through a fair and objective selection procedure outstanding professional managers to Level-I and Level-II posts and posts at any other level, as may be decided by the Government from time to time. Government have also recognised the need to develop a cadre of professional managers within the public sector. Hence unless markedly better candidates are available from outside, internal candidates, employed in the PSE, will be preferred for appointment to Board level posts. However, if internal candidates are not available, preference will be given to candidates working in other PSEs, either in the same area of business or in other areas. Mobility of managerial personnel among PSEs within the same sector or group, failing which mobility within the public sector as a whole will be encouraged, subject to certain limitations. However, in special cases, recruitment may be made from the organised services under the Central Government. Such cases would be where, because of special circumstances, it is necessary to place a member of an organised service in a PSE or where, because of the nature of the enterprise or its poor health, it would be difficult to attract good professional managers on a tenure basis. Under special circumstances, the appointment to a particular post or posts in a PSE may be made other than through P.E.S.B with the prior and specific approval of the ACC. The ACC while granting such an approval, will also specify the body such as, Search Committee, Selection Committee, or the Civil Services Board, as the case may be, that shall make the selection for that particular post or posts, as well as the selection procedure to be followed for filling the particular post or posts.
For sick and potentially sick PSEs, the Administrative Secretary of the Ministry/ Department concerned, in consultation with P.E.S.B and with the approval of the Cabinet Secretary, could take a decision at any stage in the process of recruitment to the post of Chairman, Managing Director or Chairman-cum-Managing Director of the PSE, to take a person on deputation from any of the All India or Group A Central Services without insisting on the rule of immediate absorption. Recent Initiatives of P.E.S.B to improve the Selection Process The P.E.S.B, in close consultation with major PSUs and the Department of Personnel and Training, has in recent times taken several initiatives to improve its systems and procedures with a view to making the functioning more effective and transparent. Some of the major initiatives include: i) Standardization and improvement of the performance appraisal system in Navratna, Miniratna and subsequently other PSUs so as to bring about uniformity in evaluation of eligible Board level appointees and making the appraisal format more relevant and performance oriented.
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ii) Initiation of the selection process one year in advance of the date of vacancy instead of six months as earlier in order to facilitate early selection and timely appointments to Board level posts. iii) Steps to establish the competencies required for different Board level positions and to evolve systems and procedures to make selections based on Competency Models. Against this background, the P.E.S.B has, in consultation with Bharat Petroleum Corp. Ltd. involved M/s Hay Group an internationally well-known consultancy organisation which has done pioneering work in Competency Mapping initiated an exercise to evolve appropriate Competency Models for Indian Central PSUs through a participatory process. iv) As a part of the process of demystifying the selection process, the P.E.S.B has after a consultative process initiated a series of Workshops under the aegis of the SCOPE and the International Management Institute for the benefit of senior PSU executives. The first two such Workshops have already been held in Delhi and Mumbai. v) Based on the ideas that emerged at an inter-active session with the CEOs of Navratna PSUs and the International Management Institute and the Standing Conference of Public Enterprises, the P.E.S.B is considering how best to improve the existing mechanism of one-stage interview for making selections to Board level positions. Selection Procedure and Guidelines P.E.S.B keeps a close watch on the vacancies, that are likely to arise and initiates recruitment action 12 months before the occurrence of the anticipated vacancies. P.E.S.B initiates recruitment action by sending job description of the post to the concerned Administrative Ministry/Department with the request to update the company profile and the job description within a specified time frame of 10 to 15 days. In case, the Ministries/Department do not respond within the stipulated time frame, the job description of the post is circulated suo moto as per the usual procedure. A period of 30 days is normally given to receive the nominations after circulation of the vacancy. Incase of advertised posts, the applications should be received within 21 days from the date of advertisement. Following practice is presently in vogue:
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In the first instance, as per the normal practice, the post is circulated among all PSEs, Ministry of Defence, Establishment Officer (EO), State Chief Secretaries, and to all concerned Administrative Ministries/Departments. After all the nominations are received, including names taken from the data bank, wherever necessary, these are scrutinized in the light of the job description of the post and eligibility criteria, and a shortlist of persons to be called for interview is finalized with the approval of the Board. Scheduling of interview dates is done in consultation with the Secretary of the Administrative Ministry/Department concerned who is also invited to assist the Board in the selection process. Participation by the Administrative Ministry/ Department in the selection meetings shall be at the level of Additional Secretary and above. In the case of selection to Schedule A posts, Secretaries of the administrative ministries concerned invariably assist the Board. In the case of selection of Functional Directors, the concerned regularly appointed Chief Executives of the enterprises are always asked to assist the Board. Further, in the case of subsidiaries, the Chairmen of the holding companies are invited to assist the Board. Part-time Chairmen of PSUs, who are appointed with the approval of the ACC, are also generally associated with the selection for full-time Board-level posts in P.S.Es where they have been appointed as part-time Chairman. In the case of Tehri Hydro Development Corporation and Nathpa Jhakri Power Corporation, which are joint ventures with the State Governments, the Chief Secretaries of Uttar Pradesh and Himachal Pradesh respectively are also invited to assist the Board on the advice of Ministry of Power as and when selections in these two enterprises are made. Similar procedure will be followed in case of another joint venture namely Mumbai Railway Vikas Sadan (MRVC) where the Chief Secretary of Maharashtra is invited. An extensive and updated data bank is maintained by P.E.S.B on the particulars of the officers working in the various PSEs who may fall within the zone of consideration for various posts. After the first round of Selection Interview, in case, P.E.S.B desires to see some more candidates before finalizing its recommendation, the post is advertised. In case, no suitable candidate is found and the Administrative Ministry so desires, the question of granting exemption from the rule of immediate absorption may be considered by the Board. Officers from Organized Services will be considered only on immediate absorption basis, unless the posts have been exempted specifically from the rule of immediate absorption with the approval of the Competent Authority. P.E.S.B, while sending its recommendations to the Administrative Ministry, endorses a copy to the Central Vigilance Commission (CVC) so as to enable them to initiate advance action for giving vigilance clearance. Time frames are laid down by the Government, from time to time, within which the concerned authorities are expected to process the recommendations of the P.E.S.B for obtaining order of the competent authority.
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Eligibility Criteria for Short-listing Candidates Following eligibility criteria with regard to pay scales and age of the candidates have been presently laid down: Schedule A Pay Scales : Rs.13,000-500-15,000 (pre-revised) / Rs.27,750-750-31,500 (revised) Eligibility criteria : Candidates from PSEs should be holding posts in the pay scales of Rs.8,250-9,250 (pre 1.1.1992 scale) /(Rs. 10,500-400-13,500 (post 1.1.1992 scale)/ 23,750-28,550 (post 1.1.1997 scale) and above with IDA or equivalent with central government DA formula for a minimum period of two years. In the case of internal candidate, the qualifying service in the above grade is one year. Government Officers of the rank of Additional Secretary to the Government of India, holding posts in the equivalent scale of pay with adequate experience in the relevant field will be eligible for consideration. In the case of Defence Service officers, Lt. General in Army and equivalent in other services are eligible. Schedule B Pay Scales: Rs. 12,000-400-14,000 (pre-revised)/ Rs.25,750-650-30,950 (revised) Eligibility Criteria : Candidates from PSEs should be holding posts in the payscales of Rs.7,250-8,250 (pre 1.1.1992 scale) (Rs. 9,500-400-11,500 (post 1.1.1992 scale)/ 20,500-26,500 (post 1.1.1997 scale) and above with IDA or equivalent posts with Central government DA formula for a minimum period of two years. In the case of internal candidates, the qualifying service in the above grade is one year only. Government Officers in the scale of Joint Secretary to the Govt. of India or holding posts in the equivalent scale of pay with adequate experience in the relevant field will be eligible for consideration. In the case of Defence officers, Major General in Army and equivalent in other services are eligible. Schedule C: Pay Scales: Rs. 10,000-400-12,000 (pre-revised)/ Rs.22,500-27,300 (Revised) Eligibility Criteria: Candidates from PSUs should be holding posts in the pay-scales of Rs. 6,250-7,475 (pre 1.1.1992 scale) (Rs. 8,250-300-10,050 (post 1.1.1992 scale)/ 18,500-23,900 (post 1.1.1997 scale) and above with IDA or equivalent with Central Government DA formula for a minimum period of two years. In the case of internal candidates, the qualifying service in the above grade is one year. Government Officers in the scale of Director to the Govt. of India or holding posts in the equivalent scale of pay with adequate experience in the relevant field will be eligible for consideration. In the case of Defence officers, Brigadier in the Army and equivalent in other services are eligible. Schedule D Pay Scales: Rs. 9,000-300-10,500 (pre-revised)/ Rs.20,500-25,000 (Revised) Eligibility Criteria: Candidates from PSEs should be holding posts in the pay scales of Rs.5,500-7,075 (pre-1.1.1992 scale), Rs. 7,500-300-9,900 (post 1.1.1992 scale )/ 17,500-22,300 (post 1.1.1997 scale) and above with IDA or equivalent with Central Government DA formula for a minimum period of two years. In the case of internal candidates, the qualifying service in the above grade will be one year. Government officers in the scale of Deputy Secretary to the Govt. of India or holding posts in the equivalent scale of pay with adequate experience in the relevant field will be eligible for consideration. In the case of Defence officers, Colonel in Army and equivalent in other services are eligible.
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Age Criteria Preferable around 40 years for schedules C and D posts and preferable around 45 years for schedules A and B posts. In any case, the candidates not to be above 58 years of age on the date of vacancy, except in cases where the age of superannuation has been rolled back to 58 years. In such cases, the upper age limit will be 56 years as on the date of vacancy. Candidates placed at Sl. No. 1 position in a panel recommended by the P.E.S.B is not considered for any other organisation for a period of six months or till a decision on the panel is taken by the Government, whichever is earliest. Restriction on Job-hopping Board-level incumbents in one enterprise will not be considered for posts in other enterprises unless they have completed at least two years in their present posts. These two years will be reckoned with reference to the date of joining of the Boardlevel post. Exception is being made only in the case of internal candidates who could be considered for higher posts in their own organizations even if they have not completed two years in their present posts. Criteria for Candidates from Open Market With regard to candidates from the open market, their suitability is assessed essentially with reference to their qualification, expertise, background and experience and their conformity to the job specifications, as also their performance and personality traits as revealed at the time of interview. P.E.S.B also takes into account their level and positions in their own organizations as also the standing of the organization. Notes: 1) Break-up of the 210 PSUs (out of 242 PSUs) already categorized in the appropriate schedules A, B, C and D, are as follows: Schedule A: 51 Schedule B: 84 Schedule C: 64 Schedule D: 11 The remaining 32 P.S.Es that have not been categorized as yet. 2) The cases of Board-level incumbents for their confirmation after the expiry of the first year of their term and extension/non-extension after the expiry of their approved term are processed in the P.E.S.B on the basis of documents received from the administrative Ministry/Department concerned. P.E.S.B has also prescribed Check-list of documents to be sent to the concerned Administrative Ministry/Department as under: Check List : For Confirmation Cases: Special Performance Report (S.P.R) in the prescribed format duly signed by the competent authority. In the case on Functional Directors, the S.P.R should either be counter-signed by the Secretary of the Administrative Ministry concerned or a clear confirmation to this effect should be given in the covering note. Photo copies of the up-to-date ACRs. While forwarding the ACRs, a certificate should invariably be given stating that the DPEs guidelines dated 25.4.85 have been followed while recording the ACRs.
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Check List: For Extension/Non-Extension of tenure cases: The performance appraisal report in the prescribed format B, C and D, along with updated bio-data of the Board-level incumbents. In the column relating to performance of the enterprise since the date of appointment of the incumbent, the latest figures upto the last five years should be indicated. The special performance report (SPR) duly signed by the competent authority . In the case of functional directors, the SPR should either be counter-signed by the Secretary of the Administrative Ministry concerned or a clear confirmation to that effect should be given in the covering note. The ACRs for the last five years including the latest one should be forwarded including the certificate as prescribed by the P.E.S.B. All Administrative Ministries/Departments to ensure that the proposals regarding the Confirmation or Extension/Non-extension of tenure of Board-level incumbents is forwarded to P.E.S.B with all, relevant prescribed documents complete in all respect. Ministries/Departments are required to ensure that the proposals for confirmation, extension/non-extension of tenure are sent to Secretary, P.E.S.B, complete in all respects, so as to avoid delay. Activity Describe the role of management of public enterprises and their importance. ................ ................ ................ ................ ................
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14.5 SUMMARY
A Board normally represents the body of shareholders or owners of a company as the number of shareholders is quite large and is spread throughout the nation. Therefore, the representatives of the shareholders have a major role to play in the Boards. If we talk about a public enterprise, the Board has more responsibility towards the community at large. In this unit we have discussed different aspects related to Boards. This includes types of Boards, size of Boards, tenure of Board members, their respective functions etc. This unit gives a brief description about the Boards in public enterprise.

1. What are the various types of Boards in public enterprises? 2. Describe the qualifications needed for appointment as members of boards of public enterprises? 3. Describe, in brief, the functions of Public Enterprises Selection Board? 4. What is Governments Policy regarding recruitment to various level posts in public enterprises?
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Sahai, Baldeo. (1989). Public Sector in India Historical Perspective in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai. Laha, Chandra, Prakash. (1989). Public Sector: The Socio Economic and Political Environment in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai. Nigam, K. Raj: Indian Public Sector At the Cross Roads. Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai. New Standing conference on Public Enterprises, New Delhi. Rao, S.L. Ownership, Control and Management of Public Enterprises. Luther, M.M.(1998). Public Sector Reforms: Myths and Realities. CIER (1999) : Privatisation: Options and Challenges. Bhatia, B.S.and Batra, G.S.(1995): Management of Public Enterprises (Performance and Policy Perspectives ) : Deep & Deep Publications. Rao, Jagdish and Shukla: Administration of Public Enterprises in India, Himalaya Publishing House. Venkataraman, R., (1997): Public Sector Management: An approach to review and redesign of management and control systems Renaissance Publishing House. Chopra, R.N.: Public Sector in India (Performance, Profitability and Industrial Relations), Intellectual Publishing House. Mathur, B.P., (1993): Public Enterprise Management, Macmillan India Ltd.
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UNIT 15 PERSONNEL MANAGEMENT ISSUES IN PUBLIC ENTERPRISES

Objectives The objectives of this unit are to :
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Describe the role of the Department of Public Enterprises in the Management of Public Enterprises; Explain Personnel Management Issues such as Recruitment, Wage Policy, Bilateral Agreements, Collective Bargaining, and Productivity-related aspects.
Structure 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 Introduction Department of Public Enterprises: Role in Management of Public Enterprises Wage Policy Voluntary Retirement Scheme (VRS) Collective Bargaining Summary Self Assessment Questions Reference and Further Reading
15.1 INTRODUCTION
Personnel Management issues in Public Enterprises are handled by various agencies depending on their importance. For instance, recruitment to higher appointments in PSEs such as those relating to appoint of CEOs/Board level functional Directors etc. are done through the Public Enterprises Selection Board. This Board also deals with promotions and confirmations up to certain higher levels of appointees. Lower level appointments/promotions are usually done at the CEO level with the aid of selection committees consisting of officials of the Board.
15.2 DEPARTMENT OF PUBLIC ENTERPRISES ROLE IN MANAGEMENT OF PUBLIC ENTERPRISES

In their 52nd Report, the Estimates Committee of 3rd Lok Sabha stressed the need for setting up a centralized coordinating unit which could also make continuous appraisal of the performance of public enterprises. This led to the setting up of the Bureau of Public Enterprises (BPE) in 1965. BPE was later constituted as an independent administrative unit within the Ministry of Finance, Department of Expenditure in 1969. As a result of the reorganization of the Ministries/Departments of the Central Government in September, 1985 BPE was made part of Ministry of Industry. In May, 1990, BPE was conferred the status of a full-fledged Department and is now known as the Department of Public Enterprises (DPE) in the Ministry of Heavy Industries and Public Enterprises. The Department of Public Enterprises acts as a nodal agency for all central PSEs and assists in policy formulation pertaining to the role of PSEs in the economy as also
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UNIT 15 PERSONNEL MANAGEMENT ISSUES IN PUBLIC ENTERPRISES

Objectives The objectives of this unit are to :
Project Management
! !
Describe the role of the Department of Public Enterprises in the Management of Public Enterprises; Explain Personnel Management Issues such as Recruitment, Wage Policy, Bilateral Agreements, Collective Bargaining, and Productivity-related aspects.
Structure 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 Introduction Department of Public Enterprises: Role in Management of Public Enterprises Wage Policy Voluntary Retirement Scheme (VRS) Collective Bargaining Summary Self Assessment Questions Reference and Further Reading
15.1 INTRODUCTION
Personnel Management issues in Public Enterprises are handled by various agencies depending on their importance. For instance, recruitment to higher appointments in PSEs such as those relating to appoint of CEOs/Board level functional Directors etc. are done through the Public Enterprises Selection Board. This Board also deals with promotions and confirmations up to certain higher levels of appointees. Lower level appointments/promotions are usually done at the CEO level with the aid of selection committees consisting of officials of the Board.
15.2 DEPARTMENT OF PUBLIC ENTERPRISES ROLE IN MANAGEMENT OF PUBLIC ENTERPRISES

In their 52nd Report, the Estimates Committee of 3rd Lok Sabha stressed the need for setting up a centralized coordinating unit which could also make continuous appraisal of the performance of public enterprises. This led to the setting up of the Bureau of Public Enterprises (BPE) in 1965. BPE was later constituted as an independent administrative unit within the Ministry of Finance, Department of Expenditure in 1969. As a result of the reorganization of the Ministries/Departments of the Central Government in September, 1985 BPE was made part of Ministry of Industry. In May, 1990, BPE was conferred the status of a full-fledged Department and is now known as the Department of Public Enterprises (DPE) in the Ministry of Heavy Industries and Public Enterprises. The Department of Public Enterprises acts as a nodal agency for all central PSEs and assists in policy formulation pertaining to the role of PSEs in the economy as also
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in laying down policy guidelines on performance improvement and evaluation, financial accounting, personnel management and related areas. It also collects, evaluates and maintains information on several areas in respect of PSEs. DPE also provides an interface between the administrative Ministries and the PSEs. In fulfilling its role, it associates itself with other Ministries and organizations as also premier management institutes in the country. Role and Tasks The important role and tasks of the Department of Public Enterprises are listed below: i) ii) iii) General policy relating to public sector. Matters relating to issue of Presidential Directives and guidelines to Public Sector Enterprises. Formulation of Policy guidelines pertaining to Public Sector Enterprises in areas like performance improvement and evaluation, financial management, personnel management, board structures, wage settlement, training, industrial relations, vigilance, performance appraisal etc. Matters relating to reservation of posts in the Public Sector Enterprises for certain classes of citizens. All matters relating to Memorandum of Understanding between the Public Sector Enterprises and the administrative Ministries/Departments. Matters relating to delegation of powers to Board of Directors. To undertake in-depth studies in respect of significant areas of functioning of Central PSEs. Matters relating to International Centre for Promotion of Enterprises (ICPE). Matters relating to Standing Conference of Public Enterprises (SCOPE). To monitor and evaluate the performance of PSEs and to act as a repository of data and to bring out an annual survey for the Parliament. Settlement of disputes among Public Sector Enterprises and between Public Sector Enterprises and government departments except disputes relating to tax matters. Advice on establishing new Centrally sponsored enterprises including their capital and organizational structure and memorandum and articles of association. All policy matters relating to composition of Board of Directors of PSEs, categorization of top posts, scheduling of PSEs and notification of revised pay scales and DA admissible thereon at periodical intervals. Notify revised scale of pay for Board level executives and the DA admissible thereon at periodical intervals. Co-ordination of training programmes for managerial personnel in Public Sector Enterprise. Policy relating to deputation of Government officers to Public Sector Enterprises.
iv) v) vi) vii) viii) ix) x) xi)
xii)
xiii)
xiv) xv) xvi)
xvii) Provide information to Committees appointed by the Government to examine any aspect relating to Public Sector Enterprises. xviii) Monitoring of performance of Sick Public Sector Enterprises and preparing note for PMO and Cabinet Secretariat authorizing latest development regarding Public Sector Enterprises referred to BIFR. xix)
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Examination of proposals on restructuring, joint ventures, issue of fresh capital etc. of PSEs received from Ministries/Departments.
xx) xxi)
Matters relating to counseling, retraining and redeployment of rationalized employees of CPSEs. Annual review of the performance of CPSEs and bringing out Public Enterprises Survey.
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Organisational Structure DPE is under the charge of the Minister for Heavy Industries and Public Enterprises. The Department is headed by a Secretary who is assisted by an establishment with an overall sanctioned strength of 121 personnel. This Department has five Divisions, viz. the Financial Policy Division, the Management Policy Division, the MOU Division, the Administration and Co-ordination Division and the Permanent Machinery of Arbitration. Financial Policy Division Comprises of the Public Enterprises Survey Unit, the Policy Planning Unit, Counselling, Retraining and Re-deployment Unit and the Wage Policy Unit. Policy Regarding Wage Settlements The Department of Public Enterprise functions as a nodal agency for evolution of policy relating to wage settlements of unionized employees/pay revision of nonunionized supervisors and executives holding posts below the Board level as well as the Board level. The Department provides clarifications and render advice to the administrative Ministries/Departments and the PSEs in matters relating to the wage policy and revision in the scales of pay of the executives. Government have given complete freedom to the management of PSEs to negotiate revisions of the scales for the unionized staff within certain stipulated conditions. The 6th Round of Wage Negotiation was to be entered between managements and the workers unions which was to come to effect from 1.1.1997. The Government orders were issued on 14.1.1999 and 26.7.2000 to this effect. Personnel Policy Unit The important tasks of Personal Policy Unit are Formulation of policy guidelines on personnel matters, Board structure, categorization of PSEs, vigilance and performance appraisal. It deals with professionalisation of Board of Directors and selection of non-official Directors on the Board of PSUs. Department of Public Enterprises advises the administrative Ministries on the composition of the Board of Director of PSEs. The public enterprises are divided in four Schedules, namely A,B,C,D based on criteria such as investment, capital employed, turnover, profit, number of employees etc.The pay scales of the incumbents of the posts of Chief Executives and fulltime functional directors in the PSEs are determined as per the schedule of the enterprise concerned. As on 31.3.2002, there were 51 Schedule A,88 Schedule B,63 ScheduleC and 10 Schedule D Enterprises. Creation of Posts/Appointments Categorization, upgradation and creation of new posts at Board level as also appointment of part-time non-official directors on the Board of PSEs are done by the administrative Ministries/Departments in consultation with DPE. During the year 2001-02, DPE examined 72 proposals relating to categorization, upgradation, grant of higher scales of pay on personal basis, creation of new posts and appointment of nonofficial part-time Directors. As a result 6 companies were categorized in the appropriate schedules (1 Schedule A3 Schedule B and 2 Schedule C), 6 posts of Chief Executives and 18 posts of functional Directors created and personnel upgradation granted to Chief Executives of 2 PSEs. Further, 9PSEs were upgraded to the next higher schedule. Names of 40 persons have been recommended for
appointment as non-official part time Directors on the Boards of various PSEs. As regards Navratna and Miniratna PSEs, non-official Directors are selected by the Search Committee. The Search Committee held five meetings during 2001-02 and made selections for 20 Navratna/Miniratna PSEs. Vigilance Department of Public Enterprises also deals with vigilance management in Public Sector Undertaking by issuing necessary guidelines, as a part of an on going exercise of strengthening vigilance machinery in public sector to tackle corruption and make functioning of investigation and vigilance agencies more independent, effective and credible. A model vigilance set up for PSEs has been drawn up and circulated for the guidelines of the public enterprises. Guidelines The DPE also undertakes periodical review of guidelines issued by erstwhile Bureau of Public Enterprises/Department of Public Enterprises to the public sector enterprises from time to time. A compilation of 196 BPE/DPE guidelines retained after a review by Vittal Committee has been issued in a booklet form titled Guidelines for administrative Ministries/Departments and Public Sector Enterprises Volume-I. The guidelines issued subsequently were compiled and issued as Volume-II of this publication in September, 2000. A Committee has been set up to review all the existing guidelines and its report has been received.
15.3 WAGE POLICY

Government have given complete freedom to the management of PSUs to negotiate revision of pay scales within certain stipulated conditions for the unionized staff. The 6th round of Wage Negotiation was to be entered between management and the workers union which was to effect from 1.1.97. Government orders were issued on 14.1.99 and 26.7.2000 to this effect. The Public Sector Enterprises are having two groups of employees. One group of employees are following the Central DA pattern (CDA) pay scales while the other group of employees are following IDA pattern of pay scales. For the CDA pattern pay employees, their pay scales are governed by the recommendations of the Central Pay Commission and Government decision thereon as in the case of the Government employees. The benefits allowed to Government employees are also extended to them as per the Supreme Court directions. IDA Pattern and Related Scales of Pay in PSEs Government policy relating to pay scales and pay pattern is that all employees of the PSEs should be on IDA pattern related scales of pay. Instructions had been issued by the DPE in July,1981 and July,1984 to all the administrative Ministries that as and when a new PSE is created or established, IDA pattern and related scales of pay should be adopted ab-initio. There are 250 PSEs (excluding Banks, Insurance Companies and Financial Institutions) under the administrative control of the Central Government. They employ nearly 18 lakhs workers, clerical staff and executives. Out of this, 97% of the workers and executives are on IDA pattern and related scales of pay. There are 69 PSEs which are still having employees on CDA pattern pay scales. Even in respect of the PSEs which, due to historical reasons, have continued to follow-CDA pattern, attempts have been made to rationalize their scale of pay and allowances on IDA pattern and guidelines to this effect were issued in 1990.
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CDA Pattern in 69 PSEs CDA pattern pay scales are applicable to clerical staff, unionized cadres and executives of the 69 PSEs who were on the rolls of these companies as on 1.1.1986 and upto 31.12.1988 and were in receipt of CDA pattern pay scales during that time. A High Power Pay Committee (HPPC) was appointed by the Government in pursuance of the Supreme Court directions dated 12.3.1986 which submitted its Report to the Government on 24.11.1988. Its recommendations have been implemented in these PSEs. In pursuance of the Honble Supreme Court direction dated 3.5.1990 read with the subsequent direction dated 28.8.1991, IDA pattern and related scales of pay have been introduced in these PSEs with effect from 1.1.1989, but some employees are still continuing with CDA pattern pay scales in these PSEs. Wage Negotiation Complete autonomy in the managements of PSEs to negotiate pay scales for the unionized staff within certain stipulated conditions have been allowed by the Government. The latest wage negotiation was to be entered between managements and the workers union which was to come to effect from 1.1.1997. The Government orders were issued on 14.1.1999 and 26.7.2000 to this effect. Some PSEs have already implemented the negotiated wage settlement, while some are in the process of doing so. There are now two groups of employees in public enterprises. The first group of employees are following the Central DA pattern (CDA) pay scales while the second group of employees are following IDA pattern of pay scales. For the employees following CDA pattern pay, their pay scales are governed by the recommendations of the Central Pay Commission and Government decisions thereon for the Government employees. The benefits allowed to Government employees are also extended to them as per the Supreme Court directions. Pay Revision for Executives The last pay revision for the IDA employees was done w.e.f. 1.1.97 for a period of ten years based on the recommendations of Justice Mohan Committee as per OM dated 25.6.99. In regard to the unionized employees covered by the IDA pattern pay scales in the Central Public Enterprises, the Government has decided to allow them the option to opt for either: i) ii) A ten year periodicity of pay revision with 100% neutralization of DA as set out in the guidelines issued on 14.1.99. A five year periodicity on the basis of graded neutralization as existed previously i.e. from 1.1.1992 to 31.12.1996.
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As per the recommendations of High Power Pay Committee, the CDA pattern following employees of the Central Public Sector Enterprises would get pay revision only as and when similar changes are effected for the Central Government employees.
15.4 VOLUNTARY RETIREMENT SCHEME (VRS)

In the present market scenario, in view of the ongoing restructuring in the industries including Central PSUs, several measures for reforms and restructuring of PSEs have been taken up by Government. Right sizing of manpower in the CPSUs is one of the measures adopted. Restructuring of manpower may lead to redundancy. It is in this context, it has been the constant endeavour of the Government to safeguard the interest of the employees involved in Central PSUs. In the process, the Voluntary Retirement Scheme, Which was initially announced in October, 1988 for the first time was further liberalized and a comprehensive package
was notified vide DPEs O.M. dated 5th May, 2000 so as to cater to the need of the CPSUs to meet their objectives and also to protect the interest of the workers affected due to various modes of restructuring. Considering the difficulties faced by the enterprises where the wage revision effective from 1st January, 1992 or 1997, as the case may be, could not be effected thereby leading to hardships of the employees involved in these enterprises, the Voluntary Retirement Scheme was further modified by issuance of subsequent notification of 6th November, 2001, which inter-alia provides for 100% additional compensation for employees where the wage revision of 1997 could not be effected and similarly 50% additional compensation for employees where the wage revision of 1997 could not be made effective. These increases in VR compensation are to be computed based on the existing pay of the employees. The liberalizations in the compensation package would help the sick and loss making enterprises in downsizing their manpower. From the introduction of the Voluntary Retirement Scheme initially from October, 1988 till March, 2001, 3.69 lakh employees have been released under VRS. Subsequently, as reported by 92 CPSEs so far for 2001-02, the number of employees released under VRS has gone up to around 4.00 lakh (0.31 lakh during 2001-02). VRS in Profit Making PSEs Hereafter profit making public sector enterprises who have to reduce their workforce in order to remain competitive may frame their own schemes of VRS and make it attractive enough for employees to opt for it. They may offer as compensation upto 60 days salary or every completed year of service. However, such compensation will not exceed the salary for the balance period of service left. VRS in Marginally Profit or Loss Making PSEs Marginally profit making or loss making PSEs have been permitted to introduce an improved VRS scheme based on Gujarat model. Under this model an employee will receive compensation as: i) ii) 35 days salary for each completed year of service; and 25 days per year of service for the balance of service until superannuation subject to some conditions.
The other option available to the employees is known as Voluntary Separation Scheme (VSS) already approved by the Government in respect of units under the Department of Heavy Industry. The VRS optees can opt for either of the schemes.
15.5 COLLECTIVE BARGAINING

Collective Bargaining is an important tool of negotiation between workers and owners/managers in the industrial sector. This is an important instrument in the hands of both labour and management to avert needless stoppage of work fulfilling of legitimate aspirations of labour and expectations of managers. Origin of Collective Bargaining Sidney James Webb and his wife Beatrice, eminent English economists and sociologists, are credited with first coining the term collective bargaining as an antonym to the term individual bargaining, the phrase they found in use first in their book on the cooperative movement in the course of their extensive researches they carried out into the history of British Labour Unionism (Sidney and Beatrice Webb (1920). Industrial Democracy, London: Longman, Green and Co).
History of Collective Bargaining i) U.S.A.: Studies into the past history of labour movements in some of the industrialized countries of the West, particularly the U.S.A. and U.K. reveal that collective bargaining came into vogue with the growth and development of trade unions in those countries. Early labour movement in the U.S.A. and other industrialized countries encountered difficulties in formation and development of trade unions, owing to the reluctance of employers to recognize the existence of such unions. The American Revolution gave impetus to the formation of trade unions and the earliest case of collective bargaining dates back to the 1790s. However, collective bargaining came to get legal recognition only with the passing of the National Industrial Recovery Act 1933, which guaranteed to labour, the right to bargain through representatives of its choosing. This right was reiterated by the National Labour Relations Act , also known as the Wagner Act, in 1935. These Government Laws encouraged collective bargaining. The Wagner Act was later amended by the Labour Management Relations Act, popularly known as the Taft Hartley Act, 1947. This Act considerably strengthened the collective bargaining in the country. The U.K.: In the U.K., by the end of the nineteenth century, collective bargaining had become an established practice but it was confined only to certain specified kinds of employment. Trade unions continuously struggled for recognition and extended their power and social influence with the result that healthy relations developed between employers and workers organizations on a voluntary basis. Since 1870s, collective bargaining came to be recognized by the Government as the normal practice of settling wages and working conditions between employers and workers organizations in Britain. The British Government has accepted and applied the principles of collective bargaining in the matter of wages, salaries and service conditions etc. in public employment also. India: The importance of harmonious relations between the employers and employees was realized as early as Vedic times and the practice of collective bargaining existed in some form or the other since ancient times in India. During the British rule, industrial relations followed the Laissez Faire policy and no encouragement was given to formation of labour unions. Till the middle of the eighteenth century, there was not much of industrial activity in the country. It was only between 1850-1860 that industrial development started in India with the establishment of some Jute and Cotton Mills and railway lines were laid through the country. The earliest instance of collective bargaining was that of a textile mill in Ahmedabad. Industrial disputes, mainly in the textile industry, came to be settled through mutual negotiations and voluntary arbitration. This paved the way for collective bargaining. With the attainment of Independence, the Government of India enacted the Industrial Disputes Act of 1947, which encouraged the orderly development of trade unions. This helped in the development of collective bargaining in the country.
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ii)
iii)
Definition The Encyclopedia Britannica (Encyclopedia Britannica, 14th edition, Vol.12. p.299.) defines collective bargaining in the following words: In its widest sense, collective bargaining is negotiation between the employer or group of employers and a group of work people to reach agreement on working conditions. If negotiations are between an employer and a group of his own work people, the dependence of the work people on the employer for their jobs weakens their bargaining powers, and therefore collective bargaining is more usually understood to be negotiations between one or more trade unions and an employer or a group of Associations or employers.
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Trade Unions organization gives the work people greater strength to providing means for the expert presentation of demands by skilled officials not dependent on the employers for their jobs. Further, a union has funds and means of obtaining information outside any one undertaking and can secure for the work people at any one firm the support of their followers in other firms. The Encyclopedia Americana (The Encyclopedia Americana, Vol.1, p. 502-1) defines collective bargaining as follows: Industrial history shows that collective bargaining is the method by which the progress is made in industrial relations. Collective bargaining is a procedure based upon the principle that those concerned with decisions should have a voice in their making. Some Characteristic Features 1) Group Action: As the term collective bargaining itself signifies, essentially is a group action instead of an unilateral or individual action. It has achieved a distinctive position in an industrial society where capital and labour have organized themselves into groups with the objective of fighting their disputes and settling them with a firm belief and relying on the principle that union is strength. 2) Flexibility, Fluidity and Mobility: Flexible attitude of both the management and union is an essential pre-requisite for the success of collective bargaining. In the course of negotiations, both the parties have to adopt the give and take policy to avoid any abrupt deadlock in negotiations. Either or both the parties may move from position to position as they try to stress their case. 3) Bilateral Process: Collective Bargaining involves two parties for arriving at commonly agreed solutions 4) Continuous Process: Collective Bargaining is a continuing relationship between management and the union of which the signed agreement is only the beginning. It establishes sound employer-employee relationship. Objectives The main objectives of collective bargaining are fostering of amity, cooperation and goodwill between employers and employees and achievement of harmonious relations between them. Other objectives include ensuring that no party tries to outwit the other but rather to negotiate agreements which will be in the mutual interests of the employers and employees. Extent and Scope Collective Bargaining in India has made little progress due to multiplicity of unions with different political affiliations and existence of inter union rivalry. Managements feel hesitant to negotiate and enter into agreement with a particular union, since there is always the risk that the agreement may not be complied with by members not belonging to that union, and hence are not party to that agreement. Sometimes, the attitude of some managements towards non-recognition of the unions and their lack of bargaining spirit has also contributed to poor progress in collective bargaining. Another reason for the poor progress of Collective Bargaining in India is Government intervention. The Government has, no doubt, encouraged collective bargaining but has added provisions relating to adjudication and compulsory arbitration in case negotiations fail. Governments standing orders stand in the wake of items subject to bargain, though these orders only prescribed the minimum and they can be exceeded by the union, provided the union is strong and has a good hold as a bargaining power. Except the textile industry, where the agreements are reached industry-wide,
generally agreements in case of other industrial undertakings are concluded undertaking wise. Collective Bargaining agreements may vary depending upon whether it is regarding as a single unit or a single company or it covers all workers of a certain type in a particular area or workers in an industry through out the country. Collective Bargaining is applied to finding solutions not merely pertaining to wages, hours of employment, allowances, bonus, security of service other terms and conditions of employment but this has also been applied to other working conditions such as seniority, promotions, transfers, lay-offs, vacations and handling or grievances. However, collective bargaining cannot find solutions for all the issues related to labour market and work process, and other economic and social problems connected with best it provides a procedure which helps issues and problems to be identified, handled and solved. When negotiations are in progress there is always the possibility of a dead-lock. At any stage either of the parties or both of them not agreeing to the settlement of an issue or issues may abruptly choose to close the negotiations. This is called dead-lock of negotiations. Activity Specify the role of the Department of Public Enterprises in the Management of Public Enterprises? Do you think it is too much or too little ? If so, why ? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
Project Management
15.6 SUMMARY
Department of Public Enterprise plays an important role in the management of public enterprise. Here, we have discussed the role of DPE in manaing PE keeping in mind the organisational structure and various policies related to the management of PEs. Moving further, different personnel management issues like wage policy, VRS, collective bargaining have been discussed to give a fair view regarding the importance of personnel management in Public Enterprises.

1. What is the Governments Policy regarding wage revision in public enterprises? 2. Trace the origin of Collective Bargaining in industry and its relevance to Indian conditions.
15.8 REFERENCE AND FURTHER READING

Aggarwala, Dharam Vir. (1982) : Industrial Relations and Collective Bargaining Deep and Deep Publications.
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UNIT 16 PROJECT MANAGEMENT

Objectives After going through this unit you should be able to: ! Know the concept of project management; ! Understand the project planning concept; ! Understand the implementation and the evaluation aspect of project management. Structure 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 Introduction Project Management : Concept Project Identification Project Planning Techniques of Project Management Project Implementation Project Evaluation Summary Self Assessment Questions References and Further Readings
16.1 INTRODUCTION
Post 1990s saw a great change in the economy of the nation. To improve the socioeconomic conditions in the country, large amounts of money in different projects have been invested. Usually the projects are designed in such a manner so as to earn adequate returns for the future development. But in most of the cases it is seen that projects take longer time than estimated, and returns are less than expected. This may be due may be due to inadequate planning. Therefore, it becomes necessary to have scientific and systematic management in project planning, development and implementation (Gopala Krishnan et al, 1996) Project Management plays an important role and only in the past few years it has emerged as a separate discipline. In this highly competitive world, the need to understand the concept has been growing considerably. When we talk about public enterprise, this issue becomes more important because when PEs come up with any new project, they invest the money of public with the aim of having higher returns. A proper management of project surely will increase the returns, but if the project fails, the money of the public is lost. Therefore, it becomes all the more necessary to understand the concept of project management. In this unit we are going to discuss different aspects concerning project management.
16.2 PROJECT MANAGEMENT: CONCEPT

Think of a massive project like the Golden quadrangle project of building national highways across the country. Looking at its dimensions, the project has been completed to large extent in a short span of time. This shows that the project has succeeded. Now the question arises, why do some projects succeed and the others
10
UNIT 16 PROJECT MANAGEMENT

Objectives
Project Management
After going through this unit you should be able to: ! Know the concept of project management; ! Understand the project planning concept; ! Understand the implementation and the evaluation aspect of project management. Structure 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 Introduction Project Management : Concept Project Identification Project Planning Techniques of Project Management Project Implementation Project Evaluation Summary Self Assessment Questions References and Further Readings
16.1 INTRODUCTION
Post 1990s saw a great change in the economy of the nation. To improve the socioeconomic conditions in the country, large amounts of money in different projects have been invested. Usually the projects are designed in such a manner so as to earn adequate returns for the future development. But in most of the cases it is seen that projects take longer time than estimated, and returns are less than expected. This may be due may be due to inadequate planning. Therefore, it becomes necessary to have scientific and systematic management in project planning, development and implementation (Gopala Krishnan et al, 1996) Project Management plays an important role and only in the past few years it has emerged as a separate discipline. In this highly competitive world, the need to understand the concept has been growing considerably. When we talk about public enterprise, this issue becomes more important because when PEs come up with any new project, they invest the money of public with the aim of having higher returns. A proper management of project surely will increase the returns, but if the project fails, the money of the public is lost. Therefore, it becomes all the more necessary to understand the concept of project management. In this unit we are going to discuss different aspects concerning project management.
16.2 PROJECT MANAGEMENT: CONCEPT

Think of a massive project like the Golden quadrangle project of building national highways across the country. Looking at its dimensions, the project has been completed to large extent in a short span of time. This shows that the project has succeeded. Now the question arises, why do some projects succeed and the others 1
Organisation and is simple. The projects which succeed are well managed and the fail ? The answer Management one which do not are ill-managed. This is what is known as Project Management.
The meaning of Project Management is simple. It means management of projects. According to the Oxford dictionary, Project means a plan, an undertaking; a task involving research whereas Management means people who control a business. According to the Dictionary of Management, it is an investment project carried out according to a plan in order to achieve a definite objective within a certain time and which will cease when the objective is achieved (Goel, 1987). There are many such definitions regarding project management. On combining the two words viz a viz Project and Management a simple definition can be derived quoted as an organised, venture for managing projects. Project According to the definition provided by the World Bank, project is an approval for a capital investment to develop facilities to provide goods and services (Desai, 1997). A project can be anything. A project has the following as its basic components :
! ! ! !
Objective Advantages Time Period Costs
A project can never occur in isolation, rather it will have various factors, which will either help or hinder it. Here is an illustration to show project in its simple form.
Project: Conducting A User Survey A new librarian has just been appointed at ACME foods. As part of an initial review of the services provided by the library, the librarian wants to finds out what the users think of them. A user survey seems appropriate. The objective of this project is to fund out what users of the library think of the services it provides. The benefits expected are a ranking of importance of the different services to the users which will provide the basis of any changes. The timescale will depend on the deadline for the review and the costs will be mainly staff time in designing and running the survey. Sources : Adapted from Maclachlan, Liz (1996), Making Project Management Work for you
Characteristics of a Project A Project has the following characteristics
! ! ! ! ! ! !
Risky venture Unique enterprise Dynamic nature Vital part of an overall programme Limited life span Smallest unit of investment Operations in a specified area
There can be many more characteristics of a project depending on the type of the project. The above stated characteristics are the common characteristics to all kinds of projects.
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Stages of Project Managements
Project Management
Each project has some distinct stages. As we move further, we will discuss these stages. One thing is important to note here is that the importance of these stages vary from project to project but every project does have these stages. The following flow-chart gives the idea of the stages of project management.
Identification of a Project (Project Idea)
Planning
Implementation
Monitoring Modification (If any) Evaluation
Success/Failure Stages of a Project Broadly speaking, project work takes place at the following there levels depending on the nature of the project:
! ! !
National level Sectoral level Project (individual) level
Practically, all the three levels are connected to each other and any discrepancy in any of the three levels will affect the other two levels. In the subsequent sections we are going to discuss different stages of Project Management in brief.
16.3 PROJECT IDENTIFICATION

For a new project, identification of the project is the very first stage. This is the most crucial step as it forms the basis for further stages. This stage is concerned with collecting, compiling and analysing the economic data, eventually locating possible investing opportunities. The project idea should especially indicate the objectives, benefits, time span and the cost required for the completion of the project. This would hence give a broad viewpoint of the project to be taken into consideration. The project idea leads to generation of number of project profiles (alternatives) for
Organisation and is to be made. Here, comes the selection process i.e., choosing the which a decision Management best project profile. A project which will give maximum profits at minimum costs is considered to be the best choice. The following are the criteria for selecting a particular project.
! ! ! ! !
Investment size Location Technology Equipment Marketing
Now the question arises that why is it important to identify a project ? The following can be the important reasons for which a project is identified. A proper identification of a project:
! ! ! ! ! !
acts as catalysts for economic development; initiates the process of development; beneficial considering the strategic (long-term) aspects; involve high financial investments; cannot be reversed; accelerates the pace of socio-cultural development;
A sound project idea should define the objectives very clearly, as lack of clarity at this stage would invite problems at a later stage. It should also define the boundaries (constraints) rather than going into action in the unknown.
16.4 PROJECT PLANNING

Planning is said to be a dynamic process and accelerates the work at all levels. To critically appraise a project, it is essential to have a plan. Planning of a project is a cyclic process and project formulation is necessary for a plan to be successful. Project formulation involves a series of steps to be taken to convert an idea into a feasible plan of action. Project formulation involves a series of steps to be taken to convert an idea into a feasible plan of action. Project planning is a process which involves the joint effort of a team of entrepreneurs, technicians and skilled workers. The following are the Characteristics of a good plan. A good plan should be:
! ! ! ! !
Specific Measurable Acceptable Achievable Time bound
According to Myrdals, Project formulation is one of the basic techniques through which planning can change from an institutional base to an institutional and rational base. (Goel, 1987). Five stages are involved in Project Formulation. These stages are in:
4
Project identification
! ! ! !
Technical analysis Economic analysis Financial analysis Project appraisal
Project Management
We will not go into details of these stages rather more further to know the advantages of project planning. The advantages of project planning are as follows:
! ! ! ! ! ! ! ! ! ! !
Gives training to become more entrepreneurial Screening the ideas Attracting a venture team Building team consensus Getting money and permission to proceed.
Planning therefore involves setting out: The tasks to be done; Tasks which are dependent on others; The time these would take; The order in which they should be performed; Other resources needed; And finally the end product to be delivered.
Too much planning as well as too little of it is harmful to the enterprise. Therefore planning should be such that the objectives of the project are achieved at minimum cost.
16.5 TECHNIQUES OF PROJECT MANAGEMENT

Any project, irrespective of its nature follows a definite path of planning, scheduling and controlling. Network techniques is one aspect, which helps the management in performing these functions effectively and efficiently. We are going to discuss the following techniques used in project management in brief :
! ! ! ! !
Gantt Charts PERT Charts Critical Path Method (CPM) Budget Planning Risk Analysis
Gantt Charts: Henry Gantt, 1977 inverted the chart using a standard bar chart and turned it on its side plotting tasks into a timescale showing start and finish dates. These charts were hence named Gantt Charts. The chart depicts the work to be done alongwith the interrelationship between the phases of the work. Variations of Gantt Charts like commitment schedules, analysis bar chart ABC, modified Gant Charts, project
Organisation and etc. are still used in many of the projects progress charts Management
The characteristics of a Gantt Charts are as follows:
! ! ! ! !
Gantt chart show clean and quick relationships among several variables; Focuses attention on situations needing attention; Help in providing information about a project schedule; Measures progress against the planned schedules; Shows the overall project load month by month alongwith the accumulating backlong work.
These charts are used widely as they give an immediate impression of the project. The major limitation of Gantt Charts is that it requires considerable clerical effort to draw and maintain it. Gantt Charts are particularly useful for simple projects. For more sophisticated projects we use some more sophisticated techniques like CPM and PERT. Programme Evaluation and Review Technique (PERT) PERT was introduced on the polaris weapon system in 1958 by a special project office of the US Navy with the aid of a US consulting firm. Since then, the use of PERT has spread to defence forces in all countries and to large industrial projects as well. In India, large PEs like NTPC, EIL, BHEL, FCI, IOC, ONGC etc. have used PERT successfully for new projects, diversification, replacement and for maintenance. The requisites of PERT for using its efficiency are to:
! ! ! ! ! ! ! ! ! !
Identify objectives; Schedule work breakdown; Interrelate technical and managerial aspects; Develop of project network; Estimate of time; Determinate of critical path, even slacks and activity floats; To monitor and evaluate.
PERT basically consist of three elements, which are as follows . Events (represented by circles) Activities (represented by arrows) Non-activities (represented by dotted lines)
Sample of PERT is shown in Figure 16.1 The basic advantage of the PERT chart is that the sequence of each activity is clearly displayed. PERT charts are very useful for complex projects.
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Figure 16.1 : PERT Chart for Project X 4
1 5 3 6
Project Management
Critical Path Method (CPM) CPM is a mathematically ordered system of planning and scheduling for project management, which makes possible a balanced, optimum time cost schedule and assures timeliness and minimum use of resources (Goel, 1987). It is also known as CPA or Critical Path Analysis. It was devised by Du Pont and Remington Rand in 1950s to improve project scheduling techniques. Similar to PERT, this is also based on the network principle. As in PERT, in CMP also the events are shown by circles and activites by arrows leading from one event to its successor events. Following are the basic steps involved in CPM :
! ! ! !
The whole project is broken into smaller systems, known as task. Each task is then determined by activities and events to be performed; Each activity determines the preceding and succeeding activities and also determines the time and resources needed; A network plant is drawn depicting the assembly.
Budget Planning A proper budget makes all the difference between success and failure of a project. For this, it is essential to plan the budget. This involves two basic steps:
! !
The estimated cost of the project. The estimated time to complete the project.
The estimated cost of the project will include all types of costs incurred in the project be it, people, staff, equipment, overhead expenses etc. This is the most technical of all as it requires all minutes intricacies. The main purpose of the budget profile (plan) is to monitor the spend on the project. Therefore, it is essential to know:
! !
The total actual spend, Actual vs. planned spend for individual elements.
If these are done properly, the project is said to be successful. Risk Analysis Risk is the measure of uncertainty and every human activity involves risk hence forth, a project also has certain amount of risks involved with it. Risk analysis is one such method which helps in analyzing the problems which may be associated with a project. Risk associated with a project of any public enterprise may be associated with the following areas :
! ! ! !
Project management Project staff Nature of project Organisations culture and expectations
In risk analysis, it is important to calculate risk. This varies from project to project. A sample of Risk Checklist is shown in Table 16.1.
Table 16.1: Risk Checklist Low Risk Scale 1234 Full-time experienced project manger Project team is experienced and has appropriate skills Staff are dedicated to the project Installation of a system which has been used elsewhere Business will not be affected Little or no modification or development work undertaken Little constraint on completion date Suppliers are well-established and experienced Few users No dependence on other projects outside managers control Well-developed set of standards and procedures in use Delegation of authority is clear Total 1 Inexperienced or part-time project manager Team is inexperienced and lack the appropriate skills Staff have other duties Weight 3456 5 5
High Risk
Total
12
Installation of a new system Significant impact on business operations Extensive modification or development needed
20
Mandatory completion date Supplier are new or one-man businesses Many users Heavy dependence on other projects outside managers control Few or no standards and procedures in use
16
4 3
4 5
16 15
1 28
Delegation of authority is not clear
3 44
Low risk if score less than 2 weight High risk if score is greater than 3 weight Project is therefore medium risk
= = =
88 132 109
Source : Maclachla Liz, 1996. Making Project Management work for you
The risk checklist enables to know the risk score helps in deciding the likelihood of success of the project. Therefore, risk analysis helps in establishing the priorities for the project. It is essential to note that delay in any of the activities on the critical path will delay
8
Project Management the whole project as the project management environment is a dynamic process, it undergoes continuous changes.
16.6 PROJECT IMPLEMENTATION

It is easy to plan but quite difficult to implement the plan. If the plan is implemented efficiently, the project is said to be successful. A successful project requires a thorough control mechanism. Control is the process of monitoring, evaluating and comparing planned results. The Primary purpose of control is not to determine what has happened but rather to predict what may happen in future if the present conditions continue. This facilitates the manager to effectively manage the project in compliance with the plan and implement it effectively. Monitoring The Control technique like GANTT Charts, PERT, CPM etc. help in monitoring the project. The important thing in monitoring is how to do it. The following three areas need to be monitored for the project to be complete and successful. Time period i.e., whether the project is proceeding according to the schedule or not and what can be the ways to bring it on schedule. Quality: This area shows that whether the results of each stage match the success factors or not . CONTROL SYSTEM (1) Establishing Standards
(4) Taking Corrective Action
CONTROL SYSTEM
(2) Observing performance
(3) Comparing actual performance
Source : David I cleland, 1994 Project Management Strategic Design and Implementation
Budget: This includes the costs involved in the project and whether these costs are under control or not and will the project achieve its objective within the budget or not. All the changes or modifications to be made should be done at the proper moment in 9
Organisation and the correct implementation procedure. turn guaranteeing Management
16.7 PROJECT EVALUATION

Evaluation of the project can be said to be the last stage of project management. Evaluation means examining something in particular and judging its worth. Project evaluation is done to bring all over improvements. It is basically assessing the performance with that of the objectives set in the beginning. According to Russell D. Archibald, following can be the objectives of project evaluation:
! ! !
To provide visibility of the interrelationship between different areas of the entire project. To identify problems before they occur To identify opportunities
There are also certain prerequisites for achieving the objectives. These can be stated as follows :
! ! ! ! !
A detailed description of the programme; Defining the objectives in qualitative as well quantitative terms; Establishing the standards; Selecting control techniques; Collecting all information through primary as well as secondary sources.
Types of Evaluation When we talk about evaluation we can divide it into two broad categories. The following flow-chart show different types of evaluation Types of Evaluation
In terms of Project Effects on the recepients Early Evaluation (Formative) On-Going Evaluation (Interim)
Objectives/Goals of a project Immediate Objective
Intermediate Objective Ultimate Objective
Normally, the evaluation takes place at end of the implementation stage of any activity. Many methodologies over the years have been evolved and adopted by different professionals to evaluate the project. Here we are going to see some of them but would not indulge into the details: 1) First hard information
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2) Formal/informal periodic reports 3) Graphic presentations 4) Standing evaluation review committee 5) Project profiles 6) Control centre
Project Management
The effective and efficient performance of any project depends on its cyclic process starting from planning, implementation, monitoring and control, to evaluation. Activity List any five infrastructural projects in the public enterprises.
16. 8 SUMMARY
Public enterprises and as a matter of fact private enterprise do have number of projects coming and going. Some are completed successfully and some are abandoned in the middle. Each and every project has a beginning and the end, whether they are completed successfully or not. Project management is one such field where only starting a project is not the major concern. This requires proper planning, implementation and evaluation.

1. 2. 3. What is project management ? Differentiate between PERT and CPM. Give an example of a project in each of the following sectors specially taking into account the public enterprises. Manufacturing Banking Marketing
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Maclacher, Liz (1996). Making Project Management Work for You Library Association Publishing, London. Cleland, I. David, (1994) Project Management : Strategic Design and Implementation McGraw-Hill, InC. USA. Goel,B. B. (1987), Project Management : A Development Perspective. Deep & Deep Publications Desai, Vasant (1997), Project Management, Himalaya Publishing House, Mumbai. Gopalakrishnan, P & Moorthy, Rama, V.E. (1996). Text-book of Project Management, Macmillan India Ltd., Delhi Kharbanda, O.P. & Stallworthy, E.A. (1986). Successful Project with a Moral for Management, University Press, Cambridge.
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UNIT 17 MANAGEMENT OF FINANCE, MARKETING AND PRODUCTION, ISSUES

Objectives After going through this unit, you should be able to:
Project Management
! ! !
Discuss the concept of management of finance in public enterprises; Understand the relevance of management of marketing in Public enterprises; Understand the scope of production issues;
Structure 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 17.10 Introduction Finance Objective Scope of Finance Function Relevance of Marketing to Public Enterprises Marketing Concepts in Public Enterprises Production System Production Management in Public Enterprises Summary Self Assessment Questions References and Further Readings
17.1 INTRODUCTION
Public enterprises (PEs) in India face a host of financial problems. The ultimate financial results of these enterprises have been substantially affected by their inefficient financial management. India, being a developing country, continues to strive to achieve planned economic growth through generation of additional income in various sectors of economy such as agriculture, industry, mining, internal and external trade. What is aimed at is not only economic growth but also social change in a planned manner. In the process, the country has been constantly facing the problem of limited resources, and adopt the concept of public enterprise as an instrument for better usage of these limited resources for the benefit of the society at large. Under such circumstances, marketing as an activity, which involves (1) attraction of sufficient resources, (2) conversion of these resources into products, services and ideas, (3) distribution of these outputs to various consuming public, is inevitable to public enterprises. PEs in India are of two kinds: (a) central public enterprises (CPEs) under the direct control of central government, and (b) state level public enterprises (SLPEs) initiated by the respective state governments for implementing their aims and polices. While CPEs by and large are in manufacturing activity such as machine tools, heavy electrical etc. majority of the SLPEs are engaged in promotional, developmental or service activities.
1
Organisation and and blends a set of tools called the marketing mix production Marketing utilises Management design pricing, communication and distribution. Too often many equate marketing with only one of its tools such as advertising. But marketing is oriented towards producing result and this requires a broad conception of all the factors influencing buying behaviour.
Production is a key performance area in any industrial undertaking. The success of an enterprise largely depends upon the efficiency of its production system. Production is a dynamic process. A minor portion of value addition in any economic effort is contributed by the production activity. Production or productive endeavors and achievement of organisational goals are closely linked in all enterprises whether public owned or private owned. Unfortunately, however, the significance of production is frequently misconstrued. Although it could be viewed as a simple inputoutput system, it may involve high levels of complexity. Production management goes beyond the issues of physical feasibility. It involves an active interface with all the functional areas. Besides engineering and technology, subjects such as economics and industrial psychology also play an important role in creation and operation of production system. In this unit, an attempt has been made to portray the concepts of financial management, marketing management and production management in public enterprises.
17.2 FINANCE OBJECTIVE

Finance objective constitutes the core of overall business objectives. There is a view that PEs need not have any finance objective as they are expected to generate profits since all their losses could be made good by the State. The practice reveals that whereas these enterprises have chosen to explicitly indicate the sub-financial objective, they are faced with the dilemma of evolving full-fledged financial objectives. Some PEs point out stepping up the rate of internal resource generation as their finance objective. The declaration of dividends on equity investment has been assumed as finance objective by many PEs. A sizeable chunk of PEs believe that control, cost reduction, financing of working capital and expansion, raising resources for funding new technology and arranging ways and means to finance diversification constitute the finance objective. In order to point out the finance objective in real sense of the term, we need to dissect the term PE. As is obvious this term comprises two words viz. public and enterprise. By being public, these enterprises lend themselves to the ownership and control of the Government and management by it. The enterprise dimension makes it obligatory on them to produce goods and render services at a price which should result into profits to be recorded in the profit and loss account and balance sheet. This makes it clear that a PE has both the public and enterprise dimensions. The enterprise dimension is preceded by the public dimension which suggests that a PE cannot think in terms of profits alone. However, they cannot overlook the profit earning in view of the presence of the enterprise element. In other words, a trade-off would have to be achieved by giving due credit to the nature and activities of the enterprises. PEs having a larger public dimension would lay less stress on profitability whereas those dominated by the enterprise dimensions would make efforts to maximize their profitability.
Organisation for Financial Management
Project Management
A study of the organisation for finance should reveal the status and importance of finance function in an enterprise and its role in the changing dynamics of the business entity. The organisation for finance is shaped among other things, by the structure of an enterprise. If it has a simple structure in terms of products and location, the organisation would be functional. The organisation for finance would be complex, on the other hand, in the case of multi-product, multi-unit and multi-locational undertakings. In the initial years when public sector units were just coming up we had cases of finance function being looked after by executives functioning at the middle or junior levels in the organisation. The finance departments were characteristically inadequately staffed. The background of the finance personnel was considered to be an immaterial factor. The training and education of the finance personnel were foreign to the minds of the top managements in PEs. Though finance was a staff function the variegated expertise was missing and the line relationships within the finance department dominated the staff requirements. Over the years, the organisation for finance has been undergoing a shift from pure functional and centralised type to decentralised and divisionalised type organisation.
17.3 SCOPE OF FINANCE FUNCTION

The width and depth of finance function in PEs challenges anybodys imagination. Most of the decisions in business enterprises have indirect or direct bearing on finance. PEs are no exception to this generalisation. The finance function is saddled with the following responsibilities in PEs: i) ii) Determining the financial resources required to meet the companys operating programme. Forecasting how much of the requirements would be met by internal generation of funds by the company and how much would have to be obtained from outside the firm. Developing the best plans to obtain the external funds needed. Establishing and maintaining system of financial control governing the allocation and use of funds. Formulating programmes to provide most effective profit-volume cost relationship. Analysing the financial results of all operations, reporting the facts to top management and making recommendations concerning future operations.
iii) iv) v) vi)
vii) Carrying out special studies with a view to reduce cost, improve efficiency and profitability. viii) Carrying out feasibility studies and preparing project reports. In regard to capital expenditure relating to new projects of expansions, feasibilities and detailed project report are to be prepared by the Management and these should be examined by the Finance Department to ensure that: a) The capital expenditure prepared would be in furtherance of the objectives for which the enterprises have been established. b) The expenditure proposed to be incurred is reasonable. c) The proposal is economically viable d) The financial resources for meeting the expenditure would be available.
3
Organisation and The Finance Department is the principal coordinating office for: ix) Budgeting: Management
a) preparation of long-term operating budget covering a period of 10 years indicating the likely profit/loss during the period: b) preparation of long-term capital expenditure budget covering a period of about 10 years and advise the management in regard to the timing of the incurrence of capital expenditure; c) reporting on capital expenditure budget in regard to the expenditure that is expected to be incurred during the year; d) preparation of the annual operating budget; e) preparing the budget returns that flow out of the comprehensive budgetary system in operation; f) analysing variations between budget figures and the expenditure incurred and comment on the causes that have led to such variation to facilitate the management to control expenditure by application of the principal of exception. g) preparation of Cash Flow Statement indicating the inflow and outflow of cash during the period; h) assessment of the total working capital requirements for the fiscal year and advise the management regarding the sources of financing and the working capital requirements; i) assisting all the matter relating to purchase of requirements, raw materials, and laying down suitable procedures for purchase to ensure that adequate control is exercised over such purchases and that there are no uneconomic purchases; j) advising chief executive on the pricing policies to be followed in the organisation in regard to selling prices of products, inter-departmental issues, charging of material to jobs, etc. x) xi) advise the management on all service matters having financial implications such as scale of pay, dearness allowances, bonus, gratuity etc. organising an effective internal audit department and process the reports submitted by the internal auditor and placing the same before the Board through the chief executive. ensuring that the annual accounts are prepared in time according to provisions of law on all matters relating to the statutory audit and the audit by the Comptroller and Auditor General.
xii)
xiii) acting as custodian of the cash of the company, and in discharging the duty, the Department has to ensure that adequate financial control is exercised over the allocation and use of funds in accordance with the approved programme and budgets and with due regard to polices and regulations laid down by the Board. The Department may take up from time to time special studies, particularly with reference to cost reduction, economies in administration and other overhead expenditure and such other areas which have bearing on profitability of the company. xiv) furnishing the management prospective costs of the products to enable the management to determine the optimum product etc.
4
xv)
preparation of the following reports: a) Resources employed. b) Summary of the cash flow for the quarter. c) Forecast of the cash flow for the next quarter
Project Management
d) Capital expenditure incurred during the quarter compared with sanctioned amount, budget estimates, etc. e) Profit and loss account for the quarter f) Ratios of (i) overheads to sales, (ii) stocks to sales, (iii) debtors to sales, (iv) capital employed to sales. g) Expenditure on special items of overhead. h) Cost of production of items completed during the period together with variations, if any with standards established. i) Any other report prescribed by the undertaking relating to financial and cost matters.
Investment Management Investment proposals for the establishments of new units and for the expansion of existing units emanate either from the Ministries and the Departments of the Government or from the enterprises proposing expansion and growth. The broad nature of investment is determined by the priorities indicated in the national plan. The Government exercises a measure of control on the size and pattern of investment in PEs by reserving to itself the power to approve capital outlays exceeding certain financial limits. It also exercises control over such investments through scrutiny and approval of the annual capital budgets of the concerned enterprises. Past three years have shown as increasing trend in the outgo from the union Budget to PSUs. The outgo for the year 2002-03 Rs.135559.72 crore and was more as compared to 2001-02. Working Capital Management The management of working capital in these enterprises poses problems both the respect of individual components of current assets and the volume and maturity of current liabilities. These enterprises do not have a well-defined policy in regard to the working capital management. The working capital requirements of the PEs are generally met through cash credits and advances arranged with the State Bank of India and other Nationalised Banks. The total amount guaranteed during 2002-03 decreased substantially by 15.57 per cent as compared to be previous year but when compared to 2000-01 it had increased by 7.68 per cent.
Organisation Table and Management
17.1 : Guarantees Given by Central Government (Rupees in crore)

Amount Guaranteed During 2000-01 2001-02 1747.80 2002-03 2032.10 1426.13 Guaranteed Amount Outstanding As on March 31, 2003
Guarantees
1. Cash Credit from State Bank of India (SBI) and other Nationalised Banks. 2. Loans from other sources 3. Letter of Credit Open by SBI in respect of imports 4. Payment obligations under agreements with foreign consultants or contractors Total
1580.65
8442.75 2297.35
8677.07 12552.84 1326.73 481.36
16310.36 553.48
2041.11
6563.27
397.84
704.72
14361.86
18314.87 15464.14
19004.72
Source: http:/www.cagindia.org (2004)
Financing decisions occupy a key place in financial management of PEs. The Government as the owner of PEs has contributed a major share in the investments on these enterprises. As per the audit reviewed accounts of 276 PSUs, the equity investment of the Government of India and loans given to them amounted to Rs.1,03,388,.56 crore and Rs.72,478,.50 crore respective. The details are given in Table 17.2
Table 17.2 : Investment in Central Government Companies and Corporations (Rupees in crore) Source As on March 31, 2003 Equity Central Government Central Government companies/corporations State Governments/ State Governments companies/ corporations Financial Institutions/ others Total Percentage of Central Government Investment 103388.56 13141.45 Loans 72478.50 11246.42 Total 175867.06 24387.87 As on March 31, 2002 Equity 97533.55 11529.45 Loans 76596.44 11737.94 Total 174129.99 23267.39
2624.48
6667.08
9291.56
2411.75
5154.14
7565.89
3687.67
158292.65
161980.32
2831.27
132774.95
135606.22
122842.16 84.16
248684.65 29.14
371526.81 47.34
114306.02 2226263.47 85.33 33.85
340569.49 51.13
Source: http:/www.cagindia.org (2004) 6
Project Management PEs have evolved over the years systems and procedures to manage the investments in inventories, sundry debtors, loans and advances, and cash and short term securities. Similarly, current liabilities as a component of sources of funds have started receiving comparatively greater attention. Despite these welcome changes, there has been no perceptible change in the locking up of funds in working capital. On average current assets exceed about six months turnover and the net working capital (excluding funds obtained to finance working capital requirements of the Food Corporation of India) constitutes about three months turnover. Some of the contributory factors to the exceed build-up of working capital include its slow transmutation, unfavourable credit management, absence of motivation to reduce investment in different components of working capital and lack of awareness concerning the current techniques of working capital management.
Finance and Capitalisation The capital structure in PEs is formulated on the basis of 1:1 debt equity mix suggested by the Government of India in 1961. Such a mix has been vehemently opposed by PE Managers. The committee on Public Undertakings and the administrative Reforms Commission lent their support to the contention of managers. Those who support the Government policy argue that differentiating between equity and loans is immaterial in the case of PEs as both the dividend and interest are a transfer entry. This argument does not stand ground when PEs approach the capital and financial markets for raising bonds and public deposits. Moreover, this argument is based against the basic principle of financial motivation to optimize the capital structure. The dependence of PEs on the Government financing is almost total. In the face of challenges place before PEs, it is only a matter of time that they would be required to reduce considerably their dependence on the government. As a result, they would have to approach the capital markets in future constantly. Financial Controls Financial controls include internal audit, budgeting and financial reporting systems. Internal audit is a weak link in the chain of financial controls in PEs. According to Section 619 of the Companies Act, 1956, a Government company should make available its accounts to the Comptroller and Auditor General of India for his review. The Comptroller and Auditor General of India in his audit reports on PEs has always held the view that PEs should strengthen their internal audit. However, the progress in this regard has been inadequate. Among other things, the absence of internal audit manuals, inadequate staffing and lack of expertise have hampered the quality of internal audit in PEs. The internal audit team comprises of experts mostly from accounting and finance area. This activity should be carried out by an interdisciplinary team of economists, engineers, management experts and finance and accounting personnel. In large enterprises internal audit often does not commensurate with their size. The Steel authority of India Ltd., Maruti Udyog Ltd., Indian Rare Earths Ltd., State Trading Corporation, Heavy Engineering Corporation and the Indian Tourism Corporation could be cited as cases in point.
17.4 RELEVANCE OF MARKETING TO PUBLIC ENTERPRISES

In the early stages of planned economic development, PEs, by way of engaging them in such activities which are of strategic importance, where the gestation periods are longer coupled with heavy investment, were used as instruments of economic development. Of late, however, one may find that PEs are also engaged in activities where heavy competition exists. There has been a gradual shift from investment in the manufacture of capital goods to the manufacture of consumer goods which are
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Organisation and normally in a competitive environment. At present one would find that competition Management not only emerges from private sector but also from within public enterprises. Examples are both in capital equipment, machine tools and also in consumer goods, electronic goods.
Further from various published literature on performance of some of the central PEs, it would be clear that though these PEs were once upon a time in a monopoly situation, over a period of time due to changed economic and political environment, have been pushed into a competitive environment. It may be useful to review the growth cycle concept. This concept emphasizes that over a period of time., PEs may have to shift from sheltered phase to self propelling phase through an intermediary phase called supportive phase. The sheltered phase is characterised by greater dependence on government for its performance, the supportive phase is characterised by the fact that the enterprise strives to survive on its own, whereas the self-propelling phase is characterised by total independence of the enterprise by developing within itself competitive capabilities for its own survival and growth and also contributing to the Nations productivity by way of generating surpluses. At the juncture of transformation from sheltered to supportive phase, marketing becomes more relevant since at this stage enterprises become more conscious of cost effectiveness and efficient functioning of the organsiation in more and more competitive environment. Marketing plays a dynamic role in stimulating output and consumption, the essential of economic development. On the one hand, it creates and activates new demand by improving and transforming product or processes and generating new customers and needs. On the other hand, it also guides enterprises to new production opportunities and encourages innovation and improvement in response to demand and prices. It is the most important multiplier of economic development. In the marketing management of PEs, conceiving right deserves priority attention. One has to view the problem not as a series of specialised activities and related to product mix, but as a continuous thought process, moulding of the present situation with the desired forms of the future. A fair match between the capital and output would deliver the goods to the public at large, even at the desired time and at affordable prices. Such arrangement would pave avenues for profit generation and welfare channelisation. In the context of the above analysis, let us now study various aspects of marketing as applicable to PEs.
17.5 MARKETING CONCEPTS IN PUBLIC ENTERPRISES

Public enterprises are complex organisations. They have many facets they can be seen as economic entities, administrative systems or political configurations operating a wide range of business settings. They are exposed to turbulent environments both internally and externally and therefore, present challenging tasks. The experience in the functioning of PEs has adequately demonstrated that the social purpose cannot be adequately achieved unless the functioning of the organsiation as an enterprise is successful and generates adequate returns on the investment. In order to cope with the ever-changing techno-economic environment PEs have to rely on the marketing concept. The process of marketing is mainly concerned with the exploration, analysis of consumer wants and meeting them. The marketing concept refers tot the basic philosophy of marketing. In order to be a successful enterprise, a PEs marketing philosophy must emphasie (1) customer needs and desires, (2) goal achievement, (3) societal requirements, and (4) a systems approach,. Essentially, the marketing philosophy revolves round the customer and customer satisfaction. The philosophy
8
Project Management underscores that an enterprises policies should stem from the customers needs. In understanding and implementing the Marketing concept, it is not simply enough that it has got the top management support and approval, but the concept should be communicated to every nook and corner of a PE. The entire PE must be viewed as a customer creating and customer satisfying organisation.
Business Definition On most of the occasions, it is rather difficult to define an enterprises business in precise terms. While doing so, many enterprises tend to become myopic and place heavy emphasis on the products and markets they presently serve. In the everchanging world of technology and consumer needs, the myopic view would make the enterprise outdated and obsolete. In order to exploit the opportunities that future would usher in, an enterprise has to define its business in its broadest possible sense. Having established a few decades back, each PE may reassess its own character of the business and redefine on the basis of strengths gathered over time. This vision would add very much needed vigour and strength to the management of PEs. Target Market It would be a complicated situation if a PE without an eye on the target market, gets established and continues to produce merely on the basis of servicing social commitments. Each and every PE has to have its clear target group distinguished from the mass market which is likely to be most heterogeneous in character. It is important to see that a marketing strategy focuses on some target customers, with a view to develop a more satisfying and profitable marketing mix one that will give the enterprise a differential advantage over its competitors. Marketing Mix Consists of Marketing mix commonly known as 4P mix, product mix price-mix, place-mix and promotion-mix, which are now discussed in brief in the context of PEs. Product-mix In the PEs, we find inclusion of a number of infrastructural industries, services, trade and utility undertakings. All these contribute a lot to the production factor. Peter Drucker opines that Marketing might by itself goes far towards changing the entire economic tone by the existing system without any change in the methods of production, distribution of population or income. The PEs have full support of government and therefore these enterprises have good scope to modify their policy decision in order that the product line has a correlation with customer orientation. The infrastructural industries such as machine manufacturing industries face all sorts of difficulties, specially while excelling the global competition. The industrially advanced countries of the world have been successful in initiating qualitative transformation, specifically through technological sophistication and therefore, their products are not only superior in quality but also affordable to the industrial users or prospects. In the utility undertakings, we find communication, transportation, electric and water services. For example in the case of rail transportation the product-mix decision with regard to quality of locomotives, quality of coaches and wagons need special treatment. In the services sector, we find services like banking, insurance, consultancy, tourism etc. These services one way or the other directly related to the social welfare. In the banking sector, for example, the product-mix decisions with regard to expansion of credit facilities, simplification of loan-granting processes and repayment modes need special attention. 9
Organisation and Place-mix (Distribution Channel): PEs are engaged in providing variety of goods Management and services to different customers and the type of channel varies across the type of PEs.
The PEs marketing consumer on durables such as bread and bulbs need to have an intensive channel network, which means that all the points of purchase have to be adequately stocked with the products. Since a number of alternative brands are available to the consumer, there is a problem of consumer shifting his/her loyalty in case of non-availability of the particular brand. In the case of PEs marketing consumer durables such as automobiles, refrigerators etc., there is a need for having selective distribution system. The products may be marketed through the showrooms set-up by PEs themselves or they may distribute through a dealer network. While adopting dealer network some aspects such as (1) differential advantage of proximity of customers, (2) strategic deployment of stores in terms of market coverage, area potential, competition, and (3) efficiency in handling customers etc, are required to be considered for success in distribution. For the PEs marketing industrial products, it is necessary to have sound personal selling. By and large, these PEs have to employ direct distribution or at the most with an agent in between the PE and the buyer. In India, the economic activities are centralised in and around the metropolitan cities and so majority of the wholesale trade is found in these major cities. Eighty per cent of our population live in the rural areas, PEs are required to take lead and establishe retail and wholesale outlets in the rural areas for different products. In these cases, to overcome the problem of economies of investment and rate of return, multipurpose distribution centres, as adopted by Indian Oil Corporation, may be followed. Indian Oil Corporation not only sell petroleum products at the petrol pumps, but also cater to the farm requirement by making available items like fertilizers, pesticides, quality seeds etc. Besides this, the PEs are required to make available, other essential commodities like steel, cement etc., with a scientific transport and storage system in the rural areas. Price-mix: The most paradoxical aspect is the pricing management in PEs. The mounting social costs have been affecting the pricing decisions of PEs resulting from which one finds problems like cost-price-squeeze, decelerating rate of productivity and profitability, growing cases of sickness etc. Hansan says, The price policies pursued by PEs need to be directed by the government towards the fulfillment of certain primary economic aims viz., (a) maximum utilization of the existing stock of capital, (b) accumulation of the project rate, (c) the stimulation of certain types of consumptions at the expense of others, and the provision of the strongest possible incentives to efficiency. In the context of Indian PEs, a few other which get priority attention are: a) the principle of maximum social advantage, and b) the offering of services at subsidized prices. Pricing in public enterprises differs from that in a private enterprise in that it has a macro motivation, both conceptually and operationally. The propriety of a given price in the public sector is evaluated in terms of its inter-enterprise and inter-industry implications, such that it turns out to be good or efficient from an overall point of view. And the power to give effect to an appropriate pricing structure is derived from the governmental prerogative of giving directives to the PE managements, which is often exercised informally, without recourse to a statutory directive. Promotion-mix: It is an important aspect of marketing-mix. It is an attempt to stimulate sales by all the three sources of communication viz., personal communication, impersonal communication and persuasive communication. The 10
Project Management personal communication is personal selling, the impersonal communication is advertising and the persuasive communication is the promotional measures which induce the prospects. For improving turnover, PEs need to make suitable efforts for the designing of the promotion-mix. The personal selling or advertising has been successfully utilized by some of the leading PEs such as Hindustan Machine Tools (particularly the watch division), National Textile Corporation (NTC), seems to lack its share in PEs. In a competitive economy, the PEs, like private enterprises, have also to think or plan in favour of persuasive measures. In the rail and air services, we find these persuasive measures. Although these enterprises are in a position to expand their business without offering any incentives to the prospects or the actual users, however they do such with the ultimate aim of projecting their image.
Market Segmentation Market segmentation begins with distinguished customers needs or interests. It is the sub-dividing of a market into homogenous subsets of customers, where any of these subsets may be conceivably selected as a market target to be reached with distinct marketing mix. A large number of variables, including geographic variable and buyer behaviour variables can be employed market segmentation. The other variable employed in marketing strategy is the benefit segmentation variables, in which buyers are sub-divided relation to various benefits that they are seeking from a particular product. There are different approaches a PE might choose to play after successful segmentation. One alternative is to have one product and one marketing mix for all segments referred to as undifferentiated marketing. It may also have one product with several mixes for the relevant segments, called as particularized marketing. Concentrated marketing involves one or few products and one mix for open segment. Another strategy may be to employ differentiated marketing which consists of several products and several mixes aimed towards a number of differentiated market segments. Marketing Research Marketing Research is identified as the systematic collection, analysis and interpretation of marketing information within a specific organisation for the purpose of marketing planning, control and problem solving. Marketing research improves the quality of marketing decisions and the organizations interaction with its environment. Marketing research plays an important role in PEs. As already discussed, a PE may be defined as a government owned organisation which serves specific public interests through the economic activity of production and or marketing of goods and services. In addition, PEs are differentiated from governmental units in that PE operations involve the investment and use of funds on which a return is expected, which means commercial accounting is imposed on PEs. In building marketing strategy, which houses strategic elements concerning marketing mix, product, price place (distribution), promotion, power and public relations PEs need to rely on efficient marketing information system.
17.6 PRODUCTION SYSTEM

Production is a vital system of any manufacturing organisation. A system as you might know, is a composite of equipment, skills and techniques capable of performing an operational role. The operational role entrusted to production system is to produce 11
Organisation and goods of economic value which may be capital goods or consumer durables or Management consumption items. Another aspect of a system is the existence of two or more components or sub-systems which are interacting, interdependent and interrelated. Together they constitute a system which is a composite whole.
The components of a production system are men, materials, machines and methods. The methods include technology and techniques. The main sub-systems of a production systems are: (i) Production planning and control, (ii) Materials procurement and inventory control including warehousing and transportation management, (iii) Quality, (iv) Maintenance management, (v) Energy management, (vi) Safety management and house-keeping, and (vii) Research and Development.
17.7 PRODUCTION MANAGEMENT IN PUBLIC ENTERPRISES

The 67 Report of the Committee on Public Undertaking; (CPU) which was submitted to the Fourth Lok Sabha discussed at length various production-related problems of public undertakings. This report, entitled Production Management in Public Undertakings, pinpoints main problems as under utilization of capacities, lack of cost and quality consciousness and neglect of preventive maintenance. Since the resources are invested in public enterprises towards creating productive capacities, it is necessary to ensure optimum utilization of these capacities. Low capacity utilization has been a prominent feature of PEs in the country. Table 17.3 highlights the extent of capacity utilization in percentage in PEs.
Table 17.3 : Capacity Utilisation in Public Enterprises Capacity utilization in percentage 2000-01 0-50 50-100 More than 100 Total 3 20 10 33 No. of Public Enterprises 2001-02 4 22 9 35 2002-03 2 19 13 34
th
Source: http://www.cagindia.com (2004)
How to Improve Capacity Utilization? Capacity utilization is not merely a measure of performance, but it must be realized that better capacity utilization is an important way to improve overall performance of the PEs. The main factors affecting capacity utilization in PEs are defects in capacity planning, power constraints, infrastructural bottlenecks, raw material shortages, marketing problems, poor maintenance and managerial shortcomings. The government and the managements of the enterprises concerned have initiated several measures to improve the capacity utilization. These include modernization of plants and upgradation of technology, change in product-mix, provision of balancing facilities, training and manpower development, export promotion, streamlining the systems and procedures, better maintenance of machinery and equipment, use of Operational Research and Industrial Engineering techniques, development of ancillary units, linkages and tie-ups with suppliers and markets, increasing productivity through better industrial relations and incentive schemes, improvement in managerial and operational
12
Project Management efficiency and strengthening of participative mechanism at all levels. A few other measures towards better utilization of capacity are banning of imports when indigenous capacity has been created, simplification of procedures for import of essential spares, components and raw materials as also capital goods, and timely provision of funds including foreign exchange required for diversification of procedures for import of essential spares, components and raw materials as also capital goods, and timely provision of funds including foreign exchange required for diversification, modernization or rehabilitation. Another measure to improve public enterprise performance in all operational areas is ensuring continuity in top management and giving them sufficient autonomy and powers. The government should closely monitor and review the PE performance, but the administrative ministries should not unnecessarily interfere with the operational management of the enterprises under their control. Since the enterprises differ vastly in their nature, operations as also their situation, the government or its agencies such as Bureau of Public Enterprises (BPE) should provide only broad guidelines. Flexibility should be considered as a desirable feature and entrepreneurship should be encouraged. System approach is useful in cost control because the control of the total cost clearly depends upon the control of the individual components of cost. The right approach to cost reduction is through value analysis (also called value engineering). It is an organised effort to identify unnecessary costs. The technique enables the undertaking to enhance the value or utility of its products with a little or no addition to its costs or reduce the costs without bringing down the value of the products in any manner. Efficient and accurate system of cost accounting and cost control are the hallmark of a good management. All PEs should make concerted efforts to bring down the cost of production to a fair level by setting right deficiencies, if any, in organisations and developing cost consciousness at various level of management. Stated CPU in its 69th Report to the 4th Lok Sabha. It had also recommended introduction of physical norms for raw material consumption.
Role of Industrial Engineering Industrial engineering is one of the fastest growing fields of applied knowledge which offers tremendous scope for application in public enterprises. It essentially aims at improving the productive efficiency in industrial undertakings and covers quite a broad area. Work study and systems engineering are important constituents of industrial engineering. Management Information System (MIS) also broadly comes under the purview of industrial engineering. Work study deals with the problems of how a particular job should be done (method study) and also how much time a job should take for completion (work measurement). Systems Engineering is the process of developing large scale and complex man-machine systems for successful integration of operations. MIS is both a decision-aid and a management control tool and helps in achieving better coordination among different functional areas, management levels and operating divisions. Industrial engineering can also help the managements of public enterprises in improving the production planning and scheduling, introduction of appropriate incentive schemes, elimination of wastage and simplification of procedures. It is essentially a fact-finding and problem solving discipline and PE managements can gain immensely by making full use of this staff function. The CPU recommended that Industrial engineering departments in the PEs should be strengthened and account social overhead and multiplicity of objectives, there cannot be any concessions with regard to productivity and production targets. There is a great need for improving capacity utilization in our public enterprises. There is also an urgent necessity to bring down inventory levels and improve plant maintenance. All these call for proper systems and conscious effort by management and workforce. Production function needs to be effectively integrated with overall framework of the organisation, its goals and objective and it should be given its due importance in the Public Enterprise set-up so as to achieve excellent operating results.
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Organisation and Materials Management Management
Materials constitute vital input in any production process. Materials Management covers are aspects of materials function including materials planning sourcing, vendor rating and vendor development, purchasing, inventory control, receipt and inspection of raw material, components and sub-assemblies, store keeping, materials issue and accounting, management of spares, disposal of scrap and surplus, packaging and is patch of finished goods etc. Some critical aspects of materials function with special reference to India PEs are as follows: Materials Planning: It involves estimating the requirement in terms of quantities and timing of various materials components and stores. For efficient functioning of materials department, proper coordination with production and marketing departments is very essential. Materials function also has a very close interface with finance and quality functions. Purchasing: The purchasing wing of materials management department is responsible for the efficient and economic purchases to meet the materials requirement of the enterprise in all its complexity. The purchasing should aim at procuring right materials of the right quality and in right quantities at the right time, at the right price and from the right source. Inventory Management: It covers many aspects of materials function such as fixing higher and lowr stocking limit for each item, determining its EOQ, calculating the reorder levels and establishing lead times. Inventories are an indispensable part of operating cycle of all manufacturing organisations. Inventory management can be the key to the success or failure of a manufacturing firm because excess inventory holding leads to excessive carring cost on account of interest, storage and handling charges etc. Therefore, it is necessary for the PEs to maintain a certain optimum level of inventory. Though the optimum level of inventory varies from industry to industry, generally it is considered that the value of inventory as a percentage of annual consumption should not exeed 33 per cent and the value of finished goods to net sales might be about one months sale, 8.33 per cent. At various levels (in percentage) in some PEs.
Table 17.4 : Holding of Inventory at Various Levels (in percentage) in PEs Ratio of inventory of Raw Materials to consumption of Raw Materials (No. of PEs) 105 7 22 Ratio of inventory of stores and spares of consumption of stores and spares (No. of PEs) 22 17 123
Percentage of Inventory
0-33 33-50 More than 50 Source: http://www.cagindia.org (2004)
In around 115 PEs, the value of surplus, obsolete and non-moving inventory as on March 31, 2003 was RS.367.82 crore in 46 PEs, Rs.689.63 crore in 44 PEs and Rs.1743.30 crore in 77 PEs respectively.
14
Activity
Project Management
Name one example each of infrastructural enterprises, utility undertakings and service sectors and suggest ways of modifying their product mix. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. ..............................................................................................................................
17.8 SUMMARY
Financial Management is an important component of the total management process in PEs. The finance objective in PEs may swing between the retention of net worth to its maximization. These enterprises however, do not lay down their finance objectives normally. PEs discern the trend to develop suitable organisation for their finance function. The state of the art financial management in PEs shows that they have to go a long way to tone up their financial functioning. There is an immense scope to economise on the front of fixed assets and working capital. There is a need to strengthen the financial control mechanisms. The approach to financing and capitalization need a new orientation. Like finance, marketing is inevitable to public enterprises in India. In order to effectively sub serve the purpose of public Enterprise, each public enterprise must be viewed as a customer creating and customer satisfying organism. In this unit various dimensions of marketing management have been discussed. The Government and the people of India have made huge investments in the production systems of the public enterprises, thus creating valuable social assets. These social assets must perform well and transform input resources into higher values outputs more efficiently. Production function needs to be effectively integrate within the framework of the organisaton.

1. 2. 3. Discuss the process by which we can set the finance objective for PEs in different categories. Critically evaluate the working of finance function in PEs Try to develop marketing concept for the following: a) Road Transport Corporations b) State Electricity Boards c) Municipal Corporation 4. Having understood the concept of marketing-mix try to develop marketing mix, strategy for the following: a) Tourism and Development Corporation b) State Financial Corporation c) Transport Organisation 6) Identify the various factors which influence/affect capacity utilization in PEs
15

Buffa, Elwood S. (1988), Modern Production/Operations Management, Wiley Eastern Limited, New Delhi. Chakraborty, S.K. etal (1981), Financial Management and Control, Chapter 14, Macmillan, Delhi. Chandra, Prasanna, (2001), Financial Management, Tata McGraw-Hill, Delhi Jerona, McCarthy, E., (1981), Basic Marketing a Managerial Approach, HomeWood III; Richar D. Irwin. Narain, Laxmi (1989). Principles and Practice of Public Enterprise Management (3rd Edition), S. Chand & Company Ltd., New Delhi Mishra, R.K., & Kar N.N., Nandagopal R. (1989). Financing of Public Enterprises in Indian, Public Enterprise, Vol 9 No.1 Ljubljana. Monka, Joseph G. (1985) Operations Management Theory and Problems. McGraw-Hill Book Company, New Delhi. Neela Megham, S., Marketing Management An Indian Environment, Vikas, Publication, Delhi. Philip J. Kotler. (200). Principles of Marketing, Prentice-Hall, Englewood Cliffs, U.S. htpp:/www.cagindia.org (2004)
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UNIT 18 CONCEPT, POLICY AND DIMENSIONS

Objectives After studying this unit you should be able to: ! ! ! ! Define the term privatisation and what it entails; List out the policy objectives of privatisation as adopted by countries; Distinguish between non-divestment and disinvestment options; List out the various methods of disinvestments and their advantages/ disadvantages.
Implications of Disinvestment
Structure 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 Concept of Privatisation Policy of Privatisation Dimension of Privatisation Forms of Disinvestment Summary Self Assessment Questions References Further Readings
18.1 CONCEPT OF PRIVATISATION

Privatisation appeared only in the 1980s, as a result of intensive scrutiny of the role of the state-owned enterprises (SOEs) in developed and developing countries. Many policy makers were disenchanted with the fact that a large number of public enterprises were making losses. The SOE sector had absorbed a large share of governments budgets in the form of subsidies and capital flows. Governments ran into severe financial problems in the 1980s and experienced inability to raise loans at home and abroad. This forced them to look at radical options for turning around SOE performance. These consisted of two major instruments: (1) SOE reform and (2) Privatisation. These were also insisted upon as conditionalities by the International lending institutions such as the International Monetary Fund and the World Bank. The market inefficiency of the publicly-owned enterprises, the problems of monitoring them as well as the cost of maintaining them under public ownership lend urgency to change their ownership to the private sector. Some other reasons are (1) shifting development theory, (2) ideologies in the face of SOE losses, (3) collapse of communism in Eastern Europe and former Soviet Union, and (4) some successes of early privatisation such as the experience of UK. Fiscal crises have also led governments to privatise, to stem losses and raise revenue, especially in the face of increasing public debt. Governments have also opted for privatisation, because of their inability to finance needed investments in SOEs. Finally, the initial reasons for state ownership have disappeared; technology and growth have introduced competition requiring entrepreneurship; the capacity of governments to curb excesses of multinationals etc. have also contributed to the move towards privatisation. Economists have generally held the view that private ownership of the means of production would be better in terms of economic efficiency than public ownership and public management. Ownership of a firm entails changes in property rights and this, in turn, significantly affects the behaviour and performance of the firm
1
Privatisation and Disinvestment
by altering the structure of incentives for decision-makers in the firm. Thus, under private ownership, rewards could be linked to the companys share price via share ownership or share option schemes and poor performance could be penalized by threat of take-over by another firm. Change in ownership per se can affect economic performance, all other things being equal. By reducing the number of principals to a single owner, whose overriding objective is to maximise profits, privatisation greatly simplifies the principalagent problem and creates potential gains. Allocative efficiency as well as internal efficiency increases with competition. Private ownership has been found to be most efficient - hence privatisation is most suitable - in markets where effective (actual or potential) competition prevails. (Refer Vickers and Yarrow, 1988). Where there are massive economies of scale and scope, high entry barriers or externalities, private ownership performs poorly. The incentive and opportunity to exploit consumers threatens allocative efficiency and the lack of competitive benchmarks leads to internal inefficiency and slack. Thus, privatisation is appropriate where private ownership works best, viz. where is there sufficient competition and suitable regulation. Privatisation does not mean that the State has no role to play in industrial development. The State has an important role to play in creating market conditions for proper and effective functioning of the enterprises and installing a regulatory regime which will ensure that industries function in a fair manner and until- competition becomes effective - fostering competition to increase efficiency and reduce cost. Privatisation involves transfer of three kinds of rights from the State to the private sector: ownership rights, operating rights and development rights. Depending on the form of privatisation chosen, the private sector may acquire any one of these rights or a combination of them. Transfer of operating rights may or may not include a transfer of financial risk. For instance, where a management contract transfers operating rights to the private operator, it does not involve any financial risk for the latter. Should the enterprise fail to make a profit, it is the State which picks up the losses. Corporatization, depending on the terms involved, may relieve the State of both the operating rights and financial risk. An operating concession transfers both operating and development rights, and consequently any financial or investment risk, to the private sector operator. In build-own-transfer schemes, the State transfers development and operating rights (until the asset reverts to the State), including investment and financial risks, to the private sector. Leases are sometimes also designed to transfer both operating and development rights, resulting in enhancement of the existing assets. Buildown-operate schemes entail transfer of ownership, operating and developing rights to the private sector. On the other hand, build-transfer schemes only give the private sector development rights. Privatisation could, therefore, be defined as the transfer of ownership, operating and/development rights from the public to the private sector; and the application of private sector objectives and disciplines in the operation and management of public enterprises, combined in most cases with the transfer of commercial and financial risks to their management. Privatisation has been known to have numerous nomenclatures. In India and Pakistan, privatisation is called disinvestment; while in Sri Lanka; it has been termed peoplisation. In the United Kingdom, this concept came to be known as popular capitalism. Chiles attempts in this direction has been labelled denationalisation. Other variants are prioritisation in Australia, industrial transition in Brazil, economic democratisation in Costa Rica, partners in
development in Egypt, dis-incorporation in Mexico; assets sales programme in New Zealand, transformation in Thailand and restructuring in Tunisia.Terms such as divestment and divestiture are also used to describe disinvestment. In simple terms, the term disinvestment of public sector enterprises would mean sale of up to 49% of government equity, while privatisation would mean sale of 51% or more of government equity.
18.2 POLICY OF PRIVATISATION

The policy objectives and motives for privatisation have varied with countries and with time. While the motive in industrialised countries in the 1980s could be described as ideological, that in the developing countries was linked to the macroeconomic burden of the Public Sector deficit. In the case of ex-socialist countries, privatisation viewed as an integral element in the process of transition from a centrally planned economy to a market-oriented economy. In the highly centralised states in Eastern Europe and the former Soviet Union, where the state sector accounted for nearly 70 percent or more of GDP, privatisation was instrumental in creating a market economy. In most transitional economies in Asia, where the non-state sector remained a significant component of GDP, privatisation is a method of developing and strengthening the private sector. Objectives of privatisation have been almost similar across all countries in as much as they centre around the benefits to be obtained from rebalancing the relative roles of the public and private sectors in order to increase the economic efficiency and productive power of the economy. All of them have believed that the private sector enterprise has more vitality than the public sector and that resources would be put to better productive use if they are transferred to the private sector and made subject to market incentives and discipline. In many countries, especially countries in transition, this has meant a significant change in strategies for economic growth and development. However, specific reasons for privatisation vary with each nation, depending on the nature of the political set-up, level of development, growth of capital market, political ideology, and special features such as nature of social compulsions. Objectives of privatisation have been dictated by fiscal, social or a combination of several factors, depending on local priorities. The following are the objectives of privatisation in countries which have so far taken up the privatisation programme:a) to promote economic efficiency by fostering well-functioning markets and competition; b) to redefine the role of the State in order to allow it to concentrate on the essential task of governing and to withdraw from activities which are better suited to private enterprise, where original objectives of a public enterprise are fully achieved or are no longer valid due to technological advancement or to eliminate unfair competition with private enterprises; c) to reduce the fiscal burden of loss-making public enterprises, in order to help regain fiscal control and macroeconomic stability; d) to reduce public debt; e) to release limited State resources for the financing of other demands, for example, in the area of education. (f) to generate new investment, including foreign investment;
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g) to mobilise domestic resources for development, and deepen domestic financial development; and h) to spread and democratise share ownership by encouraging share ownership by individuals, making employees share-owners and by raising productivity through incentives for holding stock. (UNCTAD, 1995). Promoting Economic Efficiency Private sector ownership could increase economic efficiency by exposure of management and labour to market incentives and allow decisions on resource allocations to be determined by private sector responses to relative price signals. In well-functioning markets, relative prices give signals regarding the relative scarcity or abundance of various resources, and about the needs of consumers and other users of products and services. This leads to efficient allocation of scarce resources and thus serves the objective of economic efficiency. Competition and Regulation are also necessary to achieve efficiency gains. In case public enterprises are functioning in non-competitive markets, competition or even threat of competition could be introduced to effect efficiency. (example: Telecommunications industry in the U.K., Malaysia and Singapore). Where competition is not possible or desirable, regulation by an independent regulatory authority would be needed to assume the role of surrogate competition and bring about needed efficiency (example: Chile and the UK). Redefining the Role of the State The relative roles of the public and private sectors have to be rebalanced so that the State can concentrate on its core functions, such as ensuring order and security and providing efficient public services, including essential infrastructure, education and social protection and the promotion of well-functioning markets, while leaving the running of the enterprises to the private sector. This calls for ideological commitment on the role of the State, and this may not be forthcoming in many countries on account of its political ramifications. In countries where the State continues to be sole or majority shareholder in public enterprises, governments enter into contract with the enterprises setting out performance targets and allow them operational and functional autonomy. Reduction of Fiscal Burden In many countries, one of the important objectives of privatisation has been to reduce the financial burden of loss-making state owned enterprises in order to help regain fiscal control and macroeconomic stability. These financial burdens have often been found to be responsible for monetary instability and macroeconomic imbalances in many countries, whatever be their level of economic development. Reduction of Public Debt Privatisation serves to reduce public debt and associated fiscal burdens of debt service with the aid of financial resources mobilised through sales of government equity. Debt reduction can, by contributing to healthier public finances, allow more capital to be made available at lower cost for private investment, thus promoting private sector-led growth. Release of State Resources By reducing the fiscal burdens of loss-making enterprises and by reducing the level of public debt servicing, privatisation enables the State to release the limited resources for priority areas such as projects for reduction of poverty.
Generating New Investment New investment, particularly foreign investment brings in new technology and management skills, as well as new partners and their access to better and profitable markets. This has been the main objective of privatisation in developing countries of Asia and Africa. Privatisation frees the enterprise from budgetary constraints and political interference from the State, allows it to raise private capital and enter into alliances with strategic partners. Mobilising Domestic Resources Privatisation could also serve to mobilise domestic resources for development that have hitherto been untapped. In some countries ( for example, Argentina) privatisation programmes have succeeded in bringing back domestic investment which had earlier been driven abroad by factors such as macroeconomic instability and excessive state intervention in the economy. These resources have been in the form of financial capital, entrepreneurial talent and other human resources. The success achieved by the UK privatisation programme in tapping domestic resources has been an object lesson for many developing countries. Spread and Democratise Share Ownership Privatisation has been known to help spread and democratise share ownership by allocation of a proportion of shares to small investors and to employees and creation of a new group of stakeholders in the well-being of the national economy. This has been the objective behind the voucher or mass privatisation in transitional economies of Europe. It is an intermediate objective which serves to further wider political and economic objectives in as much as it helps to mobilise domestic resources for investment which might otherwise be held in nonproductive forms. This also helps demonstrate that privatisation need not necessarily mean providing of benefits to large foreign companies. Giving employees a stake in the success of their enterprises can bring about changes in labour attitudes, improve labour-management relations and enhance productivity. Employees have stood to gain substantially in privatisation programme in the UK, and many of them became very wealthy individuals.
18.3 DIMENSION OF PRIVATISATION

Privatisation is to be understood not merely in the structured sense of who owns an enterprise, but in the substantive sense of how far the operations of an enterprise is brought within the discipline of market forces through measures such as liberalisation and deregulation. Privatisation encompasses a broad spectrum of possibilities, between denationalisation at one end and market discipline at the other. Broadly, it may consist of disinvestment and non-disinvestment options. Non-Disinvestment Options Non-disinvestment options could be viewed as an intermediate step towards ultimate sale of the enterprise by demonstrating the commercial viability of the public enterprises to be sold. They could even be important measures in themselves and could be considered as alternatives to disinvestment. Nondisinvestment options range from corporatisation to management contracts and involve removal of subsidies, as well as the exposure of the public enterprise to private sector discipline and competition. The main types of non-disinvestment options are as follows: a) Organisational, financial and operational restructuring, together with commercialisation and corporatisation;
b) Privatisation of management (management contracts, leases or concessions); c) Contracting out; and d) Joint ventures between public and private enterprises. Restructuring Restructuring means making changes in the public enterprises allowing it to operate more efficiently and/or rendering it more attractive to potential investors before divestiture takes place. Thus, the purpose of restructuring is to enhance the value of the public enterprise. Broadly, there are three kinds of restructuring: 1) Organisational and Labour Restructuring i.e. the reorganisation of the public enterprise into more rational or smaller units and any necessary labour shedding; 2) Financial Restructuring i.e. writing off excessive debts of the public enterprise; and 3) Operational Restructuring: i.e. the infusion of new investment or technology into the public enterprise. Organisational Restructuring usually involves splitting up the public enterprise Monolith into smaller units or independent companies pursuing major product lines. These units or independent companies could be allowed to stay in the same family, in which case, the monolith converts itself into a holding company with some reduction in centralised managerial behaviour. Some labour shedding may result in such restructuring. The purpose of the Organisational restructuring is to put the public enterprise on a sound financial and commercial footing, and to increase the net worth or sales value of the public enterprise (example: France, the Netherlands and New Zealand). Financial Restructuring concerns the treatment of the debts of the enterprise. It allows an enterprise saddled with accumulated losses to clean up its balance sheet. If disinvestment is contemplated, financial restructuring prior to the sale can help put a public enterprise on a sound financial footing, thus enhancing its sale value. Where debt liabilities are large, the State may have no other choice but to absorb them (example: Argentina and Portugal). Operational Restructuring involves new investment in order to upgrade the enterprises physical capacity or technology. Experience has shown that where the public enterprise is to be divested, operational restructuring should be left to be undertaken by the buyer. The reason behind such a move is that the government cannot second guess what the potential buyer would do and may therefore end up doing the wrong kind of changes, leading to heavy losses. Commercialisation Commercialisation is the introduction of commercial principles and objectives into the management and operations of a public enterprise. This may involve removal of subsidies, and exposure of the public enterprise to market disciplines in addition to a hard budget constraint. Commercialisation can be achieved through contract plans or performance agreements. These are negotiated agreements between the government, acting as the owner of the public enterprise, and the public enterprise itself. The contract spells out the obligations and responsibilities, such as production goals, quality of services etc.
Corporatisation converts the public enterprise into a legally and economically independent legal person with a board of directors, while government retains its equity ownership. Corporatisation can stimulate economic efficiency, by adopting private sector accounting principles, management principles based on competition and rewards linked to performance. Privatisation of Management The aim of privatisation of management is to increase the efficiency of a public enterprise through introduction of private sector disciplines and management techniques. Some of the methods of privatising management is to grant a management contract, a lease or an operating concession to a private sector operator. This could be an end in itself or could be used as a preparation for disinvestment. Management Contracts A management contract is an agreement by which a public entity contracts with a private firm or individual for the operation of a public enterprise. Here, only operating rights (not ownership rights) are transferred to the private operator. The public entity continues to make financial provisions for the operating costs and investments. Management contracts are used especially where the government hopes to revitalise a loss-making public enterprise by introducing private sector management methods (example: Hotels in Niger and Togo, Agro-industries in Cameroon, Cote dIvore and Senegal, manufacturing industries in Ghana and plantations in Sri Lanka). Leases A lease is a contractual agreement where the owner of an asset (lessor) grants another party (lessee) the right to use the asset and to profit from it for an agreed period of time in return for payment of rent. Leasing can take many forms, the main being operating leases, financial or capital leases and sale and leaseback agreements. In the operating lease, the lessor is generally required to maintain and service the leased assets and the lessee has a right to cancel the lease before the expiry of the lease agreement. Financial or capital leases do not ordinarily provide for maintenance service by the lessor; they transfer the risk and benefit of ownership and have a longer duration. Under a sale and leaseback arrangement, a firm that owns fixed assets, sells them to another party and simultaneously executes an agreement to lease the property back from the buyer for a given period. In this way, the seller not only receives the purchase price but retains the use of the assets. Leasing can bring new technical and managerial skills to the enterprise, allowing its assets to be used more efficiently. It may also be a feasible alternative where it is politically difficult to divest a public enterprise. Though leasing, Government sheds the responsibility of operating the enterprises along with risks involved but retains ownership (example: Electricity supply and water supply in Cote dIvore and Guinea; road transport in Niger, mining operations in Guinea, port management in Nigeria, steel mills and refineries in Togo, manufacturing industries in Ghana, and hotels in Cote dIvore and Niger). Concession Concession involves the transfer of operating and development rights to a private operator by the State. The State can grant concessions directly or through the public enterprises. Unlike leases, the holder of a concession has responsibility for capital expenditures and investments. Consequently, this method has been preferred by many governments (example: Argentina).
Contracting Out In contracting out, a public authority contracts a private firm to perform some specific service in the place of a public entity or in competition with it. This would involve decision of an enterprise to acquire an input from outside sources instead of producing it itself (e.g. promotion of ancillary units to produce spare parts). Contracting out is a form of operating concession. It may be used when disinvestment is not desirable or feasible for political or economic reasons. Contracting out has proved to be an important method of privatising social services. It has been mainly used in the USA where advantages of reduced cost have been noticed. Joint Ventures Joint ventures could be defined as an association of two or more natural persons or legal entities collaborating in an enterprise and sharing the risks and benefits of the joint venture. A joint venture agreement defines the business relationship between the partners. This partnership usually involves a foreign partner who may provide the capital and the know-how. Joint ventures have been found to be advantageous to both the government and the private, often foreign partner. Whereas the foreign investor gains through access to local markets, government contacts, knowledge of local business conditions and lessens the risk of expropriation though participation of the host country, governments stand to gain because the public enterprise would now get access to the foreign partners international distributional networks, thus facilitating access to export markets and also access to foreign technology, capital, and management. However, joint ventures have not been used as a popular method of privatisation because the private investor often favours setting up a new venture rather than participating in an established public enterprise, especially if the latter has been unprofitable. The Jamaican government disinvested two hotels by means of joint ventures involving both foreign and local partners. Ownership Ownership measures could consist of sale of the enterprise in full or infusion of private capital through sale of government equity. The larger the private equity participation, the greater is the degree of privatisation. Disinvestment Options Disinvestment of Government equity in public enterprises could be a) Up to 49%, in which case Government could retain ownership, management and majority shareholding. b) Up to 100%, in which ownership and management could be transferred to the purchaser of majority shareholding. In many cases, especially in India, disinvestment has been done up to 74% of the equity, leaving Government with 26% of the equity. Such a disinvestment would leave management and control with the purchaser of 74% equity but it would also enable Government to have a major say in matters such as liquidation of the enterprises etc. Government could also be a majority shareholder in case other shares are widely dispensed. Disinvestment options could be politically sensitive, often creating fears of selling the family silver and of domination of foreign investors. This is especially true of countries where the domestic capital market is unable to absorb the public
Implications of Disinvestment enterprises sales without significant depression of asset values. In such circumstances, there may be a feeling that the State assets have been sold to foreigners at less than their market value. Sensitivities could also arise where it is perceived that the sales have benefited certain powerful groups of entrepreneurs or elite, sometimes close to the political powers. Unless disinvestment is handled carefully, it could be discredited and undermined.
18.4 FORMS OF DISINVESTMENT

Disinvestment could take one of the following forms: 1) By public flotation on the stock exchange, either by fixed price or by tender offer with a minimum price; 2) By a management /employee buy-out; 3) By placing with a group of strategic investors, or joint venture partners; 4) By a trade or strategic sale, in which a company is sold to a single person or a consortium; 5) By public auctions (usually for small or medium enterprises); 6) Mass or voucher privatisation; and 7) Liquidation, followed by sale of assets (usually for PEs which are not viable). Public Flotation Public sale of assets is the most usual method of sale. In an offer of sale, shares are offered to the general public at a fixed price, which is arrived at by making a valuation of the enterprise, usually with the help of financial consultants. In a tender sale, the price is fixed in response to applications themselves, and a minimum tender price is stated. In doing so, other factors such as preferential treatment, if any, to be given to small shareholders, workers, customers etc. are also taken into consideration. The advantage of the tender offer is that there is the possibility of raising the issue price to a higher level. The disadvantage is that it is often too sophisticated for the small investor, at whom the offer is aimed. There is a third alternative i.e. a combination of fixed price and tender offer, for example, in British Airports Authority, part of shares were offered at fixed price and part as tender offer, with minimum tender price equal to fixed price. The disadvantage in both fixed price flotation and tender offer is that the company needs established commercial track record prior to sale. Therefore, flotations involve long-term preparation, and privatisation, in such cases, has to be planned many years ahead. Management Buy-out Privatisers could also consider solutions such as management/employee buy-outs (MBOs) and employee stock ownership schemes (ESOPs) in order to overcome labour unions objections to privatisation. In the former, a combination of labour and management gains a controlling interest in the firm being privatised, often by means of leveraging. In the latter, a financing technique permits employees of a firm to acquire ownership of all or part of the firms stock without personal investment on their part. The stock may be a new issue or a transfer of existing assets, such as would take place in privatisation. An ESOP fund is created by borrowing from banks, and the fund is used to acquire the companys stock. Each employee participant receives an allocation of stock to a personal account, and as the ESOP loan is repaid (by the employer contribution to the plan), the plans trustees allocate to each employee his share of the total. ESOPs have, up to now, been a peculiarly an American initiative.
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Management/employee buy-out has the advantages of causing minimum disruption to the company; it is quick and involves less disclosures than a public flotation, thereby reducing the amount of preparatory work prior to sale. To be successful, a management buy-out must satisfy the following three conditions: 1) management must have experience, competence, and commitment. 2) company must have a strong cash flow from which interest payments can be met; 3) the company must have a solid asset base to secure borrowing in the capital market. Management buy-out is best suitable in the case of small privatisations. Some examples of such buy-outs are: 1) sale of Vickers shipbuilding and Engineering Limited, a subsidiary of British Shipbuilders, to management and employees, and 2) privatisation of National Bus company subsidiaries and the National Freight Corporation. Placing In a private placement, the company or a controlling stake is sold to a limited number of investors (generally institutional investors or joint venture partners). In a private or direct placement, the State negotiates the terms of the placement directly with the investor. Private placement has lower flotation costs and greater speed. This is an useful option in which the timing of the sale is an important objective. A part of a company could be placed with institutions (i.e. sold to clients of sponsoring bank), to satisfy short-term fund raising requirements, with the possibility of a public issue at a later date. It is an appropriate method of disinvestment when enterprises are not large enough to warrant a public share offering or when the public enterprises are in poor financial situation and could be turned around only by means of the transfer to the private sector investors who have the experience and know-how. The disadvantage of placing would be that the objective of wider share ownership would not be satisfied and it may be also politically unacceptable. Trade Sale Trade sale to a domestic or a foreign company is the quickest route to privatisation, as the public enterprise will not necessarily need to demonstrate commercial track record. Potential purchasers will, however, need to demonstrate commercial factors such as buying up the enterprises market share, if operating in a competitive environment or the opportunity of providing unique product or service. For overseas purchasers, this could provide opportunity to enter the otherwise closed domestic market. Where such sale takes place to an investor who is prequalified for tendering by virtue of possessing certain strengths such as new technologies, access to finance or markets or management which are required by the enterprise, this is categorized as strategic sale. This method of disinvestment would have the advantage of speed. Competitive bidding in some form is preferable to a negotiated sale for all types of disinvestment. Such bidding improves governments selling price, and creates pressures for transparent processes. Public Auctions Public auctions are normally used for small or medium-sized public enterprises which do not require technology transfers or other special inputs. This makes the
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process very transparent, and maximises the proceeds from privatisation, provided that adequate number of competing buyers can be assembled for the auction. It is for these reasons that this process is politically more appealing than other methods of privatisation such as private placement. However, auction prices may be affected by the number of persons present when a sale is made. Adequate publicity is needed before the auction to ensure the interest of competing buyers. Public auctions have been mainly used in numerous countries of Central and Eastern Europe for small privatisations such as hotels, shops, repair establishments and restaurants. Mass Privatisation Mass privatisation (also called voucher or coupon privatisation) has been widely used in the countries in transition of Central and Eastern Europe. Mass privatisation is based on the population-wide distribution of vouchers or certificates free of charge or for a nominal fee. Usually, these vouchers are distributed to all adult citizens. The rationale behind this type of privatisation is that, in these countries, ownership of assets of the means of production was considered as belonging to the people as a whole, represented by the State. In some countries, voucher holders can exchange vouchers for shares of privatised enterprises (e.g. Russia, the Czech Republic and Slovakia), whereas in some others (e.g. Poland), voucher holders use their vouchers to buy certificates issued by investment funds, but not shares of privatised enterprises directly. There are other variations of this procedure in other countries, such as whether or not vouchers are freely tradable, whether or not foreigners could participate and whether or not cash could be used in addition to vouchers. The advantage of mass privatisation lies in the speedy transfer of assets from the State to individual shareholders. Peoples capitalism has been introduced through this method, by creating wider share ownership. This creates popular support for the privatisation process and contributes to the building of broad-based consensus for privatisation. It also contributes, albeit indirectly, the development of capital markets. The disadvantage of mass privatisation is that it creates diffused control of the privatised enterprises, and lack of managerial skills. The ills of the public enterprises, such as undercapitalization, indebtedness, outdated equipment and technology, insufficient competition and poor management are not addressed through mass privatisation. Liquidation The government may wish to liquidate the public enterprise and sell its assets instead of selling it as a going concern, especially when the enterprise is not viable. Liquidation occurs mainly where it is more advantageous for the State to sell individual assets instead of the entire enterprise since its break-up value is higher than the companys current market value as a going concern or when prospective investors are not willing to buy the enterprise as a going concern. Liquidation has been used as a form of privatisation in Poland, particularly with small and medium-sized firms. Activity a) Define the term Privatisation. Illustrate your answer with recent examples. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
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b) List out three basic policy objectives in disinvestment. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... c) List out three forms of disinvestment. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
18.5 SUMMARY
Privatisation as a world wide phenomenon appeared is 80s in the process to bridge the gap between the public enterprises and private enterprises. Privatisation emerged as a means to overcome the problems related to the state owned enterprises in the developed as well as the developing nations. State owned enterprises do have a certain role to play in the privatisation process but privatisation emerged as a method of developing and strengthening the private sector. In this unit an effort has been made to discuss the different dimensions of privatisation alongwith different forms of disinvestment.

1. 2. 3. 4. What are the different policy objectives Privatisation? Discuss. How far do different methods of disinvestment help achieve the policy objectives? Privatisation is not an end in itself but a means to the end discuss. Discuss the role of state in privatisation process.
18.7 REFERENCES
Candoy-Sekse, Rebecca (1988). Techniques of Privatization of State-Owned Enterprises, Technical Paper 90, Volume III, World Bank, Washington, D.C. Galal, A., James, L., Tandon, P., and Vogelsang, I. (1994). Welfare Consequences of Selling Public Enterprises An Empirical Analysis, Oxford University Press, Oxford. Gelb, Alan and Inderjit Singh (1994). Public Enterprise reforms in Transitional Economies, Background Paper, Policy Research Department, World Bank, Washington, D.C. Hemming, R and Mansoor, A.M. (1988). Privatisation and Public Enterprises, Occasional Paper No.56, International Monetary Fund, Washington, D.C. Kikeri, S., Nellis, J., and Shelley, M. (1994). Privatisation Lesson from Market Economies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241272.
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Sader, Frank (1993). Privatization and Foreign Direct Investment in the Developing World, 1988 92. Policy Research Working Paper 1202, World Bank, Washington, D.C. Sader, Frank (1994). Privatization Techniques and Foreign Investment in Developing Countries, 1988-93, World Bank, Washington, D.C. Suzuki, H (1991). Lessons Learned from the Guinea Privatisation Programme, World Bank, Africa Technical Department, Washington, D.C. UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-25-27. UNCTAD (1995). Comparative Experiences with Privatisation Policy Insights and Lessons Learned United Nations, New York and Geneva. Vickers, J. and Yarrow, G. (1988). Privatisation An Economic Analysis, MIT Press. World Bank (1995). Bureaucrats in Business World Bank Policy Research Report, Oxford University Press, London.

Asian Development Bank, (1985). Privatisation: Policies, Methods and Procedures, Manila. Bishop M, Kay, J.A. and Mayer CP (1994). Privatisation and Economic Performance, Oxford University Press, Oxford U.K. Galal A, Jones LP Tandon P and Vogelsang I (1994). The Welfare Consequences of Selling Public Enterprises: Case studies from Chile, Malaysia, Mexico and the U.K. World Bank Country Economics Department, Public Sector Management and Private Sector Development Division, Washington D.C. Ganesh G (1988). Privatisation Experience Around the World, Mittal Publications, Delhi, India. Gouri, G and others (1989), Privatisation. The Asia - : Pacific Experience, Hyderabad, India: Institute of Public Enterprises. Gupta, Asha (1999). Towards Privatisation BR Publishing Corporation, Delhi, India. Jackson P.M. and Price, C.M. (1994). Privatisation and Regulation Longman Group, U.K. Ramanadham V.V. (1989). ed. Privatisation in Developing Countries, Routledge, London. Ramanadham V.V. (1998). ed. Privatisation in the U.K. Routledge, Chapman and Hall. Shirley, M and John Nellis (1991). Public Enterprise Reform: The Lessons of Experience, EDI Development Studies, Washington D.C.
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UNIT 19 PRIVATISATION: INTERNATIONAL EXPERIENCE

Objectives After studying this unit you should be able to:
! !
List out methods of disinvestments followed by many countries around the world; Survey other strategic issues of disinvestment in international experience.
Structure 19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8 19.9 Introduction Progress of Disinvestment Methods of Disinvestment Strategic Issues in Disinvestments Benefits from Privatisation Summary Self Assessment Questions References Further Readings
19.1 INTRODUCTION
International experience has shown that privatisations have been successful over a wide range of enterprises, differing in size, nature, and competitive environments. The method and extent of disinvestment, as well as the peculiar features employed by the various countries to make the privatisation processes popular among the public and the foreign investors, show that ownership does matter, but only if it is accompanied by liberalisation policies, competition, regulation, public participation and public accountability.
19.2 PROGRESS OF DISINVESTMENT

The number of countries selling state-owned enterprises increased in the 1980s, as divestiture spread from the industrial countries, notably the United Kingdom, to developing countries throughout the world. In the 1990s, many governments intensified their efforts, selling more enterprises and shifting their attention from small firms operating in competitive markets to large monopolies. Mass privatisation efforts began in Eastern Europe and the republics of the former Soviet Union. According to a World Bank report (World Bank, 1995) the growing number of countries undertaking divestitures and the shifting regional focus was as shown in Table 19.1.
Table 19.1: Divestiture in Developing Countries, 1980-93 1980-87 Region 1988-93a 1988-93a
Number of Percentage Number of Percentage Value of Percentage Transactions of total transactions of total transactions of worldwide ( $ billions) value 210 108 136 46 24 30 254 367 561 11 16 25 3.2 19.7 55.1 3 21 57 1
Africa Asia Latin America
Privatisation and Eastern Europe Disinvestment
2 456 240 696
0b 100
1,097 2,279 376 2,655
48 100
17.9 96.0 174.9 270.9
19 100
& Central Asia Total developing Industrial Countries Divestitures Worldwide a.
Figures from Sader (1994), who excludes privatisations with a sales value less than $50,000, any divestitures where state-owned enterprises were simply shut down and the assets mothballed, and all mass voucher divestitures. The latter comprises an especially significant form of divestiture in some Eastern European and Central Asian economies such as Russia and the Czech Republic. b. Less than one percent. Source: Derived from Candoy-Sekse (1988), Sader (1993), and Gelb and Singh (1994).
It would be observed that there were more than four times as many transactions in the six years from 1988-93 as in the previous eight years (1980-87). Although most of the increase was due to the explosion of privatisation activity in the transition economies of Eastern Europe and Central Asia, the number of divestitures increased more than fourfold in Latin America and more than threefold in the rest of the Asia. Even Sub-Saharan Africa experienced an increase in divestitures, albeit a much more modes one that left the continent with fewer privatisations than any other developing region. As a result of these increases, developing countries accounted for 86 percent of the transactions in the second period, up from 66 percent during the first. The sectoral break down of divestitures is given in Table 19.2, which is as follows:
Table 19.2: Revenue from Divestiture in Developing Countries by Region and Sector, 1988-93 (Dollars, billion) Region Africa Asia Latin America Eastern Europe and Central Asia Total Total number of Divestitures Total divestitures for Primary Industrial Finance Infrastructure Others 0.7 1.8 8.2 1.4 12.1 392 126 0.5 6.4 9.9 8.9 25.7 1,036 92 0.3 2.6 13.3 3.7 19.9 146 35 0.1 7.4 22.5 2.0 32.0 267 51 1.6 1.5 1.2 1.9 6.2 438 Total revenue 3.2 19.7 55.1 17.9 95.9 2,279
152
456
1980-87
Note: Figures exclude privatisations with a sales value less than $50,000, divestitures where state-owned enterprises were simply shut down and assets mothballed and all mass voucher divestitures
Source: Derived from Candoy-Sekse (1988) and Sader (1993).
These indicate that early sales involved relatively small state-owned enterprises, primarily in agribusiness, services, and light manufacturing. However, in 1988-93, divestiture included sale of large state-owned enterprises in such important sectors such as electric and water utilities, transportation, and telecommunications. Of 2 the $96 billion in public revenue generated by divestiture in developing
Implications Disinvestment countries during this period, the largest share (viz. $32 billion) cameof from infrastructure. Even the $12.1 billion in sales revenue from the primary sector during this period is largely attributable to the sale of petroleum-related activities, which tend to be large scale; mines and agribusinesses account for most of the remainder. Further, it may be noticed from these figures that there is wide divergence in the average size of the firms disinvested. Latin America, for example, with just one-fourth of the transactions, accounts for almost 60 percent of the value, while Central and Eastern Europe, with almost half of the transactions, account for only 19 percent of the value. This reflects the greater experience with disinvestment in Latin American countries, enabling them to sell larger enterprises while Central and Eastern Europe governments, who were new to the process, were selling smaller enterprises, as well as giving away shares through mass privatisation schemes.
The last decade (1993-2003) has shown that divestiture has proceeded with greater vigour, with all governments, whether big or small, industrialized or developing, whether democratic or totalitarian, resorting to disinvestment of major public enterprises, such as telecommunications, airlines, airports, and utilities such as electricity, water etc. Governments have come to believe that divestiture is an essential part of the globalization and liberalization process and that it is necessary to divest if expectations of the people are to be met with any degree of efficiency and promptitude.
19.3 METHODS OF DISINVESTMENT

Various methods of sale of government equity of public enterprises have been adopted by countries in their privatisation efforts, depending on the objectives of privatisation. In the United Kingdom, some of them have been piecemeal transfers to the private sector as for example in British Petroleum, Cable and Wireless, British Telecomm etc., while some of them have been transferred totally to the private sector in one stretch as for example in British Gas and British Airports Authority. Piece meal transfers have mostly been in the nature of public offers, while total transfers have been through strategic sale, public offers or private placement. British Telecom sale was in the nature of public offer; British Coal sale was a trade sale and British Sugar Corporation sale was a private placement. In addition, there have also been around 158 management/ employee buy-outs such as in National Freight Consortium and National Bus Company etc. In France, privatisations were carried out according to the following scheme, viz. 10% to the employees, 15% to foreigners, about 50% to the public at large and about 25% to about 10 larger shareholders who comprised a stable nucleus. In Germany, emphasis was on sale through public offers. However, in former East Germany, there were trade sales and public auctions through the agency called Treuhand which was set up in 1990. By 1994, Treuhand had sold over 14,500 companies and more than 132,000 acres of agricultural and forestry real estate. Most of the companies sold were small establishments such as shops and kiosks. In East European countries, sale has generally been through auctions, public offers through vouchers and management/ employee buy-outs. In the Caribbean, most of the privatisations were in the form of trade sales. Jamaica also experimented with management leases as nondisinvestment options for privatisation of a few hotels. In Latin America, countries such as Mexico and Chile successfully disinvested major public enterprises through the trade sale route, though employees were given some shares at discounted prices. In Africa, divestitures included cases where government retained majority control (such as in Equatorial Guinea), de facto minority control (as in Nigeria), part or full equity transfer to other state agencies (as in Nigeria), or to external public or quasi-public bodies (as in Swaziland and
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Privatisation and Malawi). Privatisations have included private sales, sale of assets, management Disinvestment contracts and leasing. In Asian countries, Sri Lanka and India have mostly relied on trade sales in their privatisation efforts. Malaysia privatized its SOEs through trade sale, leasing, management contracts and management buy-outs.
19.4 STRATEGIC ISSUES IN DISINVESTMENTS

The following have been the main strategies of privatisation employed by countries which succeeded in their privatisation efforts: 1. Extent of Disinvestment An important issue to be decided in disinvestment is the question of how much to divest; whether there should be full divestiture (i.e. transfer of 100% of ownership and control to the private buyer or buyers), or partial divestiture (i.e. anything less than 100% transfer). Partial divestiture would imply continuance in the choice of ownership but discontinuance in control, depending on whether the controlling interest is sold. The decision to relinquish control should be taken irrespective of the extent of the ownership to be sold. It does not follow that selling a majority of shares means relinquishing control for the simple reason that even a 20% stake or less would be sufficient for control of a company if other shares are widely dispersed. Partial divestiture could be accomplished by selling a non-controlling interest to diversified private shareholders or by transferring ownership to another public enterprise. In either case, government retains control over the decision-making process though the government may not consider the enterprise as being owned by it. Even if control is not handed over, disinvestment may change enterprise behaviour, and economic gains may result because governments intervention could be impaired in a positive manner. For example, investment decisions for expansion programmes which previously could have been constrained by government could now be taken by the Board of Directors, who have a vital share in the companys progress. Decisions regarding incentives for increasing productivity and increasing autonomy of managers could be taken without adverse government intervention. Partial divestitures help in determining a fair price for the enterprise in an unknown environment, and thus boost future revenues of the government when the remaining shares are sold. Mexico is a good example, where the country benefitted from starting with partial divestiture, relinquishing control (to achieve behavioural change), while retaining majority ownership (to maximise governments share of the results of the changed behaviour). When the first tranche of Telmex shares in Mexico were sold, the market valued the enterprise at US$8 billion, whereas at the second and third tranches, the values were US$14 billion and US$30 billion respectively. Of course, between the sale of the first tranche and the subsequent tranches, the company had shown excellent results, barring the first year, and the stock market had become fairly active and responsive. 2. Foreign Participation A crucial issue to be decided is whether to permit foreign buyers; if so, whether direct investment (including participation in management) is to be permitted or only indirect (i.e. portfolio) management. Foreign participation has many advantages. It expands the opportunities to the firm and therefore increases potential revenue from the privatisation. Depending on the number of bidders, government could maximise the price for its holding. Indirect foreign participation would bring in capital, increase domestic investment, and reduce the constraint of balance of payments. Such benefits are confined to countries where foreign participation in capital markets is restricted, such as in Mexico and Argentina. In countries where capital markets are already open, such as in the UK or
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Implications of Disinvestment Malaysia, increased foreign participation is unlikely to increase net economic gains. Foreign direct participation helps bring in improved technical and managerial know-how. However, foreign participation has the disadvantage in that some of the buyers gains accrue to foreigners rather than domestic participants and politically, this could prove tricky to the government that allows it. Antipathy to foreign participation, if widely prevalent, could result in derailing a privatisation programme, such as in Turkey.
3. Public Participation Government has to decide whether sale of government assets would be made to the public as opposed to trade sale and whether there should be a policy of allowing individuals and institutional investors to bid for shares. One could even decide that each privatised company should have a core group controlling it such as in France, where the Government chooses one of the existing entrepreneurs to take a controlling share of the enterprise. In the UK, the move has been to promote what is known as popular capitalism, i.e. when the shares are thrown open for the public at large to bid, and thus become actual owners of the enterprise. Taking into account the fact that most of the shares had been under priced, this has resulted in substantial profits having been made by individual investors, lucky enough to get the shares at the issue price, often after merely making the payment of the first instalment. This method, of course, carries the risk that the share may not do well on the opening day the stock is listed in the Stock Exchanges and thus lose credibility for the programme. But such instances have been very rare. This policy has paid dividends, monetarily as well as politically in the UK. However, this method of privatisation would be successful only in enterprises which have good professional management. 4. Shares to Employees Most countries recognized that, in order to elicit cooperation from labour for privatisation, employees needed to be offered shares in the company. This has been in the form of free shares, or shares at concessional rates etc. in some countries. For example, the U.K. privatisation, employees got some free shares at government expense, free matching shares usually placed in a trustee scheme, and preferential consideration in the way of allotment. In British Telecom sale in 1984, 54 free shares were given per employee. Matching shares, two for one, were allowed up to 77 per employee. A 10% discount was allowed for up to 1,600 shares per employee purchased under the priority arrangements. In France, 10% of the shares were allotted to employees in every privatisation. Sri Lanka also reserved 10% of shares for employees of the public enterprises being privatized. 5. Liberalization Policies Privatisation is successful only if it is one of the liberalization policies adopted by governments (Vickers and Yarrow, 1988; Hemming and Mansoor, 1988). Privatisation works well only if markets function reasonably well and there are no significant market failures. Markets and public ownership are linked in ways that can reduce competition, even without a significant market failure. (Kikeri, Nellis and Shirley, 1994). This is best illustrated by reference to governments intervention to protect high-cost SOEs from competition or give them subsidies or privileged access to finance, or tilt what would otherwise be a level-playing field in order to prevent losses in SOEs and consequent drain on the governments budget. Thus, state ownership, created to overcome or correct market failures, can sometimes aggravate or perpetuate it. In such cases, privatisation could well be used to enhance competition because it reduces the governments direct stake in protecting particular enterprises. Privatisation would tend to eliminate a
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Privatisation governmentand failure more costly to economic welfare than the market failure the Disinvestment SOE was created to correct, as in Guinea (Suzuki, 1991). Gains, therefore, accrue as a result of privatisation even if market structures do not change, as was found in the case of Chile.
6.
Competition
In disinvestment of public monopolies, such as public utilities governments would have to seriously deal with price regulation since trading a public monopoly for a private equivalent does not guarantee efficiency or consumer satisfaction. Where enterprises produce tradable goods, a phased reduction of restrictions on import of competing goods, leading to eventual elimination of all such import restrictions would introduce needed competition. For example, Mexico, in conjunction with disinvestment, liberalised competing imports in a number of industries, such as fertilizers, auto parts, steel and chemicals. While competition decides pricing, potential competition (or threat of competition) also has an impact on pricing behaviour. In sectors such as Telecommunications and Electricity, technology may be a restrictive factor in the creation of an ideal competitive market. However, some competition could be introduced by unbundling of activities, such as production of ancillary goods and services and new services such as cellular services in telecommunications. United Kingdom, for example, encouraged private entry in such markets to provide competition to British Telecom. Chile and the UK are good examples, where prior to privatisation, the electricity industry was subjected to unbundling of activities and subsequent competition. Breaking up of large enterprises, prior to sale, promotes competition. For example, Romania converted 2, 000 of its big public enterprises into 6, 000 prior to privatisation. Competition prevented strategic entry deterrence normally practised by incumbent large firms. Competition also promotes internal efficiency and enables efficiency in product markets. 7. Regulation It has been found that even where competition policy is taken to its maximum extent, it would be necessary to regulate the prices of some large divested enterprises. Price regulation has the dual objective of lowering cost to the consumer - to prevent exploitation - and motivating producers to keep the costs as low as possible - to increase efficiency of production while assuring them of fair return on investment. For example, UK initiated a pricing formula for British Telecom - which it subsequently adopted in other privatised utilities - wherein the utility was allowed to raise prices only at a discount from the general rate of price inflation, the discount ostensibly accounting for the rate of technological progress and efficiency gains. Other countries like Chile and Malaysia, followed sophisticated price-setting methodologies, where this resulted in generating sufficient enterprise revenues to allow expansion without subsidies or consumer exploitation. The role of the regulatory machinery is crucial in the process of privatisation. It is important that the regulator and the regulatory processes are set in motion prior to divestiture. This makes clear the ground rules for operating post-divested firms and assures the consumers that they would not be exploited at the post-privatisation stage. Regulation would be required to ensure proper exercise of monopoly power, service quality, safety, environment protection, service obligations and rights to network access. 8. Development of Capital Markets
The government has an important role in regulating weak financial systems and encouraging development of capital markets. This would guarantee that competition and cost efficiency would result from privatisation leading to benefits 6 for consumers.
19.5 BENEFITS FROM PRIVATISATION
Depending on the objectives of privatisation, international experience suggests that, if wisely implemented, divestiture is perfectly capable of producing annual welfare gains in the vicinity of 5 to 10% of pre-divestiture annual sales. (see Galal et al, 1994). In a typical developing country, the public enterprise sector generates about 10% of GDP, and annual sales are 2.5% of that. If half the sector were to be divested, the annual gains would amount to something like 1% of GDP. This would be a substantial gain and equivalent to 7.6% of government consumption. Additional economic benefits might follow from unleashed private entrepreneurial activity, accelerated capital market development, better use of scarce administrative resources, heightened productivity on the part of the remaining public enterprise managers and workers, and other indirect effects. Privatisation gives birth to a number of benefits. Not only does bleeding of continuously loss-making SOEs stop, and capital receipts accrue as a result of privatisation, but also there is regular income for the government as dividend for the share retained, besides income from taxes etc. Efficiency also improves with change of ownership. In the UK, most privatized enterprises showed enormous profits after privatisation. Utilities such as telecommunications, gas and electricity showed drastic reductions in prices charged after privatisation, and even the quality of services improved. Government was a major beneficiary of privatisation, since nearly 8 billion pounds a year were contributed by the privatised companies by way of share sales, tax receipts and dividends, while previously these very same enterprises were costing the tax payer around 50 billion pounds a week by way of interest on borrowings and subventions towards losses. In Chile, net benefits from privatisation and regulation outweighed benefits from reforming and regulating the same monopolies while in public sector. Privatisation also helps in developing the stock market. For example, in Jamaica, privatisation of National Commercial Bank (NCB) and Caribbean Cement Company (CCC) laid the foundation for future privatisations by developing the stock market. Hence, privatisation should be assessed by more than simply its effects on the enterprises themselves. Privatisation helps in stabilizing the economy as was demonstrated in Mexico, where divestiture of state assets played a major role in macro-economic stabilization. Proceeds from disinvestment were used to retire domestic public debt, hence interest rates went down. Large sums were also raised from moribund public enterprises such as Telmex. Fiscal impact of divestiture was positive, even where no net sums were raised, as in the case of privatisation of Mexicana. Privatisation can be a boon for citizens and employees too. In the UK, nearly 11million shareholding public (nearly 25% of the population) were benefiting from regular, increasing dividends from the privatized companies as early as 1995. Around 90% of the eligible employees were shareholders in these companies. They benefited from increased profitability through increases in quantum of bonuses and rise in share prices. For example, in 1994-95, the bonus in British Airways was around 94 million pounds (which was 42% more than in the previous year). Average earnings of employees increased in British Airways by 3.75%. Privatisation also helped the companies concerned. Privatized companies benefited because productivity went up. In British Airways and British Gas, productivity per
Privatisation and up by 20% in 1994-95. In British Telecom, call failure rate went employee went Disinvestment down from 1 in 25 to 1 in 200.
Activity List out three important strategic issues in international experience of disinvestment. ......... ......... ......... ......... .........
19.6 SUMMARY
In this unit, the International scene relating to privatisation has been discussed in brief starting with progress of disinvestment, different methods of the disinvestment as followed by different countries have been touched upon. This gives an insight into the working of different nations and tells the way, privatisation has made an impact in the day-to-day working of the enterprises. Last but the least, the advantages of privatisation have been discussed in turn giving a positive picture to the concept of privatisation.
19.7 SELF-ASSESSMENT QUESTIONS

1. What are the different methods of disinvestment followed by most countries in the world? 2. Discuss the benefits of Privatisation.
19.8 REFERENCES
Candoy-Sekse, Rebecca (1988). Techniques of Privatization of State-Owned Enterprises, Technical Paper 90, Volume III, World Bank, Washington, D.C. Galal, A., James, L., Tandon, P., and Vogelsang, I. (1994). Welfare Consequences of Selling Public Enterprises An Empirical Analysis, Oxford University Press, Oxford. Gelb, Alan and Inderjit Singh (1994). Public Enterprise reforms in Transitional Economies, Background Paper, Policy Research Department, World Bank, Washington, D.C. Hemming, R and Mansoor, A.M. (1988). Privatisation and Public Enterprises, Occasional Paper No.56, International Monetary Fund, Washington, D.C. Kikeri, S., Nellis, J., and Shelley, M. (1994. Privatisation Lesson from Market Economies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241272. Sader, Frank (1993). Privatization and Foreign Direct Investment in the Developing World, 1988 92. Policy Research Working Paper 1202, World Bank, Washington, D.C.
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Implications of Disinvestment Sader, Frank (1994). Privatization Techniques and Foreign Investment in Developing Countries, 1988-93, World Bank, Washington, D.C.
Suzuki, H (1991). Lessons Learned from the Guinea Privatisation Programme, World Bank, Africa Technical Department, Washington, D.C. UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-2527. UNCTAD (1995). Comparative Experiences with Privatisation Policy Insights and Lessons Learned United Nations, New York and Geneva. Vickers, J. and Yarrow, G. (1988). Privatisation An Economic Analysis, MIT Press. World Bank (1995). Bureaucrats in Business World Bank Policy Research Report, Oxford University Press, London.

Asian Development Bank, (1985). Privatisation: Policies, Methods and Procedures, Manila. Bishop M, Kay, J.A. and Mayer CP (1994). Privatisation and Economic Performance, Oxford University Press, Oxford U.K. Galal A, Jones LP Tandon P and Vogelsang I (1994). The Welfare Consequences of Selling Public Enterprises: Case studies from Chile, Malaysia, Mexico and the U.K. World Bank Country Economics Department, Public Sector Management and Private Sector Development Division, Washington D.C. Ganesh G (1988). Privatisation Experience Around the World, Mittal Publications, Delhi, India. Gouri, G and others (1989), Privatisation. The Asia - : Pacific Experience, Hyderabad, India: Institute of Public Enterprises. Gupta, Asha (1999). Towards Privatisation BR Publishing Corporation, Delhi, India. Jackson P.M. and Price, C.M. (1994). Privatisation and Regulation Longman Group, U.K. Ramanadham V.V. (1989). ed. Privatisation in Developing Countries, Routledge, London. Ramanadham V.V. (1998). ed. Privatisation in the U.K. Routledge, Chapman and Hall. Shirley, M and John Nellis (1991). Public Enterprise Reform: The Lessons of Experience, EDI Development Studies, Washington D.C.
UNIT 20 DISINVESTMENT: EXPERIENCE AND STRATEGIES

Objectives After studying this unit, you should be able to:
List out various crucial strategies to be adopted for successful disinvestments.
Structure 20.1 20.2 20.3 20.4 20.5 20.6 20.7 What to Disinvest Sequencing of Disinvestment How to Disinvest Summary Self Assessment Questions References Further Readings
20.1 WHAT TO DISINVEST

It would be preferable to privatise a public enterprise when it loses its comparative advantage. So long as public enterprise rather than private enterprise is found to be a superior means of contributing to national well-being and so long it does not suffer from a comparative disadvantage, it should be preferred to other forms. The comparative advantage is to be measured in terms of the commercial returns, social returns and a desired trade-off between them. It would be prudent to trifurcate the public enterprise sector into (a) those which will be allowed to die, (b) those to be divested and (c) those to be retained in the public sector. A properly constituted committee could go about this exercise within a tight time frame, and get a list of those enterprises which should clearly be divested. A virtual automatic selection category would consist of those enterprises whose presence in the public sector has no economic justification whatsoever.
20.2 SEQUENCING OF DISINVESTMENT

Competitive enterprises which are small relative to both the product and the product market should be among the first to be sold. These have the dual advantage of not being able to exploit market power and hence could avoid the difficult post-divestiture problems of regulation etc. and being amenable to competitive bidding, thereby avoiding the difficult problems of price-setting, negotiations and are capable of rapid improvements in performance (hence building up of credibility for future sales). This strategy was followed in Mexico, in the competitive sectors such as hotels, auto parts, and textiles. Though the number of such enterprises may be large, their contribution to GDP may be negligible and hence their privatisation may not have much economic impact. In view of this, many governments may prefer to divest their large enterprises in the first instance, which may have the additional advantage of visible impact on the growth rate of the economy, as well as indicate the seriousness of government intent. In such an eventuality, the temptation would be to sell the best-run enterprises first because it would be easy to find buyers for them. However, the financial gains would be smaller because the enterprises are already well-run. The greatest potential gains accrue from the sale of worst-run enterprises, but the problem here is of finding buyers, not price. It may be in the interest of
governments to press ahead with such sales, though gains from the sale price would be of secondary importance. Large gains are also possible in industries where damages are caused by constraints on autonomy and where quick decisions are required, such as for marketing consumer goods (especially abroad). They would find buyers without difficulty, but the potential gains would be smaller, because they are well-run. The greatest economic gains accrue from the worst-run enterprises (not because they are unviable). But sale of well-run enterprises would help establish credibility for the programme and declare serious intentions of the government. Ultimately, it is not so much what is disinvested but how it is disinvested that makes a difference (Galal et al, 1994). The correct choice of the assets initially to be divested and the order in which others would follow would be crucial to the success of the privatisation programme. Some countries, such as Guinea, made the decision to work on all fronts at once - the industrial, financial, agricultural and service sectors. Others, depending on local circumstances, have been more selective, choosing those enterprises first who absorb the heaviest subsidies or those which are judged to be the most marketable. A few privatisation plans have given priority to the service or agricultural sectors. If the Government is keen on getting large additions to revenue, privatisation may start with those enterprises which are easy to sell at the highest price. These would be the most profitable. The next in line would be those which are not currently profitable, but which could be better managed in private hands. This strategy was followed in Grenada. The size of the enterprise being put on the market could be crucial for governments privatisation programme, in the sense that if successful, they would not only produce the largest revenue, but they would reduce subsidy costs, and signal the seriousness of the governments resolve. This was reflected in the experience of many countries in Latin America, as well as in the UK.
20.3 HOW TO DISINVEST

Disinvestment process involves a number of carefully structured steps and should be undertaken with utmost caution. Failure to observe due caution offer leads to derailment of the entire process. Some of the important steps are as follows: 1. Preparations for Sale There are a number of steps which have to be taken by government to prepare the enterprises for sale. Some of them are: 1) creation of legal entities making sale feasible. This entails legal transformation into corporate forms, permitting private holding of shares; 2) break-up of large firms/monopolies into viable and non-viable units; 3) separation of competitive activities from non-competitive ones; 4) identification of peripheral assets (such as real estate holdings, sports teams, restaurants) that can be sold as separate concerns; 5) appointment of new managers with different attitudes and approaches (favouring divestiture and autonomy); 6) debt write-downs - Care should be taken that it is done only when the company changes hands, otherwise it is likely to create a sense of complacency and inhibit entrepreneurship; loans receivables could be written off, thereby increasing net assets and its selling price, or they could be left in
2
the company. Increase or decrease in the capital base might be necessary to bring the funding of the company in line with its business requirements; 7) clear up environmental liabilities or inclusion of such liabilities as conditions of sale; 8) downsizing of labour force - usually the most difficult step, especially in developing countries; this would entail handsome redundancy benefits for the firm and this would enable a better price for the enterprise if it is done before divestiture rather than leaving it to the post-divestiture stage. Working with Labour Unions to obtain their support for privatisation and allaying fears of workers would be crucial for the privatisation programme; 9) restructuring of state-owned enterprises - Restructuring by the government especially internal management restructuring or financial restructuring would be essential but large new investments should be left to the new owners. There is, of course, the danger that restructuring could be expensive and raise the worth of the enterprise (and therefore, the price at which it is to be offered for sale), reducing the number of potential buyers and thereby reduce the returns on the sale. However, potential buyers could be taken into confidence and the patterns of restructuring most appropriate for the longterm interests of the enterprises negotiated with them; 10) Consensus building i.e. developing agreement on the rationale, objectives and basic elements of the privatisation programme among key support constituencies; 11) Legislation and Organisation: Establishing an adequate legislative and organisational framework for the privatisation programme; 12) Prioritisation and Valuation : Setting a schedule for enterprises to be privatised and establishing probable market values for near-term candidates; 13) Social Objectives : Developing specific proposals to deal with social objectives of an enterprise after privatisation; 14) Public vs. Private Monopoly: Establishing rules of the game for monopolistic enterprises to operate effectively in the private sector; 15) Public Awareness: Designing a training and communications programme to develop public understanding and support, both for the process and for specific transactions, to correct misconceptions and overcome biases. 2. Valuation of Enterprise
It appears that the best method of valuation of a public enterprise and pricing of its shares is to let the market decide these through competitive bidding. It is important that bidders should be carefully pre-qualified and the regulatory environment must provide incentives for modernisation. If the governments asking price is based on historical book value, it will have no resemblance to what the buyer will offer because the assets would have eroded over time. On the other hand, if the book value has not been adjusted for inflation, this is bound to grossly underestimate the market value. 3. Under Pricing
It has been found that where public enterprises have been sold, the share price has been usually under priced, as a strategy to achieve quick success and establish credibility for future sales. Investors make profits and are favourably disposed towards the privatisation programme. Where shares have been overpriced, investors lose and are wary of future public offerings, as for example,
in Turkey. Again, as a positive strategy, governments have opted to sell in tranches to offset potential political and financial costs. Clawback clauses have been used in certain privatisations, such as in UK where privatisation of 12 regional electricity distribution companies entitle government to share in any gains that the company makes on subsequent sale of land, buildings or other property that may be undervalued in the original sale of the enterprises. 4. Discounts
Government may attempt to win political support without making large fiscal sacrifices by offering discounts to small investors and asking institutional investors to pay higher prices for their shares, either through fixed prices or by tender offerings. 5. Golden Share
The modality of sale could also provide for a golden share, as in the UK, which gives overriding powers to the government which holds the golden share, to prevent transfer of more than 50% of the voting stock or voluntary winding up of the firm and the power to intervene in crucial policy issues. 6. Sale in Tranches
Many countries appeared to have resorted to government-financed sales for debt because financial systems were not deep enough, where SOEs were not sufficiently attractive and preferred buyers do not have enough cash. However, it would be better to sell for cash, even at a lower price, than accepting debt. Cash sales provide liquidity to pay liabilities of enterprises as well as severance pay to the redundant employees. Activity List, in sequence, enterprises that should be disinvested on priority. ......... ......... ......... .........
20.4 SUMMARY
This unit discusses the different strategies to be adopted so as to have a successful disinvestment. Here, the ways and means to disinvest have been discussed giving a clear picture as to how the disinvestment process takes place. There are different steps involved in a disinvestment process and these steps have been taken care of in this unit. The whole unit discusses, disinvestment as a process.

1. Discuss the six main preparatory measures that Government must take before undertaking disinvesment. 2. What do you undestand by sequencing of disinvestment.
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20.6 REFERENCES
Candoy-Sekse, Rebecca (1988). Techniques of Privatization of State-Owned Enterprises, Technical Paper 90, Volume III, World Bank, Washington, D.C. Galal, A., James, L., Tandon, P., and Vogelsang, I. (1994). Welfare Consequences of Selling Public Enterprises An Empirical Analysis, Oxford University Press, Oxford. Gelb, Alan and Inderjit Singh (1994). Public Enterprise reforms in Transitional Economies, Background Paper, Policy Research Department, World Bank, Washington, D.C. Hemming, R and Mansoor, A.M. (1988). Privatisation and Public Enterprises, Occasional Paper No.56, International Monetary Fund, Washington, D.C. Kikeri, S., Nellis, J., and Shelley, M. (1994. Privatisation Lesson from Market Economies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241272. UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-2527. UNCTAD (1995). Comparative Experiences with Privatisation Policy Insights and Lessons Learned United Nations, New York and Geneva. Vickers, J. and Yarrow, G. (1988). Privatisation an economic analysis, MIT Press. World Bank (1995). Bureaucrats in Business World Bank Policy Research Report, Oxford University Press, London.

Asian Development Bank, (1985). Privatisation: Policies, Methods and Procedures, Manila. Bishop M, Kay, J.A. and Mayer CP (1994). Privatisation and Economic Performance, Oxford University Press, Oxford U.K. Galal A, Jones LP Tandon P and Vogelsang I (1994). The Welfare Consequences of Selling Public Enterprises: Case studies from Chile, Malaysia, Mexico and the U.K. World Bank Country Economics Department, Public Sector Management and Private Sector Development Division, Washington D.C. Ganesh G (1988). Privatisation Experience Around the World, Mittal Publications, Delhi, India. Gouri, G and others (1989). Privatisation: The Asia - : Pacific Experience, Hyderabad, India: Institute of Public Enterprises. Gupta, Asha (1999). Towards Privatisation BR Publishing Corporation, Delhi, India. Jackson P.M. and Price, C.M. (1994). Privatisation and Regulation Longman Group, U.K. Ramanadham V.V. (1989). ed. Privatisation in Developing Countries, Routledge, London. Ramanadham V.V. (1998). ed. Privatisation in the U.K. Routledge, Chapman and Hall. Shirley, M and John Nellis (1991). Public Enterprise Reform: The Lessons of Experience, EDI Development Studies, Washington D.C.
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UNIT 21 IMPLICATIONS OF DISINVESTMENT

Objectives After studying this unit you should be able to:
List out the strategic issues which arise out of disinvestment; Explain what is meant by the term social safety net; Describe various methods of tackling the problem of redundancy in public enterprises.
Structure 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8 21.9 Strategic Issues Arising out of Disinvestment Voluntary Retirement Scheme Retention Agreements Retraining Employee Shareholding Schemes Summary Self Assessment Questions References Further Readings
21.1 STRATEGIC ISSUES ARISING OUT OF DISINVESTMENT

a) Transparency Transparency, which should include studies to inform the public about the reasons for divestiture, creates credibility and dispels doubts regarding shady deals. Both transparency and speed are served by a centralised policy unit/agency responsible for privatisation, rather than in Cabinet Commissions and Sector Ministries. The latter may lack the administrative capacity, create delay, have a vested interest in keeping state firms in their original form and makes process less transparent. The privatisation agency / authority should report to the top of the political hierarchy, have clear mandate / authority to take decisions and consist of small but highly competent staff. In Mexico, a unit consisting of a mere seven people, divested hundreds of enterprises within a few years. In Philippines, a privatisation trust headed by a qualified businessman and staffed by a small group of private individuals, who were paid salaries at private sector rates, disposed off more than 150 non-performing assets in two years. Decentralisation of privatisation tasks could also help expedite decision-making. b) New Investment Privatisation programmes have been found to be successful in achieving the objective of attracting new investment, and have been the main stimulus to flows of international investment. In Jamaica, for instance, privatisation-related flows accounted for 94% of total inward foreign investment in 1987. Central and Eastern Europe received the largest share of privatisation-led foreign direct investment (FDI) viz. $2.4 billion in 1992, which represented 52.5% of total FDI inflows for that year. Latin America and Caribbean countries received, in that year, $2.3 billion in FDI from privatisation, while East Asia and Pacific region received $302 million (UNCTAD 1994).
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c)
Labour Redundancy
Countries as diverse as Argentina, Japan, Mexico, New Zealand, Tunisia, and the United Kingdom have terminated surplus state enterprise employees prior to privatisation. Sometimes it becomes necessary for governments to do so if an enterprise is to be sold, since investors shy away from surplus labour and the problems of tackling redundancy. Moreover, governments are usually better able than private investors to alleviate adverse social consequences and thus defuse worker opposition. Resistance by workers and their unions is offset by offering fixed workers severance payments, banning strikes, and reducing the power of labour unions through various measures. The prospect of political unrest arising from unemployment has led many governments to approach privatisation very cautiously. Governments should be prepared to meet with labour leaders at an early stage in discussion of the SOEs targeted for privatisation, both to listen to labours position and to reassure workers that their concerns are being taken seriously. This would go a long way in reducing opposition to the privatisation process, especially if it is accompanied by a well-planned educational campaign on the need to sell shares of SOEs and the methods of achieving it. Labour unions distrust of privatisation is founded on the perception that it would inevitably be a threat to pensions and other labour rights. SOEs are, in most cases, overmanned. In many SOEs, there are phantom workers, i.e. workers who do not work but are paid, and therefore, reduction in labour force might only mean elimination of phantom workers.. Sale to the private sector would almost certainly result in reduction in the work force. The amount of reduction in the labour force would depend on its composition. If the work force is largely unskilled labour, then the chances of job loss are greater, since productivity could be maintained or improved by giving greater incentive to fewer workers. On the other hand, if the work force consists largely of skilled workers, the chances of job losses are minimal, since services of skilled workers cannot be easily duplicated or dispensed with. In Jamaica, when the National Bank of Jamaica was privatised, there were little or no redundancy because most of the employees were trained in banking operations. Similar was the case with the Caribbean Cement Company in Jamaica, whose operations were not labour intensive even before privatisation. In Turkey, the privatisation of Teletas (the production arm of the telecommunications network) meant no serious staff losses because of the specialised skills that the workers possessed. In Costa Rica, the proposed buyer of the national fertiliser company specified that, while it intended to move the location of the firms research laboratory, all the scientists and technicians would be automatically retained if they were willing to move to the new site. In Tunisia, the government created jobs for workers in privatised or liquidated firms through what was essentially a public works programme, implemented to tide workers over for a temporary period while they sought re-entry into the labour market. In Sri Lanka, part of the proceeds of sales of SOEs has been set aside for severance pay; in the Sudan and Mali, special funds were set up to provide loans to workers to permit them to go into business for themselves. In Guinea, the government retained in civil service positions, those who were unable to find jobs in the private sector. In Malaysia, new owners of SOEs must accept all employees who choose to stay with the firm and no workers may be laid off (except for disciplinary reasons) for five years. In countries where multiple industrial opportunities exist, placement of surplus labour may not be a problem, although some retraining may be required. In developing countries, however, where unemployment rates are high and there is
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little alternative employment and no social security system, governments would have to balance the immediate costs involving severance pay, pensions and other benefits as well as retraining programmes against the benefits of relief from subsidy payments and long-term gains in economic growth. Privatisation could actually be an instrument of increasing the work force over the long term through increase of business, diversification of business etc. Overall growth in the economy could follow with higher employment in other sectors, such as services that might not otherwise been available. Funds diverted from elimination of subsidies and the sale of divested SOEs could result in new development projects producing new jobs. It must be remembered that reforming a SOE would result in precisely the same extent of redundancy as privatisation would, and therefore, this should not deter the government in going ahead with the privatisation process.
21.2 VOLUNTARY RETIREMENT SCHEME

Most privatized enterprises in the world have been over manned. The World Bank in a study made in five countries Chile, Egypt, Ghana, India and Turkey, has concluded that overstaffing has varied between 20% and 90%. The normal method of reducing this overstaffing to desirable levels has been through adoption of a Voluntary Retirement Scheme (VRS). This scheme provides for monetary compensation to those employees who opt to retire. The amount of compensation has varied from 30 days pay & for every year of service rendered or number of years of service left, whichever is less subject to a maximum, fixed at the discretion of the concerned Government. This compensation serves as a social safety net for retiring workers. In countries like India, minimum VRS compensation has been fixed by law; in Sri Lanka compensation is decided on a case-to-case basis. In India, a National Renewal Fund (NRF) was established to provide funds for VRS compensation. In India, up to May 1999, 0.13 million CPSE workers had opted for VRS under the NRF scheme. The number of workers opting for VRS had started declining after 1994-95. This could indicate loss of interest of the workers or the falling budgetary allocations to NRF or both. In the initial years, the allocations were supported by contributions from the multilateral agencies. A widespread criticism of the NRF has been that while the main objective of NRF was to help in retraining, counseling and redeployment of affected workers, and in employment generation, an overwhelming portion of the total expenditure incurred on NRF was utilized for compensation payment under VRS. The rate of redeployment of those workers who benefited from VRS was quite low. Out of the 98,327 beneficiaries under the NRF who were surveyed, only 36,889 workers were retrained. The number of redeployed workers was still lower at 11,623. Even if some of the workers might not have opted for retraining and redeployment, these figures appear quite low; especially of those who got redeployed. Later, public enterprises were permitted to raise resources from the market for this purpose. However, VRS could become a double-edged weapon, since good workers may opt to go away, leaving the bad ones behind. This happened in Pakistan, when 43% of 17,000 workers left with golden handshake (most of them productive workers) and created problems for the enterprises. Similarly, initial privatisations in Sri Lanka were preceded by massive downsizing of labour. Immediately, after privatisation many of the good workers who had taken VRS were called back, since the new managements found that they did not possess good, knowledgeable labour to run their enterprises.
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21.3 RETENTION AGREEMENTS

Privatisation can be a very painful process unless special measures are taken to cushion its negative impact on employment. One such measure is for Government to enter into agreements with the purchaser of the enterprise guaranteeing retention in service of employees for a certain period of time after change in ownership. Such an arrangement has helped smoothen the process of transition from public to the private sector. By the time the agreements expired, it was expected that the environment would improve considerably and that the workers would have less problem in adjusting to downsizing. This arrangement may depress the price which the purchaser is willing to pay for ownership of the enterprise, but it may suit the Government in quickening the pace of privatisation and transfer the likely hassle of downsizing labour to the purchaser. Such agreements have been observed in Sri Lanka and India. For example in Malaysia, agreements provide that no staff of the privatized enterprises may be retrenched within the first five years of privatisation, except on disciplinary grounds; staff redundancy, if any, would be resolved through normal attrition, redeployment and expansion activities; affected personnel, upon privatisation, would be offered a package of employment benefits on no less favorable terms and conditions of service than those enjoyed by them while in government service; such personnel shall be given the option of joining or not joining the new company; those not wishing to join will be retired and given their rightful retirement benefits immediately; and those wishing to join will be offered two schemes of service- one which replicates the Government scheme of service, and other which is commercially oriented. In the latter scheme, employees are entitled, among other things, to purchase the firms shares and enjoy such bonuses as the firms performance may warrant. In addition to offering shares to employees, employee stock ownership programmes (ESOPs) and employee loyalty scheme could be considered. In Pakistan, employment is assured for one year after privatisation. Employees whose service are terminated after one year are entitled to unemployment benefits for two years. They are provided with training and soft loans to facilitate self-employment and given priority in selection for overseas employment. It is noteworthy that in Pakistan, trade unions are signatories to the agreements.
21.4 RETRAINING
In developed countries such as the U.K., labour displaced due to downsizing in privatized enterprises are paid unemployment benefits till such time they become employed elsewhere. The State merely provides a safety net and leaves it to the individual to acquire training or skill on his own. The aim in such countries is to make the markets operate more efficiently. This reliance on the market to coordinate the demand and supply of skills precludes any action from the part of the Government in avoiding or limiting worker displacement. The Government only tries to speed up the process of redeployment. By encouraging entry of a large number of players in the market, Government ensures competition and as well increased opportunities for displaced labour. In developing countries where unemployment is already huge, and there is no safety net, the State is bound to intervene more positively in arranging retraining and redeployment of surplus labour. In addition, the state arranges adequate compensation for workers being displaced, so that the compensation amount serves as a safety net. For example, in India, the Government had provided compensation for those opting for Voluntary Retirement Scheme and till a few years ago undertook their retraining/ acquisition of new skills for reemployment or self-employment. However, as of now, India does not run these training centres but merely provides compensation for displaced workers.
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Sri Lanka and India have entered into specific agreements with purchasers of their enterprises safeguarding employees retention on conditions which are not inferior to what the employees were getting prior to privatisation for a period of one year. Thereafter, it is left to the management of the privatized enterprises to deal with labour redundancy. Most privatized enterprises have resorted to downsizing labour in Sri Lanka and India. Though compensation has been paid to workers, no attempt is made by Government or by the new management of the enterprises to retrain labour for alternative means of livelihood. Many workers have frittered away their compensation money in social functions like marriages etc. or in gambling and are facing penury. This problem can be addressed (1) through entry of adequate number of competitive players in the areas operated by public enterprises and (2) by making it incumbent on privatized enterprises to finance retraining programmes. Fortunately, some foreign assistance is now available for such retraining and this has ameliorated the situation to some extent.
21.5 EMPLOYEE SHAREHOLDING SCHEMES

Allocation of a proportion of shares of privatized enterprises to employees (including distribution of free shares, discounted share prices, has become a standard feature of privatisation policy in several countries, notably the United Kingdom. The UK privatisation programme provided for special terms of share offers for employees of the enterprises privatized. For instance, in British Telecommunications, employees received (a) 54 free shares per employee; (b) matching shares, two for one, up to 77 per employee; and (c) 10% discount for up to 1,600 shares per employee purchased under priority arrangements. In British Airways, employees received (a) 76 free shares per employee; (b) matching shares, two for one, up to 120 per employee; and (c) up to 1600 shares by each employee under the priority offer at a discount of 10%. In Mexico, employees have been given the right of first refusal i.e. the firm is sold to outsiders only if employees do no want to buy it. In Sri Lanka, the design of privatisation provides for allocation of 10% of shares to the employees. Employee share ownership plans (ESOPs) and management/employee buy-outs are other measures used to secure labour cooperation for the privatisation process. For example, in Russia, employees are entitled to 30% of liquidation proceeds. ESOPs have been used in privatisation in the U.K. and Canada. Activity a) List strategic issues that result from disinvestment. ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... b) What are the ways of tackling redundancy? ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... .......................................................................................................................
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21.6 SUMMARY
Disinvestment is an important part of privatisation as discussed in earlier units. This unit discusses the strategies issues which arise out of the disinvestment process. Different schemes like VRS have been discussed and an effort is made to understand these concepts and their implications related to the employee.

1. What are the implications of disinvestment on labour? 2. Discuss the ways to tackle such implications.
21.8 REFERENCES
Galal, A., James, L., Tandon, P., and Vogelsang, I. (1994). Welfare Consequences of Selling Public Enterprises An Empirical Analysis, Oxford University Press, Oxford. Gelb, Alan and Inderjit Singh (1994). Public Enterprise reforms in Transitional Economies, Background Paper, Policy Research Department, World Bank, Washington, D.C. Suzuki, H (1991). Lessons Learned from the Guinea Privatisation Programme, World Bank, Africa Technical Department, Washington, D.C. UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-25-27. UNCTAD (1995). Comparative Experiences with Privatisation Policy Insights and Lessons Learned United Nations, New York and Geneva. Vickers, J. and Yarrow, G. (1988). Privatisation an economic analysis, MIT Press. World Bank (1995). Bureaucrats in Business World Bank Policy Research Report, Oxford University Press, London.

Asian Development Bank, (1985). Privatisation: Policies, Methods and Procedures, Manila. Bishop M, Kay, J.A. and Mayer CP (1994). Privatisation and Economic Performance, Oxford University Press, Oxford U.K. Galal A, Jones LP Tandon P and Vogelsang I (1994). The Welfare Consequences of Selling Public Enterprises: Case studies from Chile, Malaysia, Mexico and the U.K. World Bank Country Economics Department, Public Sector Management and Private Sector Development Division, Washington D.C. Ganesh G (1988). Privatisation Experience Around the World, Mittal Publications, Delhi, India. Gouri, G and others (1989), Privatisation. The Asia - : Pacific Experience, Hyderabad, India: Institute of Public Enterprises.
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Gupta, Asha (1999). Towards Privatisation BR Publishing Corporation, Delhi, India. Jackson P.M. and Price, C.M. (1994). Privatisation and Regulation Longman Group, U.K. Ramanadham V.V. (1989). ed. Privatisation in Developing Countries, Routledge, London. Ramanadham V.V. (1998). ed. Privatisation in the U.K. Routledge, Chapman and Hall. Shirley, M and John Nellis (1991). Public Enterprise Reform: The Lessons of Experience, EDI Development Studies, Washington D.C.
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CASE 1 :STATE BANK OF INDIA, 19981

Mishra was perturbed. As an AGM of the prestigious State Bank of India Staff College at Hyderabad, he was scheduled to take a session with the young probationers on the benefits of the restructuring as suggested in the McKinsey Report. He was perturbed, not only because the report was something that was not easy to understand, but the portions of the report that he had read and understood, he was not convinced about. Much had changed since the time when he himself had started his career as a probationer in 1976. Branch expansion had been phenomenal, turnover had increased substantially, the very nature of competition itself had changed. Nevertheless, the nature of decision making had remained the same : banking after all was a serious subject ! Surprisingly, the SBI was not a nationalized bank. It had been created by an Act of Parliament in 1955, a logical successor to the Imperial Bank of India, which in turn had been created merging the four Presidency Banks in the 1930s. Its immediate objective in 1955 was that within the next ten years to create a network of over 500 branches within the length and breadth of the country !. As the only large state sponsored bank in those days, it was given the privileged status of being the treasury bank, and in the places where the RBI did not have any branches, SBI would step in for carrying on the functions, like presiding over the clearing. Mishra wistfully recalled the stories of yore when in the absence of the Collector in the District, the next officer that could give the order for firing, was none other than the Agent of the State Bank of India. By the time the 1969 nationalization had come around, all pretensions towards these grandiose existence had fallen by the wayside. In 1971, SBI was the un-crowned market leader, but the top management had realized that in the increasingly competitive environment, the position that had been assumed as given, was no longer something that could be taken for granted. Other commercial banks, now nationalized since 1969, were asking for their share for government business as also questioning the exclusive subordinate status to the RBI that was bestowed on the State Bank. The banks management also realized that the operating environment had changed totally. With increasing amounts of bank funds being earmarked for the statutory SLR and CRR, operating margins were being reduced. Bank profitability was increasingly dependent on reducing operational logistics time. There was also the danger of expanding beyond a size that could supplement the growth efforts of the organization. Thus in 1971, SBI commissioned IIM-Ahmedabad to suggest a new structure for the organization. The IIM Team had done a wonderful job of organizing the 3000 odd branches in 1971. The basic unit of the structure continued to be the branch. Some thirty odd branches made up a region, and some 4-5 regions made up a circle, enshrined in the Local Head Office. The LHO was more or less contiguous with states of the Indian Union. Thus the Patna Circle would represent Bihar, Bhopal Circle would represent MP and so on. This was however not a hard and fast rule. Delhi circle would consist of part of UP, Rajasthan, and Punjab.
Case prepared by Prof. Ajit Prasad, Faculty, International Management Institute, New Delhi. Case material has been prepared to serve as a basis for class discussion. Cases are not designed to present illustrations, of either correct or incorrect handling of managerial problems.
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HR Initiatives for Turnaround of Visakhapatnam Steel Plant
This case has been prepared based purely on press reports and an article in Business India, March 2000
Case Studies
Each circle was headed by a Chief General Manager supported by two General Managers, looking after Operations and Planning respectively. Under the GMs would be the Regional Managers and the Branch Managers. Decisions regarding loans would be cleared at the BM, RM or CMC level depending on the amount. [ The CMC was the Circle Management Committee consisting of the CGM, GMO and GMP ]. Each Circle was also authorized to have a local board, consisting of local representatives of Bureaucrats, eminent personalities etc. Only major decisions would need to be referred to the Central Office in Bombay. The LHO was the nerve center of the operations. Housing the all powerful CMC, meant that decision were taken fast enough, keeping the local imperatives into account. Posts of Development Managers for the different functional areas like P, Agl, IB, SIB, C&I were created, reporting to the GMP, to develop market intelligence and to perform the planning functions. In the early years, the monopoly positions of the SBI relegated these posts to professional obscurity ! The CGMs reported to Central Office, to their respective Deputy Managing Directors, which were designated on functional basis. Thus for international banking decisions, the DMD, IB would be consulted and so on. The DMDs in turn reported to the Managing Director and the Chairman [ Two separate posts ]. The board at the central level comprised of representatives from the Ministry of Finance, RBI, industry etc. For administrative purposes the CGM would report to the DMD, Personnel, while his ACR would be written by the MD in consultation with the DMDs. This structure introduced in the early seventies, fitted the organization like a glove. The primary purpose of reducing logistics time, and therefore the cost of transactions was achieved. Also with increased devolution of financial powers, loan applications processing time came down sharply from an average of 6 months to an average of 2 months. However, this was not without a cost. There was a feeling that the cost of this reduction in logistics time was being felt increasingly on the NPA [ nonperforming assets] figures, which were steadily increasing. Profits were thus further strained. There was another reason for this. With the changes in the political ideology, which replaced structural reforms with cheap capital intensive techniques of production, loan melas became the order of the day. This was further compounded with the new role of the Lead Development Banker being assigned to the SBI. This meant that profits from the other operations were increasingly under pressure. Nevertheless, the demarcation of circles, on the basis of States helped in within-the-state co-ordination. And the SBI could take full advantage of this. Its recovery of loans granted under the social schemes [ Mishra shuddered to recall the DIR loans at 4% interest, without any guarantee that were issued to the poorest of the poor ] was probably the best among all the commercial banks. The IIM team had assured that this structure could stand branch expansion till 6000 branches, after which a new structure would have to be introduced. This was proved true, and it was only as late as the early eighties, that minor modifications were felt necessary. This modification came in terms of introducing a new tier of Chief Regional Manager between the RMs and the GMO, with the further devolution of financial power. Thus 3-4 RMs would report to the CRM, who in turn would report to the GMO. This was roughly akin to the Commissioner system of District administration in most of the states, which served as a buffer between the DM and the Home Secretary. The LHO structure was followed at the CRM level, with the planning functions too being replicated in the form of Development Officers, for the different segments. There was also the enlargement of the CMC, with the introduction of a new post called GM, Commercial, looking after specific high volume-high value commercial account branches.
Towards the end of the seventies, there was a major turbulence in the form of the recommendations of the Pillai Committee report. Among its various recommendations was one that was destined to have a major impact on the recruitment policy of the SBI. This was the recommendation to merger the erstwhile OGII [ Officer Grade II ] with OGI into a new scale called JMGS-1, [ Junior Management Grade Scale 1 ] which would have benefited over 15,000 officers, a substantially large chunk of the 25,000 officers in the SBI. But this merger meant that Probationary Officers, who joined as OG-Is, would now be joining at the JMGS-1 scale, making them junior to all OGII officers. The start of the nineties saw further changes in the operating environment. The liberalization policy that swept the county saw the coming of a large number of private banks, with state-of-the-art communication technology, with highly specialized segments. This was in response to the fact that the financial services market was getting highly focused, and highly segmented. Specialization had became the order of the day. Competing banks were getting learner and thinner and fighting over margins that were getting reduced further. The SBI here was at an inherent disadvantage. As an organization that was a logical and moral extension of the state, it could not flout any of the rules that the Finance Ministry introduced. Not only did it have to strictly adhere to the CRR/SLR norms, it also had to strictly follow the rues that 40% of all advances be made to priority sectors, 25 % be made to the weaker sections etc. This left little money to go around for advances to the Corporate World, which was fast emerging a highly profitable and discerning segment. Profitability was further affected by the provisioning for the NPAs as suggested by the stringent norms of the Choksey and Narasimhan Committee reports. Computerization which could have helped in reducing costs significantly, was a major issue with the SBI unions. The other banks however were able to leverage this in setting new standards for operational logistics. The HDFC Bank touted that it could process a loan application within 36 hours. The customer too was getting wiser, and smarter, and more choosy. For the SBI this was a major shock. Mishra had wryly commented once that for an organization that never had any problems getting its customers, the very face of the customer was now getting blurred ! Towards the end of the eighties, the very strengths of the SBI seemed to be turning into its weaknesses. The massive branch network, now some 8500 odd branches, was introducing a heavy liability on the profits. Their contribution too in mobilizing deposits was being questioned. In Patna Circle, with over 500 branches it was estimated that 3 branches, Patna Main, Dhanbad, and Jamshedpur, accounted for all the net profits. Some 40 branches supported the losses of the remaining 450. The NPAs, which nevertheless were still above the other commercial banks, were also increasing. There was also a flight of very qualified officers at the middle management level to more lucrative jobs with the burgeoning private sector banks. Thankfully, the basic strength of the SBI, it dominant position in the retail banking [personal] segment had not waned, and its ability to raise large amounts of deposits from the average householder, no doubt leveraging its government image continued. This infact provided the very backbone to support the large volume advances that were being sought after by industrial houses. [ RBI rules prohibited lending more than a specified percentage of deposits to one borrower. This immediately put a lot of smaller banks out of the reckoning. Alternatively they had to recourse to consortium financing. ]
Case Studies
Efforts were made to correct the situation and gear up to the market requirement. To get closer to the customer, specialized branches were opened. Thus branches catering specifically to Industrial Finance, Corporate Accounts, International Banking, and Personal Segments were set up. This did help somewhat, but the top management realized that more needed to be done. The IIM structure had outlived its purpose, and in 1996, McKinsey and Co. were brought in to look at the situation afresh and recommend a new structure.
Table : Positioning of Different levels of Officers in State Bank of India pre IIM report Level-10 Level-9 Level-8 Level-7 Level-6 Level-5 Level-4 Level-3 Level-2 MD & Chairman DMD Secretary & Registrar Dy. Secretary District Officer Staff Officer -1 SO2 SO3 OGI* post IIM & Pillai reports MD & Chairman DMD CGM GMs SMGS-6 SMGS-5 [ CRM ] [ RM ] pre McKinsey MD & Chairman DMD CGM GM DGM AGM Chief Manager Manager Deputy Manager
SMGS-4 MMGS-3 MMGS-2
Officer Level-1
OGII
JMGS-1*
Asst. Manager*
Clerical Levels * indicates direct entry level as Probationary Officer.
As Mishra read again the brief circulated from Central Office regarding the recommendations of the McKinsey Report that wure being implemented, he was still perturbed. Not entirely convinced that this new structure would fit the existing organization in the same way that the IIM structure had done, he also saw several conflicts in the implementation process, including those with the organizational culture. Not entirely convinced himself, he wondered what sort of job he would do in convincing the young probationers at the lecture. Issues for Discussion: 1. Discuss the need for organizational change in the SBI in the seventies to the nineties. Why had the IIM structure outlived its purpose ? 2. What are the conflicts that Mishra is worried about ? 3. What are the success and failure factors that you see in the McKinsey report?
Annexure BRIEF CONTAINING THE PRINCIPLE RECOMMENDATIONS OF THE MCKINSEY REPORT

The Background : The banking industry in India is facing tremendous pressures with respect to profitability. This is not only on account of increased competition but also on account of more stringent banking regulations. With the process of globalization process, banking customers are also looking for products and services which are available internationally. There will thus be a need to create new products to meet the changing customer requirements. The Diagnostics : The consultants, McKinsey and Co. have observed that the bank enters the era of deregulation with a strong capital base and an expense-to-income ratio, with is comparable with world class banks. However, with an ROA of 0.22% in 1993-94, the SBI is behind private sector banks [1.3%] and the foreign banks operating in India [3.2%]. Market share has slipped from 25% five years ago to 20% now. The consultants, while devising strategies for the Bank have kept in view the following significant areas for business development. [1] to retain and nurture high value corporate clients who contribute substantially to Banks income and profit, [2] to avail of new opportunities that have opened up for the Bank for undertaking Leasing and project Finance, [3] to develop mid market business, by financing large number of mid sized corporates, [4] to focus on opportunities for mortgage lending as well as consumer durable finance, and [5] to fully utilize the large network of branches, especially in rural areas for mobilizing deposits. The Strategy Statements: Vision : To be a premier Indian Financial Services Group with global perspective, world class standards of efficiency and professionalism and core institutional values. To retain its position in the country as a pioneer in Development Banking. To maximize shareholder value through high sustained earnings per share, and to build an institution with a culture of mutual care and commitment, a satisfying and exciting work environment and continuous learning opportunities. Mission : To retain the Banks position as the premier Indian financial services group, with world class standards and significant global business, committed to excellence in customer, shareholder and employee satisfaction, and to play a leading role in the expanding and diversifying financial services sector, while continuing emphasis on its development banking role. Values : Excellence in customer service ; profit orientation ; belonging and commitment to the bank ; fairness in all dealings and relations ; risk taking and innovation ; team playing, learning and renewal ; integrity and transparency; and discipline in policies and systems. Strategies and Systems : the existing market segmentation was given a re-look in the light of the emerging environmental changes. While in the highly regulated environment, there was limited scope for competitive strategies such as cost leadership, produce differentiation, focusing on customer groups etc., in a competitive situation, focused attention assumes a lot of significance.
Case Studies
The broad strategy has been to create SBUs to deal with specific customer groups/ business activities requiring focused attention. These customer groups are required to be handled in an integrated manner, i.e. both in respect of planning and operational areas. The Business Groups and the SBUs under them have been identified as: 1. Corporate Banking Group : SBUs include the Corporate Accounts Group, Leasing Group, and Project Finance Group
2. National Banking Group : the 13 LHOs constitute the SBUs under the NBG, each LHO having two network of branches to give the business focus : Development and Personal Banking [ also referred to as the retail network] and Commercial Banking 3. International Banking : Foreign offices constitute one SBU and the other SBU being global Merchant Banking and the Link Office Associates and Subsidiaries : The SBUs identified under this group are Associate Banks and other Subsidiaries.
4.
A fifth business group has also been identified, viz. Personal Banking Group, with three SBUs namely Consumer Finance, Mortgage Finance and Credit Cards under it. For the present, this group has been put under the charge of NBG. Value Propositions : In deriving the strategy, Value Propositions have been identified for each Group. Broadly speaking, value proposition is that attribute which the Bank is striving to add to the products/services being offered to the customers so as to make the offering competitive in the market place and attractive to the customers. Organizational Structure : The organizing principles are as follows : 1. A lean and integrative corporate center, focusing on long term planning and policy formulation, with no active role in daily operations : center to add value in areas requiring cross business unit perspectives or expertise Targeted business units, each with a distinct profit and loss responsibility for a distinct definable set of customers A senior management team, with common performance aspirations and clear accountability organized on the basis of a simple structure The key processes identified for streamlining are : credit and risk management, improved balance sheet and performance management, progressive and differentiated human resources process an technology management. The inspection and audit systems would need to be realigned with the various changes taking place in the strategies, systems and structures.
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The Apex Management Structure will have: 1. 2. The Chairman as the CEO Four staff functionaries under the corporate center, viz. DMDs with the dual designation of Corporate Development Officer, Chief Financial Officer, Chief Credit Officer, and DMD in charge of Inspection and Audit.
3. The four business groups will be headed by: (a) (b) (c) (d) 4. MD and Group Executive : Corporate Banking Group MD and Group Executive : National Banking Group DMD : Associates and Subsidiaries DMD : International Banking
All the above eight functionaries report directly to Chairman and are independently responsible for matters relating to their group/ staff area.
Revised Structure at the Circles : Salient features of the restructuring are 1. Circle Structure will consist of [a] the LHO, [b] the Network Headquarters, [c] Zonal/ Regional Offices, and [d] Branches Circles are to be divided into two focused networks [a] commercial, and [b] Development and Personal Banking Planning to be integrated with operations. Planning support to be provided by [a] business planners, for network GMs and [b] Sales Planners for AGMs Special re-emphasis on loan recoveries and NPA management by providing support at the various levels in the LHO.
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LHO and Network Headquarters : The LHO will be headed by a CGM and supported by three staff functionaries of the rank of DGMs to oversee policy and strategy formulation and policy implementation in the areas of Financial Management, Credit Management and Personnel and Services. The three functionaries are designated as Circle Financial Officer, Circle Credit Officer and Circle Development Officer. Two network headquarters each under a GM have been created to manage the Commercial Banking and Development and Personal Banking network Branches. Branch Structure : The structure at the branches would be reviewed after the network configuration stabilizes.
CASE 2 : CORPORATE PLANNING AT Turnaround SAIL, of Visakhapatnam 198993 Steel Plant

It was the February of 1993 and Dr Sengupta had mixed feelings. As the Senior Deputy Director with the Steel Authority of India Ltd., a public sector undertaking, he was in charge of the corporate planning activity in the organization. On one hand he was elated because after two and a half years of hard work by his team, the Corporate Plan 2005 document had been finalized [a brilliant document he thought personally], had been accepted formally by the Board, but on the other hand he was depressed because of the impending revision of the numbers : was this to mean that all the work had gone to waste ? In 1993, SAIL was a mammoth public sector undertaking. [ It still is !] Turnover 12000 Crores, Output close to 10 million tones of crude steel, 2,00,000 employees, nine plants, 14 departments and in 1996 would be classified as one of the navaratnas of the Government. While it had formally be set up in 1972 , it could trace its roots back to 1954, when Hindustan Steel Limited was set up with the task of constructing and operating three steel plants in Rourkela, Bhilai and Durgapur. Bokaro was added later on. As were, MEL and VISL. The sheer diversity of the product mix and the volume of production [ in any given year, SAIL would be moving close of 50 million tones of raw materials ], was mind boggling. As his Chief Economist had one remarked, you have to see the rolling mills of Bokaro, to really understand the sheer dimensions of operations In 1980s, the steel industry was in midst of transition. Still predominately influenced and controlled by the Public Sector, of which naturally SAIL was a powerful player, the private sector had a dismal and residual presence. Legislation restricted the entry of the private sector into the capital intensive but profitable blast furnace route [ BFBOF ] of steel making. The private sector was free of course to enter into the alternate route [ the DR-EAF ], which was quite energy intensive and had all the associated problems of energy shortages. The result was an industrial structure that was highly skewed. SAIL and TISCO, were the major dominant players accounting for over 65% of the total market. The rest of the market was fragmented. Even within this market, the major producers were subject to administered price control, where the Joint Plant Committee of the Ministry of Steel would determine the prices of steel in consultation with the main producers, taking costs of production into account. [ a possibly apocryphal story recounts once of a jocular remark of Russi Modi, CMD of TISCO, Thank God for SAIL ! ]. Distribution too was tightly controlled, with most of the distribution powers being held by the Development Commissioner of Iron and Steel, a post usually held by an IAS officer of the rank of Joint Secretary. Thus controlled production, prices, distribution and investments were the market characteristics that Krishnamurthy was functioning against1. Within this framework, thinking about profits was something that did not come naturally to SAIL employees. Planning again was not part of the culture of the organization. And before Krishnamurthy, planning meant the annual production plan. Planning was basically supply side determined, most of the industry worked under a corruption of Says Law that Supply will create its own Demand : what can be produced can be sold. Planning was also in volume terms, prices and profitability having little inputs in the determination of the strategic choice.
HR Initiatives for
Case prepared by Prof. Ajit Prasad, Faculty, International Management Institute, New Delhi. Case material has been prepared to serve as a basis for class discussion. Cases are not designed to present illustrations, of either correct or incorrect handling of managerial problems.
Case Studies Before 1985, the fortunes of SAIL had been mixed. Productivity was low and output had stagnated. Capacity utilization was low [ in the range of 60-80% ]. Morale was low, and the company, despite the presence of administered prices, had made continuous losses. In 1985, Krishnamurthy was asked to take over this giant monolith. With months of taking over, two priorities were clear. First if SAIL was to turnaround, it would have to grow, and this growth would have to come from additions to capacity, and second, for adding to this capacity, substantial investments would have to be made. Resources and investments were going to be very important.
Corporate planning in SAIL laid its genesis to this. In 1986, Krishnamurthy created the Corporate Planning Directorate, separating the planning functions from Operations. The subsequent task was more difficult : finding someone to head the function. Krishnamurthys choice eventually fell on Arvind Pande, [IAS, 66MP], then Joint Secretary with the Prime Ministers Office. The offer was also convenient to Arvind Pande, it came at a very opportune time : he was due to be repatriated to his home cadre, and his wife, a professional in her own right was loth to do so. Paradoxically, one of the first tasks of the Corporate Planning Directorate was to find suitable office. In 1986, SAIL had offices spread all over the city, the HT house at Curzon Road, Express Building in B S Z Marg, etc. After much debate and deliberation, and direct intervention ant the Chairmans level, it was decided to surrender part of the second floor, albeit cramped, to the freshly inducted recruits of Corporate Planning Directorate. Said A J Malhotra, Dy Manager [who was pulled out of the Central Marketing Organization], in the initial days, it was difficult even to get a peon, let alone an officer to do the work !. Ravi Garg, who followed Arun from Finance, was equally upset at the loss in the facilities that his new assignment presented. Nevertheless over the months, things settled down. The First Corporate Plan was prepared, and presented. Corporate Plan 2000 was a repetition of history. The National First Five Year Plan had been an agglomeration of projects : an accounting plan. SAILs endeavor was none more. It was a collection of numbers, but nevertheless a good collection of numbers. it gave Krishnamurthy the teeth to fight the Project Appraisal Division of the Planning Commission, for money so badly needed for investment [ in the 1980s all investments in the Public Sector had to be cleared by the Public Investment Board, of which the PAD in the Planning Commission was the first step] and with the much needed money, things were on the go in SAIL. Corporate Planning was not the only job that was entrusted to the Directorate. External interfaces was an important task. Parliament questions, ministerial replies etc consumed much of the time of the officers, inasmuch as Pande felt the need to strengthen the Directorate. Additions came in the form of an Economics cell, started by Anita George, a bright MBA from Boston. Sanjay Sinha, from the Policy Group was tempted to move over, as was Anoop Sharma. Prasad came in as the Senior Economist from the Planning Commission and S C Sharma, from the Ministry of Industries joined as the Economic Advisor. Corporate Planning would now function as a think tank for the company.
1
From 1991 onwards the structure of the industry changed drastically. Free licensing, even of the BFBOF route, withdrawal of FEF, and the APM led to the setting up of large capacities, in excess of demand, especially in the profitable HR Coil segment. On the external front the collapse of the Soviet Union, and the resulting economic crisis thereof, led to international prices being depressed and there was evidence of large scale dumping. These events however took place after the Plan had been published. 2
HR Initiatives for With personnel firmly in place, things started to happen in the CP Directorate. Turnaround of Business environment scanning started in a serious manner, with a bulletin being Visakhapatnam published for top management. Diversification started being looked at afresh : there Steel Plant were projects of Caprolactum and Carbon Black at Bokaro, Almora Magnesite at Nainital, and other joint ventures. Fresh approaches were made to improving productivity through the direct intervention of the Organizational Systems group, a small cell in the Directorate created to look at ways in which enhancements could be made in productivity levels.
The activities of the Planning Units having stabilized, it was decided undertake the ambitious target of revising the Corporate Plan 2000. In 1988, work on the Second Corporate Plan started. The Directorate decided to go about the process in a more scientific manner, making this a strategic plan rather than an accounting plan. In the approach note to the Plan, Prasad, the Chief Economist, wrote the planning process must rest on scenarios and be able to generate multiple options. One of the weaknesses that we have had do far is that we have never been able to suggest prioritization of projects : let alone the specification of a Plan B In 1988, it was decided that it was decided that given the changes that had taken place in the environment, there was need to revise and update the plan. Thus Corporate Plan 2005 was initiated, with the objective of providing both a production and investment plan to the company. The second plan exercise was a mammoth one. It was to be a participatory exercise, using a bottoms up approach to the planning process rather than the traditional top down approach. Some highlights of the planning process were : 1. In 1989, an approach paper was prepared and circulated listing the approach and the priorities that the new plan would have. This was debated at a number of top management workshops, and a final theme developed. Given the crystallized approach, planning cells of the nine units were called for consultations at Corporate Office, and given instructions that each unit should prepare a Corporate Plan for itself under the assumption that it was a stand alone unit. This plan was to be termed as the Unit Perspective Plan, UPP. Each plan should specify the vision, the resources required and the plan that its has to reach that vision. This was to be an unbounded exercise and units were told to do a lot of deliberate day dreaming. Each plan should also be broken down into functional plans, covering areas like operations, finance, raw materials, personnel etc. At the corporate office expert groups were formed to look at each functional area across the whole organization. Thus the expert group on productions would be required to look at the production plan of the whole company without any plant biases. Ditto for finance and other functional areas. There were a total of nine functional groups. In 1990 a series of workshops were held at the management Training Institute at Ranchi were consistency was looked at among both the unit level plans and the expert groups. There rounds of consolidation exercises were done. In 1991 December, Dr S R Jain led the board of Directors through the presentations and finally approved the Corporate Plan numbers. The final plan over its entire period had an outlay of over Rs 42,000 Crores. The levels of investment had run into some rough weather. To some it seemed rather ambitious. Unfortunately some of the some were decision makers. Naturally, Director Finance was very hesitant to accept the targets. Dr S R Jain, the Chairman also had his own reservations, about whether it would be possible 3 to push this target through the PIB.
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Case In Studies 6. a series of workshops held at Ranchi, the Corporate Planning group had to work hard, to push the consolidation figures through. The task had been laborious, it was never easy bringing to convergence fundamentally divergent views. The Final plan had investment allocations of 20,000 Crores for the 8th Plan, 16,000 Crores for the 9th Plan and 7,000 Crores for the first three years of the Tenth plan.
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The consolidation exercises had not been easy. Naturally, Bhilai and Bokaro had objected to toning down of their investment plans. In some cases there were radical differences in the technology that should be adopted. PBCC Vs Stamp Charging was one. There were also variances in the external competition scenario that were presented. In 1992, while preparing the final plan document, the economic environment changed. Delicencing of the industry had started : operations wanted to rework the numbers. Import tariff rates had gone down : marketing wanted to rework the numbers. Exchange rates had changed : finance wanted to rework the numbers. Nucor had come out with a new technology : projects and R&D wanted time too to rework the numbers. Individual units too started to clamor about wanting to change the Plans. The Corporate Plan was accepted wholeheartedly by the board in 1992. Corporate Communications films were made and circulated. Groups from Corporate Office went to the plants for making presentations and clarifying any doubts.
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10. Late 1992, the exercise finished. Dr S R Jain, had retired, and M R R Nair took over. Mr. Nair had been Director Personnel when the planning exercise started. When the numbers were approved, he had been MD, Bokaro. 11. The Corporate Planning Group at the Corporate Officer was given the Best Group Award at a simple but impressive ceremony on SAIL day. Heads of Planning Cells at the units were given promotions as and when they fell due. 12. In May1993, following the change in the Government, fresh estimates were to be made for the 8th five year plan. The Finance Directorate gave a five year investment proposal of Rs 13,000 Crores. Things were more or less the same, but IISCO had been dropped. The writing of the document itself had also been a substantial exercise. Two sets of the document were released. Set A, which contained the investment chapter and was released to a select few, and Set B, without the investment chapter, which were for general circulation. It was Prasad, who led the writing team, who insisted on separate chapters for assessing the operating environment, the strategy statements, the functional activity plans, and giving credence to the then imperatives, specific chapters on Value Addition in SAIL, and Environment Management. The last chapter The Constraints to Growth, listed some major factors why the plan targets may not be met. To drive home the point it was decided that the subtitle : Growth with Profitability would be mentioned on each page of the document. The forward by the Chairman, S R Jain, recorded: .. This Cooperate Plan [perspective 2005] specifies a blue print to take the company into a further high growth path. Distinct from the earlier Plan, the document identifies not only the targets, but more important the strategies that need to be adopted
4
Again
Change is the hall mark of any growth process. Managed change will be one of the strengths that SAIL will exploit to retain the spirited growth..
In all, over 12 executives had worked continuously for 2 years on the preparation of the Corporate Plan at Corporate Office alone. The numbers that must have worked in the units were probably more to the tune of 50-60. As Sinha, the economist remarked, the sheer volume of data and paperwork generated, succeeded in bring out a lot of ideas about the organization. An important spin-off was the bringing the planning functions across units closer. As Dr Sengupta looked at the glossy cover of the new Corporate Plan, he could but stop the gushing feeling of pride. It had been a tough job, but worth it. The final document, when presented to the visiting World Bank team had drawn much appreciation. The Directorate had grown from strength to strength over the years. Apart from the core planning functions, more power had been added in the form of the Computer Services Division being asked to report to it. The Quality function became an important part of the Directorate as did the MOU function which involved substantial interaction witrh the Ministry of Steel. The recent communication by the Finance Directorate was however a source of worry to him. Following a recent meeting with the Working Group of the 8th Five Year Plan, the resources available had been pruned down. The Investment outlay for the perspective plan would have to be curtailed from 20,000 Crores to 13,000 Crores for the 8th Plan Period. As Dr Sengupta made his way to the scheduled meeting with the Chairman, he could not help wondering on the futility of the whole exercise. The ink had not yet dried on the Corporate Plan Document, and there was already talk of revising the figures. Dr Sengupta shook his head regretfully at the inevitability of events.
Case Studies
THE KEY PLAYERS IN THE SAIL STORY
Dr V Krishnamurthy : Formerly with BHEL, and MUL, also Secretary, Heavy Industries, was brought in by Rajiv Gandhi , to turnaround the perennial loss making company. A charismatic leader, he used all techniques to motivate employees, and delivered profits. Started Corporate Planning in SAIL by bringing in Arvind Pande as Director Corporate Planning. Left SAIL in 1989 to become Member Planning Commission. Vision : SAIL to become the third largest steel producer in the world.. Dr S R Jain : An internal man, joined as management Trainee Technical and grew with the organization. In between, was also CMD of HEC and CIL. Came back as Vice Chairman SAIL under V Krishnamurthy and then succeeded him to Chairman. A technologist at heart, Famous Quote : I wear to hats, one as Chairman, the other as a technologist. You can come and see me any time if you want me to wear the technologist hat. Was content to make profit of one crore per day. Vision : SAIL to become the technology leader in the industry.. Mr. M R R Nair : An internal man. Joined as Management Trainee Personnel. Was also the youngest Director on the Board. Was also MD Bokaro. Succession to Chairman was not automatic. Reportedly had to face stiff competition from the current Chairman, Arvind Pande. During his tenure, profits went into the four figures. Vision : focus on Customer satisfaction... Mr. Arvind Pande, [ IAS, 66MP ] in 1993 the Vice Chairman and Director of the Board. Joined SAIL in 1986, having resigned from the IAS. Last positing, Joint Secretary Prime Ministers office. In SAIL started off as Director Corporate Planning and then assumed charge as Director [Personnel and Corporate Planning]. In between also held concurrent positions MD Rourkela, IISCO and Director in Charge Raw Materials. Succeeds Nair as Chairman in 1997.
A BRIEF ON SAIL AND ITS UNITS
SAIL : SAIL was originally set up as a holding company, with HSL and BSL. Later on the Holding Company concept was dropped. It is now a vertically integrated company, which was recently awarded the status of a navaratna company.
BSP : [1959] Bhilai is the original Russian plant. At 4.0 mt capacity it produces long products and plates. Long products are wire rods, bars, structurals, etc. and are used primarily in construction. Plates are used in ship building and flooring. Profit making DSP : [1960] Durgapur is a long product plant [ 1.5 mt ] as well a s producing railway materials : It was set up with British aid and technology. It has recently gone in for substantial investment for completely revamping the iron and steel making process. Loss making, but with this new investment, costs have come down. Skeptics say however that capitalization of this investment will see that this unit never makes profit. RSP : [1961] Rourkela was set up with German assistance, It has a capacity of 1.6 mt, and is probably the most versatile plant in the SAIL fold, producing a large variety of flat products, as well as CRGO sheets and also space application steel. There is also a fertilizer plant attached to the steel plant. Breaks even. Substantial investments required to upgrade technology. BSL : [1973] Bokaro was originally planned to be set up as a separate company, with USAID help. At the last minute, this project was aborted and the Government turned to USSR. It is now a 4.00 mt plant, producing primarily flat products , such as HR cold, CR Sheets etc which are primarily used in the white goods industry, consumer durables etc. Profit making, but of late has started only breaking even. However there is substantial excess capacity in the HR market. Capital investment undertaken in terms of introducing concast. IISCO : The Indian Iron and Steel Company [ est. 1918 ] located at Burnpur in West Bengal was originally funded by the British and nationalized in 1972. It was brought in as a subsidiary in 1978 within SAIL. Loss making. SAIL has been trying for some time to hive this unit off. JICA, Swaraj Paul, Mittals, etc all have turned down this offer. Located in W Bengal, this unit has strategic importance in terms of politics. Requires lost and lost of investment. MEL : Maharashtra Electrsmelt, located in Chandrapur, near Nagpur. Manufacturing Ferro alloys, a vital input in the steel making process. Perennially loss making. But of strategic importance to prevent cartellization of the other players in the market. Loss making. VISL : Vishvisweriya Iron and Steel Limited. Located at Bhadrawati, Karnataka. State owned, SAIL acquired initially 40% of the share, now holds 100%. Perennially sick, mainly due to high tariffs and consumption of power. May break even, after the introduction of a new blast furnace.
Case ASP Studies : [1965] Alloy Steels Plant, Durgapur. Uses small electric arc furnaces to produce special and alloy steels. Losing market share to domestic production and imports. High cost producer and thus loss making unit. Requires massive capital and technology injection.
SSP : [1980] Salem steel plan was set up using French technology. Gets slabs from ASP and abroad, rolls them into stainless sheets. Only brand that is consumer friendly in India.. Requires technology injection. Some talk of going in for backward integration to meet demand in the south Indian market. Initially profit making, but due to high costs, loss making now. HIGHLIGHTS OF THE CORPORATE PLAN 2005 In light of the new policy environment of an open regime, the strategic long term mission of SAIL has been recognized as growth with profitability The emphasis is on maximization of internal generation of resources through increased production, sustained enhancement of quality of products and services and harnessing the market potential in a competitive environment. The growth strategy identified in the planning horizon upto 2005 is aimed at exploiting the latent potential of SAIL plants through further modernization and technological upgradation. No greenfield capacity will be created. The production of crude steel from the five integrated steel plants will grow to a level of 18.9 mt in 2004-05 from 9.87 in 1991-92. The corresponding saleable steel targets is 17.5 mt from 7.48 mt. The share of flat products in saleable steel will be 73.4% in 2004-05 compared to 56.5% in 1991-92. 100% of the crude steel production in the ISPs will be through the BOF route, and 97% of the crude steel will be processed through continuos casting. Obsolete and energy intensive open hearth furnaces will be phased out. The plan aims at a 30% reduction in specific energy consumption and a doubling of works manpower productivity by 2004-05. Increased production will mean an increased demand for raw materials. The requirement of iron ore will increase to 32.3 mt, while that of coking coal and limestone to 20 mt and 9 mt. Coal imports will continue. The targets for exports will grow to 3.5 mt, equivalent to 20% of the saleable steel production, making SAIL a net foreign exchange earner. The capital investments for new schemes meant for modernization and expansion of SAIL steel plants and the captive mines during the period 1992-2005 is envisaged at around Rs 23,200 crores, and for the service units like RDCIS, CMO etc, at around Rs 1950 crores. In addition the subsidiary units like IISCO, VISL, and MEL would require approximately Rs 10,000 crores for their modernization. The total internal generation in the planning period in SAIL, excluding subsidiaries is expected to be Rs 36,000 crores. The gross margin to capital employed ratio is projected to improve from the current level of 17% to 32% by the terminal year. .. The plan envisages the payment of dividend of 30% [on equity] by the terminal year of the Plan.
8
ISSUES FOR DISCUSSION

1. 2. 3. 4.
Examine the efficacy of the elaborate planning process in SAIL . Evaluate on a scale of 1-10, the success of the Corporate Plan. If Dr Sengupta were to repeat the exercise all over again, what should he do ? What is the importance of the Vision exercise in the detailing of the Planning process? Are numbers sacrosanct in the planning exercise. What is the difference between planning and strategic planning? How can planning be used to create sustainable competitive advantage? Is this being created in SAIL.
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CASE 3 : GLOOM TO GLORY: THE SUCCESSFUL TURNAROUND OF THE SINGARENI COLLIERIES COMPANY LIMITED
Prologue Gloom to Glory is the story of one of the most amazing and unbelievable comebacks in the plan of government economics and the roles played by a visionary political leadership, professional management and a newly awakened labour force. It was in the year 1996 that Singareni Collieries Company Ltd (SCCL), the 107 year old state public enterprise, was experiencing stormy weather. Its financial performance hit rock bottom with accumulated losses of over Rs.1200 crore. It maladies included an excessive baggage of over 100 confrontational trade unions giving one strike call a day, low quality of coal, no customer focus, old and obsolete technology. To add to its woes were administered coal prices and adverse geo-mining conditions which pushed the only coal-mining company in South India to the brink of sickness and uncertainty. A period that had in store a gloomy and doubtful future for all its stakeholders the government, customers and about one lakh workforce. Against this gloomy scenario, the Government of Andhra Pradesh, under the visionary leadership, stood up to the challenge and took some bold decisions and firm actions the result of which was a miraculous and remarkable turnaround. By 2002-03, the company wiped out all its losses and entered the year 2003-2004 with net profits. It was a glorious year a year of complete satisfaction, happiness, success and achievement. Its a story to be shared and learnt from the experiences. This case is a sincere attempt to highlight the ups and downs of Singareni Collieries and the remedial actions in the form of reforms that contributed to the turnaround of the company. The case study on the spectacular turnaround of this company explains the various forces that lead to sickness of public sector entities. It also explains how new paradigms, the state and the SCCL management in reforming a sick public sector unit have drawn. Introduction Coal: Mother Natures Dark Child: Man is blessed with abundance of natural resources, including mineral wealth, that play vital role in the development of a country and promote the economic growth when explored and made best use of them. Coal, which is one of the important minerals, is known to man since ages and this natural wealth has been put to diverse use in the modern world. Regarded as the fuel for growth, coal is an important input for power generation, a vital infrastructure for economic development. The mineral provides around 23% of global primary energy needs and accounts for a share of over 38% among various sources of total
Case prepared by Dr. B. Rathan Reddy, Faculty, Institute of Public Enterprise, Hyderabad. Case material has been prepared to serve as a basis for class discussion. Cases are not designed to present illustrations, of either correct or incorrect handling of managerial problems.
Case Studies
power generation in the world. The world coal consumption is projected to go up from 4.7 billion tonnes in 1999 to 6.4 billion tonnes by 2020 primarily in China and India, which are expected to account for 75% of the increased consumption. Energy Consumption: Commercial energy consumption in India has grown from over 26% to 68% in the last four and half decades. Coal accounts for 63% of the countrys energy needs. The current per capita primary energy consumption in India is about 243 kgoe/year, which is well below that of developed countries. Driven by the rising population, expanding economy and a quest for improved quality of life, energy usage in India is expected to rise to around 450 kgoe/year in 2010. Considering the limited reserve potentiality of petroleum and natural gas, eco-conservation restriction on hydel projects and geo-political perception of nuclear power, coal will continue to occupy center-stage of Indias energy scenario. Coal Mining in India commenced in 1774 and the production level increased from 6.19 million tonnes in 1900 to around 340 million tonnes in 2002-03. In India, coal production is still significantly under the government control and ownership, with Coal India Limited (CIL) along with its subsidiaries being the number one producer. Coal India, which is a Central Public Sector Undertaking, contributes to 87% of the countrys total coal production. Singareni Collieries Company Limited, owned jointly by the Central Government and the Government of Andhra Pradesh, accounts for 10% of the national production with only 7% of national coal reserves. Challenges: A majority of PSUs continued to operate in post-liberalisation era facing the new dynamics of market and taking on the challenges of competition from local, national and international private players. The PSUs also had to work under the threat of privatisation, and move towards newer paradigms of accountability, economic viability and transforming to be more competitive. Several PSUs became sick and were either closed or privatised.
Policy Reform Markets opened
Changed Scenario Protected markets turned competitive Funds inflow stopped, losses Immune labour made accountable New competition from private/foreign players PSUs losses no longer fully absorbed by government
Impact on PSUs Monopoly lost
Change Needed Become market-oriented
Reduced fund allocations
Resource crunch
Turn profitable
Labour reforms
Employee insecurity
Employee attitude
Privatisation
Customers Reign, quality-cost imperative
More customer and quality focused Workout a complete turnaround
Sickness
Loss-making PSUs faced with sickness/ closure
Liberalisation and economic reforms had also impacted the coal industry in a significant way. The coal industry as subjected to greater regulatory changes, competition, rapidly changing technology and consumer preference.
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The structural adjustment and the liberalisation programme announced by the Government of India offered both) opportunities and threats in the form of:
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Free pricing and distribution of coal; Pressure on demand from domestic coal companies and imported coal due to lowering of import duties; De-Licensing of coal industry; Stoppage of budgetary support from the government .
Against this backdrop, Singareni Collieries, which was on the brink of sickness and closure, is among the few Indian public sector units to have redefined, re-evolved and re-engineered itself and made significant strides towards profitability and viability in a liberalised market era. History (1871-2003): 1871: Dr. William Kind confirmed coal deposits in Godavari Valley. 1886: Hyderabad Deccan Company Pvt. Ltd., was incorporated in England. 1889: First commercial operation commenced at Yellandu, Khammam Dist., AP (then a part of Warangal Dist). 1920: Hyderabad Deccan Company Pvt. Ltd was re-christened us the Singareni Collieries Company Limited (SCCL), and its script listed in the London Stock Exchange. 1945: The Nizam of Hyderabad purchased the shares of the company 1948: Machine mining started at No.5 Incline in Kothagudem 1949: SCCL came under State control 1975: Opencast mining started at Godavarikhani (RG OC-1) 1983: Longwall mining started at Godavarikhani (GDK-7 Inc.) 1986: Introduction of Walking Dragline (RG OC-1) and commencement of computerisation 1989: Introduction of Blasiting Gallery method at Godavarikhani (GDK-10 Inc.) 1994: Introduction of Input Crusher and Conveyor technology in an Opencast mine for the first time in the country. 2001: KK-2 Incline (an underground hand section coal mine of Mandamarri Area) crossed 1.0 OMS (Output per manshift). 2002: Introduction of Surface Miner Technology at Yellandu (Koyagudem OC). 2003: The company achieved a stunning turnaround. All accumulated losses wiped out. Entered net profit regime.
Case Studies
Promoting Industrial Development The giant State enterprise, SCCL is an important engine of economic growth in Andhra Pradesh. It contributes around Rs 400 crore as royalty and sales tax to the States exchequer. Sector-Wise Offtake 2002-03
Cement 13% Others 9%
Power 78%
With a base of about 6,000 vendors, the company has spurred the growth of ancillary industries in the State. The economic prosperity of the entire coal belt in Andhra Pradesh is dependent on SCCL. In consonance with the national policy, SCCL facilitates the development of small scale industries and local industries. Development of roads, water supply and other social infrastructure in and around the colliery areas, in partnership with a proactive state government, has helped in improving the quality of life all around. Singareni Collieries has several strategic advantages ranging from huge coal reserves to client proximity being the only coal-producing company in South India. The company harnesses its locational advantage to service a large market in and around its areas of operations. About 3,500 major, medium and small-scale industries form its customer list which includes diverse industries such as thermal power plants, cement, steel, paper, textile, tobacco, ceramics, pharmaceuticals, distilleries etc. Singareni supplies coal to several thermal power plants, including NTPC (Ramagundam), APGENCO power stations and power stations in Karnataka, Maharashtra and Gujarat. The power sector consumes 78% of SCCLs coal production. Thirty seven cement plants situated in the states of A.P, Karnataka and Tamil Nadu consumes 13% of its coal production. The balance 9% is supplied to about 3400 small and medium scale industries. With spurt in industrial growth in the southern states and huge increase in demand for electricity, Singareni will have to play a key role in empowering the economies down south of the country. With the new Electricity Act providing opportunities for independent power production and distribution, the demand for SCCL coal is poised to increase further.
Role of Swot Analysis for Turnaround of SCCL Introduction The SCCL embarked on a variety of strategies to improve the performance. The means adopted were use of: 1. Better communication system 2. Multi departmental teams 3. Structural changes in IR systems 4. Various I.E techniques etc. Swot Analysis in SCCL The SWOT analysis as to five years ago is described below, listing out only more important parameters to portray the then situation. Strengths 1. 2. 3. The organization is more than hundred years old. It has a pool of well trained human resources. The human resources have high and proven level of technology absorption capabilities and are second to none.
Weaknesses 1. 2. 3. High accumulated loss. Became potentially sick to be re-referred to BIFR. Employees have been displaying low level of commitment/light attitude towards improvement in performance, importance of productivity, work culture, changes and reforms, job satisfaction, wage levels, work norms, concern for aspirations of other sections of public, need for thrift etc. Employees have been exhibiting minimum level of awareness on company parameters, problems in nearby organizations, management processes, role of coal sector on the economy of the down stream organizations, importance of quality, importance of work norms, ownership particulars of the company, reforms process of the company etc. Difficult IR situations with multiple unions and frequent strikes. Reduced production and wage earned due to IR situation. Assumption of guaranteed employment, irrespective of change in number of mines and firm views about the system of employment of dependents. Drudgery in some of the jobs like manual filling of coal into tubs and such other underground operations. Communication process not upto the mark and needed overhaul.
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10. The coal sector is deregulated. 11. Disturbed social fabric-role of extremism in organizational aspect.
Case Studies
Opportunities 1. High scope for expansion
Threats 1. 2. 3. 4. Closure of non-performing organizations in the vicinity and elsewhere. Phasing out of subsidies from Government. Insistence by Government on a minimum I.R.R. (16%) for opening of new mines. Erstwhile cost driven pricing structure and its tendency to build up inertia in the organizations.
Swot Analysis and Further Course of Action The management had critically analyzed the SWOT situation as described above. The follow up action plan was multi pronged. In simple, this consisted of utilizing the strengths, opportunities and evolving methods of counter threats. Detailed and higher emphasis was laid on eliminating/minimizing the weaknesses the I.R. situation and the resultant effects in terms of reduced production, increased losses hurting the organization, wages lost by employees on account of unfavourable I.R situations etc. The various methods followed by management are with emphasis on: 1. 2. 3. 4. 5. 6. 7. 8. 9. Communication to all employees about organizational status. I.R. scenario Motivational needs Improvement of working conditions Strengthening of welfare measures and social development HRD methods Frequent reviews Education of family members Other strategies
These are discussed as follows: Communication a) Communication system is thoroughly over hauled and well handled. Written (letters, pamphlets) form, oral (public address systems, Audio, Radio, TV) communication, group form (on the occasion of public functions), Establishment of communication cell & interaction with media strengthened. b) A mammoth exercise is done to communicate facts and figures to all the employees at mines and depths. (of over 1 lakh). A number of committees are constituted for this. The members are from Mining/IED/E&M/Finance/Personnel/Best workers. The scope of communication is vast. This communication to the rank and file is done 11 times. I.E.D. helped design of the informations template. This has helped in creating awareness among the employees and their role in improvement of organization.
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Motivation Plans With the help of I.E.D the employees were explained work norms and the need to improve work turnout. The concept of fair day work was explained. Improved productivity linked wage incentive plans were made use of. A system of payment of 10% of the companys profit to the employees was initiated. There was good improvement in productivity performance. Reforms for Turnaround of SCCL The closed business environment before the economic reforms of 1991 had left little place for performance, provided little incentive for innovation and entrepreneurship. When the windows of liberalisation were opened, much like the spencer mouse wondering where the cheese went, the company was caught unawares. The half-a-decade period from 1992 to 1997 was when the strife between the need to change and the reluctance to it became apparent. Globally, the psychological strife between change and inertia has always taken a huge toll on business, large and small. Large organizations love their model of success, and they become possessive about their model more than their success. Honeywell is an interesting parallel. The US giant, after nearly a century of brilliant performance, starting with a small chance discovery to control heat in coal furnaces, had run excuses by 1995. Ironically its rise and slope was being able to adapt or resist change and position itself to the technological requirements of the 19th century. But Singareni had more than surface resistance to change .It had a trade union problem that was hell bent on walking down a suicidal path of confrontation with the management. The turbulent phase in the companys history saw the accumulation of huge losses and inability to keep up its financial commitments. Poor Industrial Relations characterized by a number of illegal and catcall strikes, militant trade unions, indiscipline and deterioration in work norms set the foundation for the downward slide. Several other factors also catalyzed the downward path, viz. administered coal pricing by the government which did not allow increase in sales prices despite periodic wage hikes and a groaning interest burden had all added to its losses. Bad practices like huge stores inventory and power pilferage from its colonies burgeoned power and other costs. The prescription for Singareni was obvious: Rx Reforms SCCL Pre-reform period The Dark Days, Bad Dream As Singareni Collieries Company Ltd is the largest coal producer in South India, the Government of India initially provided sufficient budgetary support to the company to augment its production capacity by opening new mines or introducing mechanisation in the existing mines. In view of the growing energy requirements and in pursuance of the socialistic policies of the government, the emphasis was more on enhancing coal production rather than project viability. Frequent strikes, law and order problems, low productivity, apart from unremunerative coal price vis-a-vis cost of production during the period 1989-90 to 1991-92 affected the financial health of the company.
Case Studies
Referral to BIFR Apart from Industrial Relations (IR) problems and regulated pricing, other adverse factors like skewed debt-equity ratio and huge interest burden resulted in heavy losses for the company during 1989-90 to 1992-93. SCCL became a sick industrial company and was referred to the Board for Industrial & Financial Reconstruction (BIFR) during May 1992. However, due to a liberal financial package extended by the Government of India in consultation with the State Government of Andhra Pradesh and sustained efforts by the management and unions, a modest financial turnaround was achieved. The company earned profits of Rs 17.76 crore and Rs 26.64 crore in 1993-94 and 1994-95 respectively. By March 1994, SCCL came out of the BIFR purview. Poor Industrial Relations The IR scenario in SCCL has been characterised by a number of illegal and cat call strikes. The number of strikes reached a peak of 475 nos. in 1991-92. There were multiple trade unions. The management had no details of actual patronage of workers. There was also a spurt in activities of militant trade unions especially during the period 1989 to 1993. The average number of strikes during these four years was 446 with a production loss of 1.83 million tonnes per year. This had contributed to gross indiscipline and deterioration in work norms in the company in general and in Bellampalli region in particular. Low Equipment Utilisation & Man Productivity The frequent IR problems in the pre-1997 period also adversely affected machine utilisation. Singareni made substantial investment for procurement of Heavy Earth Moving Machinery (HEMM) in opencast mines and mechanised longwall units in underground mines The availability and utilisation of HEMM in opencast mines and longwall units in underground mines were lower than the norms on account of poor work culture prevailing in the company at that time. The performance of conventional hand section (manual mining) underground mines also suffered on account of poor IR scenario and law & order problems. The productivity in terms of overall output per manshift (OMS) in these underground mines was stagnant at around 0.60 tonnes from 1992-93 to 1996-97. The low productivity levels in the mines coupled with the periodic wage increase of workmen through National Coal Wage Agreements resulted in steep increase in the cost of production from underground mines as the wage component accounts for almost 55-60% of the total cost of production in underground mines. In spite of being uneconomical, the mining operations in the underground mines were continued to accommodate the huge workforce of about 1.14lakhs. The huge losses incurred in these mines on account of low productivity affected the financial health of the company. Non-adherence to Quality Commitments About 85-90% of coal output of the company is supplied to thermal power and cement plants. Marketing of coal with emphasis on coal quality did not gain the importance in view of huge demand-supply gap. Selective mining and segregation of shale/stone/clay bands present in coal seams was not given due attention. This resulted in numerous complaints from dissatisfied customers and prolonged disputes with them. Customers confidence in getting assured coal supplies was also greatly undermined due to IR problems resulting in loss of production.
Inefficiency in Operations All the operations in the mines and departments were undertaken with departmental equipment and manpower. The low operational efficiency of departmental manpower affected the performance of mines and financial health of Singareni. Despite rising costs, the management could not make the workforce or unions to accept the bringing in of private players as partners to cut costs and increase efficiency. There was no outsourcing of activities during the early 1990s. Administered Pricing Coal prices were fixed by the Government of India upto 1996 and in view of the likely impact of such price increase on power, railways, cement and steel sectors, the administered prices were invariably pegged down, leaving SCCL with little or no margin. Hike in input costs like wages due to periodic wage revisions under National Coal Wage Agreements (NCWA), interest costs, stores etc., were also not fully compensated in the annual/bi-annual price revisions by the Central Government. The Yearly average cost of production was Rs 731 /ton during 1996-97 but the average sale price was fixed at Rs. 529/ton. This impacted the companys bottom line. Burgeoning Power Cost During the period 1980 to 1990, there was an increase in the number of private colonies in mining areas. Some of the residents of these private colonies began to tap power illegally from SCCL powerlines. SCCL was incurring huge expenditure towards the power bills due to such illegal drawal of power. The power consumption reached an all time high of 630 million KWH in 1996-97. Increase in Inventory The company procured mining machinery from various countries/companies keeping in view the specific requirements of the projects. Joint protocols were entered with countries like U.K., France, China and Germany for introduction of modem technologies like Longwall, BG and In-pit crusher- conveyor technology. The stock of various equipment components/spares in the stores increased from Rs 238 crore in 1993-94 to Rs 379 crore in 1996-97. Adverse Capital Structure The company took up several mining projects in the 1970s and 1980s with the help of liberal infusion of equity and loans by the Government of India. This was made to step up coal production for meeting the escalating energy requirements of the country. The increasing loan component and interest costs resulted in skewed debt-equity ratio which increased from 1.87:1 in 1973-74 to reach a peak of 3.68:1 in 1991-92. The company was unable to service its debt and defaulted on the payment of interest and loan instalments during the eighth plan period. SCCLS IR Problems (pre-reform period)
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There were nearly 100 Trade Unions each vying for supremacy and Catcall/ Illegal strikes were a common feature. Competition and one-upmanship among multiple trade unions was the main reason for the large number of strikes. There was a spurt in activities of militant trade unions like SIKASA (A banned outfit of Peoples War Group) especially during the period from 1989-90 to 199293. The average number of strikes during these four years was 446 Nos. with a production loss of 1.83 million tonnes/year. The number of strikes reached a peak of 475 in 1991-92. Frequent strikes, law and order problems and high cost of production during the period from 1989-90 to 1991-92 affected the financial health of the Company. Manpower reached a peak of 1,16,918 in 1990-91.
Case Studies
Low literacy levels, extreme hardships in working conditions, strong opposition to innovation and change further worsened Workforce-Management relationship.
SCCL Reforms for Resurgence Troubles for companies, much like for individuals and countries, come not as a spy or two but in battalions. Successful and resilient companies, like great individuals and nations of character, emerge stronger from testing times. Singareni Collieries Company Ltd., emerged stronger and victorious. The reforms story of SCCL has many marvellous facets, but most significantly reforms were humane, logical, transparent, beyond ISMs, performance-oriented and incentive-based. The traditional perceptions of the role of the Government, Management, Labour, Technology and Market were redefined and made allies in the building and growth of the company. SCCL Post-reform Period Under effective management, with full political backing and dynamic leadership, Singareni Collieries initiated a series of result-oriented reforms that were aimed at revamping its operations in order to put the company back on the growth track. The need for urgent remedial action was realised as the companys accumulated losses rose to Rs 1,219 crore and the performance by 1997 had hit rock-bottom-the worst ever in its history of over 100 years. The management identified the areas for introducing the reforms, articulated the needed change and brought about a phenomenal turnaround. The company decided to take on the problems headon. Introspection and open brain-storming made the problems clear and a lateral approach to finding solutions strengthened the plan of comeback.
Problems Identified Industrial unrest through multiplicity of trade unions Low literacy and awareness among workforce Historic Errors Succumbing or reacting to wild catcalls/strikes Neglecting the issue New Approach Unifying trade unions through path breaking elections A high pitch communication drive harnessing media, launching literacy programmes Focussed multi-faceted workers welfare programme Establishing outsourcing of non-core and ancillary activities through publicprivate partnerships Innovative programmes launched like Dial-your-GM, field visits, interactions, follow-ups Used innovative financial instruments like debt swaps
Poor quality of life for workers Inefficient and high cost of overburden removal operations
Lip service or ignore issue
Persisting with status quo
Management inaccessible to Oblivious to issue, maintaining distant labour force at large management style Huge interest payments
Accumulating losses, banked on Governments write-offs or support Oblivious to issue. Bank on regulatory industry status.
Little Customer Care or Quality Consciousness
Fuel Supply Agreements. Technology infusion for quality testing, workforce visits to client sites Focus on safety, environment protection, labour welfare.
Lack of clear Corporate Blue print for growth 10
Sporadic moves
Strategy for Turnaround Some of the key elements of the reform strategy included: Trade Union Elections A 21-day strike in June 1998 by workmen was resolved under the guidance of the State Chief Minister. Honble Chief Minister directed the management to conduct labour union elections. Trade union elections were held in September 1998 in SCCL for the first time in the history of the coal industry in India. Elections were held under Secret Ballot system to elect one recognized union at the company level and one representative union at the area level. This put in place a mechanism that enabled Mine Managers to concentrate more on production and productivity matters. The company successfully conducted trade union elections in 1998, 2001 and 2003. Election Benefits
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Wild catcall strikes ceased. Management IR focus time reduced with only one union at the company level and representative union at each area to negotiate with. Trade union leaders became more responsible. The move provided foundation for the greater shift in thrust from a protected environ to a fiercely competitive market condition and from employee-management confrontation state to one of partnership. The management harnessed the first step towards consolidating industrial relations through the trade union reforms with several positive measures including building good communication strategies transparent management systems, innovative and effective welfare measures to integrate the workforce into a motivated and significant force to achieve its goals.
Financial Restructuring Package The Government of India approved a financial restructuring package in 1999 for SCCL, which included:
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Infusion of fresh equity of Rs. 268 crore by the Government of Andhra Pradesh and Rs. 257 crore by the Government of India during the ninth plan period from 1997-98 to 2000-01. Ten year interest-free moratorium on Rs. 663 crore of overdue interest on the Government of Indian loans. Waiver of penal interest on interest of Rs. 66 crore. Rescheduling of the Central loans of Rs. 157 crore by two years.
Financial Re-Engineering Liquidating receivables in the form of tradable bonds : Rs. 1,164 crore in 3 year interest @ 15 to 12.5 per annum. Higher interest bearing Central loans (17 & 16%) discharged by pledging 13% bonds for 11.75% interest loans. Through such carefully planned debt-swaps, the company saved Rs. 61 crore in a four-year period.
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Case Studies
Cost-Cutting Measures
Rationalization / Right sizing of manpower was undertaken by the Singareni through the introduction of voluntary retirement scheme for certain categories of workmen. Over 6,265 employees opted and retired under this scheme. Reduction of play-day and overtime allowance (savings of Rs. 33 crore per year). Stoppage of employment to land ousters. Regulation of dependent employment against vacancies. Dismissal of chronic absentees. Energy conservation in mines/townships and reducing power pilferage in colonies. Inventory reduction by adopting rate contracts for spares & fast moving items. Particulars Inventory (Rs. in crores) 243.36 218.82 206.90 210.13 185.44 190.90 Inventory Level in Number of Months Consumption 8.13 6.62 6.58 5.80 4.74 3.80
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1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
Public-Private Partnerships / Outsourcing The company employed outsourcing of over burden removal (OB) as a strategic initiative to:
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Improve business focus on core competency. Reduce total cost of operations. Overcome limited internal resources. At present 50% work of OB removal is outsourced and the balance is done departmentally. The company saved about Rs. 1,610 crore by partly outsourcing OB removal in opencast mines since 1997.
Outsourcing of Ancillary Activities Learning lessons from the success in outsourcing of OB removal operations, the company started off-loading of ancillary services. Some of the services outsourced include:
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Catering & maintenance of guesthouses Ambulances and light motor vehicles like cars, jeeps, etc
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Sanitation in workmen colonies Loading, unloading and stacking of materials in the stores. Distribution of material from stores to various mines and departments. Security services in Hyderabad Corporate office, Guest house etc., Savings on account of these measures is about Rs. 4.36 crore per annum. Off-loading of these activities not only improved the quality of service, but also allowed the management to concentrate on core activities.
Communication Strategies The management grasped the potential risk of lack of strong internal communication and workforce reach-out programmes. There has also been a growing perception among the workforce that the management is isolated, distant and insensitive to the needs of workmen. The management therefore realized that an effective two-way communication at all the levels is necessary. Most of the difficulties in the communication process in SCCL were due to its labour intensive nature of the industry with majority of the workforce being illiterate and unaware of conventional rules and procedures and the direction in which the company should be moving. Apart from these barriers, some of the conditions like geographical distance between employees of the organization in terms of location of the mines spread over 350 Kms in 4 districts was also an important barrier. The indulgence and interference of extremist activists in coal belt areas was another major factor hindering the process of communication. With a view to bring out awareness among the workmen, maintain transparency in administration and to bridge the communication gap, various communication methods to interact with the groups, individuals and their families, etc, have been taken up by the management. Some of the steps taken in this direction are: Communication Cells
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The company opened communication cells for creating a stable platform for continuous interaction with workmen and their families. The cell uses the television as a medium for bringing home the key issues facing the company. Every week an exclusive programme titled Singareni Tarangalu is telecast in local TV Channels. The company also disseminates information to its employees through in-house magazine Singareni Vaarthalu. Pro-active press meets, posters & pamphlets on various issues are used to educate workmen.
Visits by Multi Departmental Teams Multi-departmental teams comprising of members drawn from various disciplines visit mines and departments to highlight the performance of the company and the issues concerning production safety, welfare etc.
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The teams use local language and dialect and visual aids to communicate effectively. They also visit workmen colonies and townships in the evenings to maximize coverage. Subjects of topical interests are also discussed with the workmen, suggestions are invited and implemented wherever feasible.
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Case Studies
Results of Effective and Continuous Communication with Employees Through Multi-Departmental Teams
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There is better appreciation by employees of the challenges faced by SCCL in the liberalized environment. Workmen have realized the need to improve production, productivity, reduce costs, extract good quality coal and satisfy the customers needs. They are motivated to realize their responsibilities. Multi-Departmental Teams have cultivated the minds of workmen to listen to the views of Management and appreciate the realities. Earlier they were only listening to unions and responding to their wishes. Workmen were not aware of the Managements views and the companys interests, the other side of the coin, before forming their own ideas on various issues. Now management is in a position to explain its views to workmen on issues like dependent employment, re-deployment of surplus workmen, privatization etc. The press was also reporting the unions views and views/actions of Management were coloured as harmful to the interest of the workmen. But now there is a significant change in the attitude of the press and their role is supportive for harmonious industrial relations. There is good improvement in Industrial relations due to this effective communication channel with workmen, union leaders, press and officers. The previous trend of workmen to go on strike on slight pretext is arrested and now they are debating and seeking reason/facts in strike calls. Cat-call strikes are reduced significantly. Thus Multi-Departmental Teams have proved to be effective for communication with workmen, officers, trade unions and press. They are contribution to improvement in industrial relations, productions, productivity, and profitability of SCCL. They have become the main channel to take contentious issues to workmen, explain to them in detail and elicit their views on all important matters.
The improved performance of SCCL from 1997-98 to 2000-01 compared to that in 1996-97 due to implementation of various corrective measures, cost reduction programs, better communication with workmen leading to their effective participation etc, is summarized below. Customer-Centric Measures
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To improve coal quality, selective mining has been introduced for separation of clay bands. Customer meets have been arranged for getting first hand details of their grievances. Automatic samplers and electronic weighbridges installed to avoid quality and quantity disputes. Fuel supply agreements entered into with major customers with penalties, bonuses and commitments to keep up customer satisfaction and ensure assured demand.
Use of IT
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In-house software development group (SDG) comprising of trained personnel from various disciplines constituted to develop department-wise applications. INTRANET established between. Kothagudem, Ramagundam and Hyderabad offices.
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Underground Mine Management System (UGMMS) introduced for the first time in the Indian coal industry at No. 5B incline at Kothagudem. Opencast Mine Management System (OCMMS) introduced at Manuguru opencast-II mine. SCCL website www.sccl.mines.com launched. Video conferencing facilities are on the anvil. SCCL proposes to introduce satellite-based communication systems for Heavy Earth Moving Machinery.
HR and Welfare Strategy Human Resource development through training and continuous upgradation of skills is an important thrust area of the Management. The company has a well-established Human Resource (HR) department with 10 vocational training centers and a full fledged Training Institute (Nargundkar Institute of Management) to impart in-house training. Leading HR Consultant, Dr. B. Ratan Reddy, Institute of Public Enterprise has imparted training for the executives and Trade Union Leaders together for over a period of two years from 2002-04. This intensive training helped the employees to change the mind set of the employees and helped them to visualise about the company's vision, mission, competitor analysis, competitive strategies, global strategies and its impact on productivity, production, quality, Interpersonal Relationship, Negotiation skills, Team Building and effective communication skills. SCCL recognises workmen as stakeholders in the companys progress and welfare of workmen continues to be an important corporate philosophy of the company. The average expenditure per employee on welfare which was Rs. 14,402/- for the year 1996-97 has increased to Rs. 30,195 in 2002-03 (increase of 110% over last 6 years). In 2002-03, the welfare expenditure on workmen was Rs. 293 crores. Welfare Measures
Literacy Drive: To achieve total literacy among employees, a scheme called Telugu in 7 Days was launched with the help of Professor Goteti Balakrishna Murthy of USA. Many employees and their families are participating in this campaign. The aim of the literacy missions is to enable the miner to read the notices and newspapers and understand their pay particulars. Housing: Over 47,250 quarters were provided to employees and the housing satisfaction is around 50%. Education: SCCL has established The Singareni Collieries Educational Society (SCES) which manages two colleges and 22 schools in the four districts of AP. These institutions provide education to 13,386 students. Apart from the schools run by SCES the company has provided land / infrastructure to 17 private schools on a nominal rent basis. Rs. 8.31 crore was spent on running the educational institutions during the year 2002-03. Amenities: Thirty-three employee recreation clubs, 11 stadia and 10 community halls have been provided in the mining areas. SCCL spends more than Rs. 50 lakh per year for maintenance of these facilities.
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Water Supply: The company spends around Rs. 30 crore per year for supplying about 22 million gallons of drinking water per day to its colonies and surrounding habitat. As an important welfare measure, SCCL commissioned Godavari Water Supply Schemes in the Bellampalli region (7.50 MGD), Ramagundam region (7 MGD) and Manuguru area (4 MGD) benefiting around 4.37 lakh residents in company quarters and 2.83 lakh residents in nearby private colonies and hutment areas.
Swap: SCCL launched a unique scheme under the title Special Welfare Amenities Programme (SWAP) in 1997-98. In SWAP, both colony representatives (workmen) and management decide on the works to be carried out in their respective areas. Separate budgetary provisions are made under SWAP, which has cut down delays in execution of works. It has also enabled the company to undertake improvements as per the felt needs of workmen. Drainage & Sanitation: SCCL spent Rs. 28.26 crore on Special Welfare Amenities Programme (SWAP) from 1997-98 onwards for improving civic amenities like drains, sanitary lines, etc in workmen colonies. Medical & Health: The company administers seven hospitals with 1006 beds and 43 dispensaries in its mining areas. Around Rs. 50 crore was spent for medical care in 2002-03, including Rs. 1.84 crore for referral of 3,465 employees and their dependents to speciality hospitals. Construction of a 50-bed hospital at Bhoopalpalli in Warangal district is under progress Community Development: Singareni Seva Samithi is a social service organization formed within the company to undertake community development activities for the benefit of unemployed children of employees and bring household transformation in coalfield areas. The activities undertaken by the samithi include providing vocational training on various trades like sewing, sarirolling, welding, etc., and assistance to eligible employees children for attending recruitment camps of Indian Army, State Police, CISF, etc. To inculcate the habit of savings amongst the employees, SCCL took the initiative of disbursing the wages through banks. All the employees have opened bank accounts and the habit of savings is reflected by way of increased bank deposits in the coal belt areas by above 50%. All workmen receive their wages through banks and ATM counters. SCCL firmly believes in involving employees as Partners in Progress. It is the only PSU in the entire country sharing its profits with its employees from 1999-2000 onwards. Around 10% of the companys profit was paid to workmen as special incentive during the last three years (Rs. 67.94 crore). SCCL has enhanced the special incentive to 11% of its profit for the year 2002-03.
Landmark in SCCL History (2002-03) The year 200203 was a watershed in the history of Singareni Collieries as has notched up the highest ever production, profitability and productivity.
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Production of 33.24 million tones of coal during 2002-03 was the best ever production in the history of SCCL. Coal dispatches of 33.37 MT are the best ever dispatches.
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The increase in coal dispatches has been 2.32 MT over the year 2001-02 and was the highest increase ever in the history of SCCL in a single year. Despite 22 days strike during 2002-03, 25.9 million tones of coal were dispatched to power sector the highest ever in the history of SCCL. Power sector dispatches constituted 78% of total dispatches during 2002-03. Gross turnover of Rs. 3689 Crore achieved during 2002-03 is the highest ever turnover in the history of the company. Due to series of innovative productivity improvement measures cost of production reduced by a record 6.4% in 2002-03. As against Rs. 861 per tonne cost of production during 2001-02, the cost of production during 2002-03 was Rs. 806 per tonne. The company attained the highest ever profitability of Rs. 417 crore as profits after tax. It entered the net profits regime for the first time after 27 years (since 1975-76). SCCL paid dividend to the shareholders for the first time after 37 years (since 1965-66).
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Other Achievements
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In 32 years history of All India Resource Competitions, the SCCL team for the first time bagged the overall first place for the year 2002-03 in the national level competitions. The company also got following other prizes. Best Rescue Team Best Rescue Team Member Best Team In Rescue & Recovery The company bagged 3 of the 14 National Safety Awards (Mines) in 2002. SCCL participated for the first time in International Trade Fair on Mines, Minerals & Metallurgy held at Pragati Maidan, New Delhi, in September 2002. The company stall bagged the first prize for Design and Concept out of about 74 exhibitors in the trade fair from India and abroad. SCCL bagged the coveted FAPCCI (Federation of Andhra Pradesh Chamber of Commerce and Industry) Award for best outstanding performance among industries of Andhra Pradesh for 2002-2003. SCCL has also bagged the prestigious Coal India Productivity Organizational Award for the year 2002-2003, for outstanding improvement in productivity through application of industrial engineering techniques. SCCL participated for the first time in 19th World Mining Congress and Expo 2003 held at New Delhi from 1 5th November 2003. The companys stall won the first prize for Design and Concept in National Category. During 2002-2003, Coal production commenced from KTK-3A Incline in Bhoopalpalli and Koyagudem opencast project in Yellandu area with a projected coal production capacity of 1 million tonne per year.
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Case Studies
Outsourcing / Public Private Partnerships It is a common practice across the globe and also in India that private corporates carry out outsourcing of certain activities as a strategic business initiative. Outsourcing is adopted for the following reasons:
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To improve business focus on core competency. To gain access to world-class capabilities and technology To reduce total cost of operations. To achieve performance guarantees. To overcome limited internal resources (capital and skilled manpower). To free up capital for core business. To transfer operating risk to the service provider. To off-load functions difficult to manage or control.
Originally outsourcing to private agencies in SCCL was done for surface coal transport from mine to Coal Handling Plants and for driving of tunnels / Shaft sinking from surface to reach underground coal seams. Introduction of outsourcing for overburden (OB) removal in a new mine through private contractual operations in SCCL was launched in a small way at Gouthamkhani open-cast mine, Koyagudem, in September 1993. Subsequently, contractual operations for OB removal was introduced in other new mines Medapalli OC in Ramagundam and IC D Block in Yellandu area where the company could not afford to invest in machinery. Later, this concept was extended to other mines where a huge backlog in OB removal had built up over the years and where the stripping ratio was very high. Some of the reasons that compelled SCCL to undertake outsourcing of OB removal were:
Gradual Decline in Underground Hand-Section Production: Underground hand section production reduced from 12.73 Mt in 1988-89 to 11.07 Mt in 1992-93 with corresponding fall in productivity levels from 0.72 tonnes per manshift to 0.61 tonnes. Further, growth in machine-mining was not to the expected levels. Hence, production from opencast mines had to be augmented to meet the ever increasing demand.
Crisis Management Consequent to the trade union elections, there has been a significant improvement in the industrial relations scenario as the number of strikes have come down by 90% during 1997-2002. However, the success of the turnaround was severely tested by the strike notice of all recognized trade unions in January-February 2003. Following the managements decision to introduce Surface Miner technology at Koyagudem open-cast mine, trade unions gave a call for strike. A deliberate disinformation campaign was launched with the introduction of this technology being equated with privatization and loss of jobs.
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Corporate Communication Policy In continuation of the various communication activities initiated in 1997, the company in 2003 brought out a comprehensive corporate communication policy. The policy a unique experiment in public sector aims at reaching out to about 1 lakh workforce spread over 67 mines to develop the spirit of bondage among workmen and executives. Some of the objectives of the policy are:
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Singareni Day will be celebrated on December 23 every year to promote the spirit of Singarenism. Full-fledged corporate communication cells are established in each area and separate budgetary allocations are made for communication and PR activities. Mine Sadassu were started at each mine and departments. They are also conducted in hospitals, workshops, powerhouses, etc. The Mine Manager and the executives enlighten the workmen on the current issues concerning the coal industry and educate them on various policies communicated by the corporate office. Padayatra was a new initiative launched by the company as Workers Vaddaku Management (Management at the door steps of workmen). Under this programme, a group of executives headed by the Area GM conducts Padayatra team consist of executives from all major disciplines including medical & health and members of Singareni Seva Samithi (SSS). The members hold placards and banners containing appropriate the catchy slogans to raise awareness level on issues like water conservation, anti AIDS, etc. In the Padyatras the local media are also involved and this is hailed as one of the best transparent initiatives which has brought the administration to the doorsteps of the workforce.
Wages Through Banks Among the various initiatives to promote the well-being of employees, payment of wages through bank is perhaps the best innovation carried out. This has not only brought the PSU and the banking community together for mutual benefit, but also led to the empowerment of companys employees. Before this practice was introduced, wages were paid to workmen at mines in the form of cash. A World Bank study in the coal belt regions concluded that payment of cash has contributed to increase in conspicuous consumption and rise in alcoholism. Speeding up of Settlements (Area Terminal Benefit cells) In line with the policy of welfare-oriented management, the company launched a novel activity for the benefit of the retired workmen. It has set up Area Terminal Benefit Cell at each area to speed up settlement of benefits due to workmen on superannuation, death, etc. Group Gratuity Scheme In SCCL Gratuity paid out of working capital funds as and when the claim is admitted. In other words the amount provided is not being invested specifically. In tune with the changing times and to protect workers interest fully and plan for healthy finances for the company in the long run, the company launched Group Gratuity Scheme in Obtober 2003. State PSUs like APSRTC, APDDC and Central PSUs like Western Coal Fields have been successfully operating such Group Gratuity Schemes.
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Under the Group Gratuity Scheme, the company would set up a trust fund in collaboration with LIC and will earmark Rs. 200 crores initially. The job of investment and actuarial valuation would be taken over by the LIC free of charge and interest will be paid by LIC on the accumulated funds. The employer has to pay an initial contribution at the inception of the scheme to secure past service gratuity. Energy Conservation Measures In SCCL, burgeoning power will was one of the major areas of concern. The government audit, during the review of the companys performance, has observed that SCCKL incurred an avoidable expenditure of Rs. 218 crore during five years (ending March 2001) on power consumption. Not only power wastage, but also illegal tappings of power and power pilferages have become rampant. Eco-Friendly Mining
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Easing pressure on natural resources. Reducing air pollution. Environment monitoring. Clean environment Green environment
Change in temperature pattern has been observed where good green coverage has been developed. One such area is Ramagunam wherein temperature reduction was noticed to the extent of 2o Celsuis. Literacy campus and workshops are organized regularly to bring environmental awareness.
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Training young minds. Development of parks & green space. Training and exposure to frontline staff. Waste recycling and reuse. Water Harvesting. Vermicompost pits.
Safety Measures The company has taken a pro-active role to improve the safety record in its mines. The policy is Safety First. Safety Always. Safety Forever. SHAPE Involving communities and local bodies as stakeholders in the development process is a key mission area in the state governments resolve towards a People-friendly state. In this direction, SCCL has launched an innovative programme called Surrounding Habitat Assistance Programme (SHAPE). Some of the objectives of the SHAPE include:
Involving the local villagers where mining activities are planned as stakeholders. The slogan of SHAPE is PARTNERS IN PROGRESS. Instead of SCCL deciding on welfare measures for its workers and local villagers, the SHAPE aims at fulfilling the felt-needs of the local community based on their assessment.
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The basic emphasis will be on providing infrastructure in respect of housing, drinking water, sanitation and drainage, medical facilities, roads and street lighting. All activities which will be undertaken by the company for providing basic infrastructure, will be on the USER PAYS PRINCIPLE. The concerned local body (gram panchayat / municipality) will compulsorily enter into a memorandum of understanding (MOU) with the management. The MoU will specify the respective responsibilities of the local body and the management. While the company will partially meet the cost of capital expenditure, the respective local body will be entirely responsible for maintenance of the asset including all recurring expenditure. The company proposes to spend around Rs. 193 crore for welfare activities in surrounding habitat in creation of drinking water facilities, road improvements, sanitation, etc.
Customer Focussed Services In the area of liberalization where customer is the king, coal companies have to be sensitive to the quality and transparency in coal supplies. Singareni has about 3,500 major, medium and small-scale industries on its customer list, which include diverse industries such as thermal power plants, cement, paper, textile, tobacco, ceramics, pharmaceuticals and brick kilns. About 94% of coal supplies are to power houses, cement units and captive power plants under the core sector linkage. Challenges Ahead Singareni Collieries completed the turnaround from a loss making PSU into a profitable one during the year 2002-2003. With the highest ever production and profits, the company has transformed into an organization with sound fundamentals. With huge coal deposits and growing demand from the energy sector in particular, the company is gearing up for higher production challenges. With a transformed management and motivated workforce, it is looking forward for more successful years ahead. The Challenges for the Company in the Near Future Include:
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Possible reduction in import duty of coal. Rationalization of railway freight rates. Tightening environmental stipulations regarding ash content, stricter implementation of Kyoto protocol to discourage use of coal to reduce emission of greenhouse gases. Discovery of gas reserves in the Krishna-Godavari Basin in Andhra Pradesh, and consequent impact on SCCL market share in South India. The imperative need to improve performance of underground mines as the reserves in Open-cast mines are limited.
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Issues for Discussion 1. Discuss the effect of effective and continuous communication with employees. In your opinion what other measures can be taken to communicate with employees? 2. What do you understand by customer focussed services? How does this concept applies to the coal companies? Discuss. 3. The case discusses the strategy for turnaround. Discuss its advantages and disadvantages. References Reddy, B Ratan. (1999), Turnaround Strategies , Reading Material, IPE. Reddy, B Ratan. (2000), Turnaround Strategies, Printed Case Study, IPE. SCCL. (2004). Glory to Bloom. Website, SCCL. National Seminar on Industrial Engineering in Mining in India of SCCL (2003).
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CASE 4 : H.R. INITIATIVES FOR TURNAROUND OF VISAKHAPATNAM STEEL PLANT

Introduction Visakhapatnam Steel Plant is the largest PSU in the entire South India in terms of investment, which is Rs. 8500 Crores. The study of Turnaround of VSP and its HR Initiatives for the same is an eye opener for any HR professional. A Company which was written off and informed to BIFR of its cumulative losses over Rs. 5000 crores has made a remarkable come back with Rs. 1521 crores net profit during 2003-04. The Company was turned around with all time record turnover of 6174 crores during the year 2003-04. One has to make an in-depth study to note reasons for such a Turnaround. Vision, Mission and Core Values The vision, Mission, and Core Values have been revised from time to time. As they stand today are as follows: Vision: To be a continuously growing World Class company We Shall:
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Harness our growth, potential and sustain profitable growth; Deliver High Quality and Cost Competitive Products and be the first choice of customers; Create an inspiring work environment to unleash the creative energy of people; Achieve excellence in Enterprise Management; Be a respected Corporate Citizen, ensure clean and green environment and develop vibrant communities around us.
Mission: To attain 10 million ton Liquid Steel capacity through technological upgradation operational efficiency and expansion to produce steel at International Standards of cost and quality; and to meet the aspirations of the stakeholders. Core Values:
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Commitment Customer Satisfaction Continuous Improvement Concern for Environment Creativity & Innovation Outsourcing of non-core activities
Case prepared by Dr. B. Rathan Reddy, Faculty, Institute of Public Enterprise, Hyderabad. Case material has been prepared to serve as a basis for class discussion. Cases are not designed to present illustrations, of either correct or incorrect handling of managerial problems.
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Objectives The objectives that have been arrived through a series of Brain Storming Sessions of Sr. Executives are as follows: 1. Expand plant capacity of 5 Mt by 2007-08 with the mission to attain 10.0 Mt capacity in two subsequent phases. Wipe out accumulated losses by 2006-07. Be amongst top five lowest cost liquid steel producers in the world by 2006-07. Achieve customer satisfaction levels on par with world class organization by 2006-07. Make RINL the employer of choice by caring for employees. Develop people as knowledge workers by 2005-06 and achieve an improvement of 5 percentage points in employees satisfaction levels every alternate year. Be ranked as an excellent business organization by 2006-07
2. 3. 4.
5.
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Ensure zero effluent discharge by 2005-06 and contribution to improving quality of life (health, literacy and water) in at least one village every year. The Setting The plaque in front of the control room of Blast Furnace 1 reads Blowing in of Godavari on 28th March, 1990 at 09-31 hrs opened by Shri Bonda Kannayya, senior most employee of Blast Furnace. This clearly amplifies peoples power and participation in public sector units the temples of modern India as referred by our late prime minister Pandit Jawaharlal Nehru. PSUs have come off age with a determination to excel against the sea of limitations both in terms of socio-economic conditions and also the technological advancements. After independence the successive governments always placed greater emphasis on development of Indian steel industry. The six integrated steel plants (major plants) of which 5 are in the public sector were set up during the 50s and early 60s. Though India has abundance of iron ore and other raw materials for iron making besides the advantage of cheap and skilled labour, it was not able to cope up with technological changes successfully in the field of iron and steel making. Thus for years, Indian steel industry was not able to grow at the expected growth rates and was never in competition in the global perspective. In this back drop, the idea of setting up of an integrated steel plant, the first shore based plant at Vizag took a definite shape during the 5th Five Year Plan. Erstwhile Soviet Union agreed to help in setting up of Visakhapatnam Steel Plant (VSP) popularly known as Vizag Steel. Visakhapatnam Steel Plant is the only shore based integrated steel plant with the available technology of 1980s. The plant is located amidst natures bounty, in a city fast emerging as the face of the future and also bestowed with the picturesque Ghats on one side and the mighty Bay of Bengal on the other. Locate 16 Kms to the South West of the Visakhapatnam Port, it lies between the Northern boundary of the National Highway No. 5 from Chennai to Calcutta and 7 kms to South West of Howrah Chennai Railway line.
VSP Earlier The salient features of VSP earlier are as follows:
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Largest PSU, Only shore based integrated Steel Plant. Escalation of cost due to delay Rationalization and Restructuring Cumulative loses of over Rs. 5,000 Crores Intimation to B.I.F.R. Un-skilled employees Sporadic I R Problems Highest cost 1st Generation of Employees High Interest Rates & Debts 1/4th of Capacity Utilization
VSP Today VSP stands today with the features given below:
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Investment over Rs. 8,500 Crores 3.0 MT Liquid Steel Capacity 115-120% Capacity Utilization of all Production Units Year Gross Sales (Rs. in crores) 5,059 6,174 Profit (Rs. in crores) 521 1521 Labour Productivity (t/m/yr) 253 262
2002-03 2003-04
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Lower Manpower among Steel Majors Literacy Rate of Employees 95% Absenteeism Rate 0.68% lowest Savings thru SRS, QC, etc, in 2002-03: Rs. 21.5 Cr. A Debt Free Company from October 2003 Plantation of Trees 3.586 m one tree for every ton capacity Many Techno-Economic indices crossed Indian Frontiers Lowest Sp. Energy Consumption per ton of Liquid Steel (6.32 G cal) in India. Rs. 208.5 Cr. Savings thru cost reduction measures LD Gas recovery of 98% in 2002-03 Best in India Lowest Production Cost per ton of Liquid Steel (in Rs.): RINL POSCO TISCO NIPPON 6882 7904 8265 9858
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First Steel Plant in India Certified for all 3 Quality Systems under QMS (ISO 9001), EMS (ISO 14001 & OHSAS 18001) Necessary SOPs & SMPs in place Funds for AMR Schemes, Batter #4 & Working Capital met through internal resources.
The Evolution Visakhapatnam Steel Plant was initially conceived as a unit of SAIL to augment its long product capacity and also to service its southern markets. During early 70s, three steel plants were conceived for South India one each at Visakhapatnam in Andhra Pradesh, Vijayanagar in Karnataka and Salem in Tamilnadu. Ultimately because of massive civil agitation Visakha Ukku Andhrula Hakku in Andhra Pradesh, announcement was made in parliament in April 1970 for Visakhapatnam Steel Plant and foundation stone was lain on 20th January, 1971 by Late Mrs. Indira Gandhi, the then prime minister of India. Feasibility report was made in October, 1973, Indo-Soviet agreement signed in June, 1979 and comprehensive revised DPR made in November, 1980. Finally the project was sanctioned by the Government in July, 1982 and a separate company Rashtriya Ispat Nigam Limited (RINL) for VSP was formed on 18th February, 1982. As per original schedule the plant was to be commissioned by 1986. However, because of seven cash crunch and lack of Government funding, the expected progress did not take place and the project became unviable. Therefore in 1986, a rationalized concept was adopted in which some of the envisaged facilities were dropped to lower the capital cost and the name place capacities of steel making and rolling mills were uprated to make the revenue generation more attractive. The finally trimmed plant facilities were fully commissioned and dedicated to Nation on 1st August, 1992 by Shri. P. V. Narasimha Rao the then Prime Minister. In the rationalized concept Liquid Steel capacity was uprated to 3.0 Mt from installed capacity of 2.2 Mt and one Universal Beam will was deleted completely and the total capacity of finished steel from the three mills was uprated to 2.41 Mt from installed capacity of 1.93 Mt. This has put a tremendous pressure on production front to perform beyond the installed capacities. The Restructuring This long gestation period of almost 22 years from concept to commissioning, let to escalation of capital cost of the plant. Original estimate in the year 1979 was Rs. 2,256 crores which increased to Rs. 3,897 crores by 1982 and further increased to Rs. 6,849 crores in 1986. Under the rationalized concept after dropping certain facilities, the total capital cost finally stood at Rs. 8,594 crores, when it was declared fully commissioned in August 1992. Out of the total cost of Rs. 2,674 crores. Borrowings were resorted to with the interest rate ranging from 13 to 21% to meet part of the project cost due to inadequate budgetary support and release of funds by GOI. As a result this company has to bear high interest and depreciation burden resulting in continuous losses year after year. In fact the company even before commencing its operations had incurred a loss of over Rs. 2,000 crores. In this scenario, Government of India came to the rescue of the plant through two stages of capital restructuring in 1993 and 1998 converting all its loans into equity and preferences shares. By this Government of India (GOI) converted Rs. 3,330 crores of its loan and Rs. 791 crores of interest on GOI loans into equity / preference shares thereby bringing the total investment of GOI in the form of share capital with zero GOI Loans. This resulted in lowering the interest burden on VSP by Rs. 521 crores annually.
The Global Scene Worlds crude steel picked up at a significant rate only after the 2nd world war. With a meager production level of 28 million tones (Mt) in 1900, the production crossed 100 Mt mark in 1927. The production in 1943 was 159 Mt which sharply fell to 111 Mt in 1946. Only then the growth was faster, reaching a level of 211 Mt in 1951, 305 Mt in 1959, 433 Mt in 1964, 529 Mt in 1968, 630 Mt in 1972, 703 Mt in 1974 and 746 Mt in 1979. The seventies witnessed one of the most severe economic crises on account of petroleum oil. This had a pronounced impact on the overall economy of the world and particularly steel industry. The world production of steel started declining to 644 Mt in 1982. The production improved to 683 Mt in 1983. 710 Mt in 1984, 719 Mt in 1985, 714 Mt in 1986. During 90scrude steel production increased from 728 Mt in 1991 to 842 Mt in 2000. There has been continuous increase in production during nineties except for the years 1992 and 1997. Finally world steel production touched an all time high of 965 Mt during the year 2003 and poised to cross 1 billion tonne mark in the year 2004. Major steel producing countries of the World till 50s are only five, viz., USSR, USA, UK, France and Germany. During 60s and 70s, steel production started picking up in Japan and only after 1975 steel capacity started coming up largely in Eastern hemisphere. China, Japan and Korea emerged as leading steel producers during the last 25 years. The growth in China has been spectacular from 57 Mt in 1991 to over 200 Mt in 2003. In contrast, Indian steel industry had inconsistent growth producing around 30 Mt during the year 2003, a meager growth compared to world standards. This is mainly due to low per capita steel consumption in India. At present, per capita consumption of steel of the world is about 150 kg while some of the developed countries over 400 kg. Chinese consumption level of steel had improved tremendously during last few years to around 140 kg. Against this, consumption in India has increased to present level of around 30 kg from consumption in India and all efforts should be made in this direction. QUO VADIS In tune with our vision to become a world class organization, we need to first find out who is really world class and bench mark with them. Firstly our aim should be to become world class in steel making which is our core business before endeavoring to our ultimate goal of becoming a world class organization. With the big boost received from turnaround, Vizag Steel has earnestly started its journey towards this vision. World Steel Dynamics, a leading publication from United States, every year published a list of top World Class Steel makers. The list includes the elite steel companies like POSCO of South Korea, Severstal Steel of Russia, Shagang, Anshan Steel and Bao Steel of China, Tata Steel of India, BHP Steel of Australia, CST and Gerdau of Brazil, China Steel of Taiwan and Nippon of Japan. There are about 20 key attributes on which World Steel Dynamics judges world class steel makers. They are: (1) cash operating costs (2) profitability (3) balance sheet (4) dominance in country / region (5) domestic market growth (6) harnessing technological revolution (7) access to outside funds (8) cost cutting efforts (9) downstream business (10) environment and safety (11) expanding capacity (12) iron ore and coking coal mines (13) liabilities for retired workers (14) location to procure raw materials (15) alliances, merges and acquisition (16) pricing power with large buyers (17) product quality (18) skilled and productive work force (19) stock market performance and (20) threat from nearby competitors.
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The first 3 attributes which are basically finance related contribute to 26 points out of 100 and the balance 74 points are almost equally divided among the remaining 17 attributes. As financial position is once again linked to other performance factors, it is imperative that we also should concentrate on these factors. Again with VSPs Govt. owned status, attributes (9), (15) and (19) are not relevant at present. The attributes (12) and (14) speaks of ownership of iron ore and coking coal mines for which VSP has started its efforts already. Of the remaining twelve attributes, we should concentrate mainly on five attributes namely technological up gradation, cost reduction, environment and safety, expanding capacity and quality of product as VSP is already bestowed with skilled and productive work force. After careful consideration, through consensus across the organization, five key areas of focus have been identified as: i) Technological up gradation and Re-engineering
ii) Cost reduction iii) Environment and Safety iv) Expansion v) Quality On self assessment from the reports of CRU International which publishes cost data, Vizag Steel is almost close to becoming the lowest cost steel producer. Also, working on similar lines to assess our own ranking on the lines of world steel dynamics, Vizag Steel stands some where around 15th position among the top 20 world class steel makers. This gives us a lot of self satisfaction. The need of the hour is to benchmark ourselves with these world class steel making companies and continuously improve ourselves integrating the various initiatives till we achieve our goal. Working in this direction, a Centre for Business Systems (CBS) which was formed recently, has organized a number of workshops involving a cross section of employees. Through consensus the earlier vision, mission and objectives were revisited for revision and new business strategies have been identified for a time bound implementation. A concise document has been brought out and distributed to various process owners. The results are showing up. The horizon is full with hope and with the steely resolve to bring in continual improvements through innovation and people involvement, the day is not very far when Vizag Steel ultimately becomes a world class organization. And our journey towards excellence continues.
HUMAN RESOURCE MANAGEMENT AT VISAKHAPATNAM STEEL PLANT

Introduction One of the primary objectives to the Company is to develop a well-knit personal policy and a comprehensive personnel programme that will be result-oriented and to develop an organizational culture, which motivates employees to contribute their best towards achievement of organizational objectives. In accordance with this objective, VSP has given considerable emphasis on development of human resources, as well as formulation and implementation of progressive personnel policies, systems, rules, and procedures to synchronize organizational needs with individual aspirations. Since inception, VSP has laid emphasis on effective man management as it subscribes to the belief that effectiveness and success of the organization depend largely on the skills and commitment of the people. Brief History The Personnel & Administration Development was established along with establishment of the Company in the year 1982. Initially, the department was operated from RTC Complex at city which was later shifted to CISF Barracks and Auxiliary Shops premises respectively located in the plant premises. Since then the department has professionally spread in the entire plant keeping in view of the requirements of the personnel working in the Company to give personnel services at the door step of the internal customers. Transformation and Metamorphoses of the Function Emphasis on Personnel and Industrial Relations functions have been gradually converted into HR functions linking with HR strategies and plans for attainment of the organizational goals and objectives. Human resources have been put above machines, as after all the machine is made by man. Year after year, the HRM function has been enriching itself through renewed vigor to meet the challenges and requirements during project, commissioning and operation stages. The department has met successfully the requirements at each stage and nurtured itself as a function which can turn around the Company. Although the HR professionals have seen turbulent period in the initial stages of project and commissioning one the systems have set into operation, the fruits of seeds that have been sown by personnel professionals have started yielding results. Apart from highest Labour Productivity in the integrated steel plants of India Human Resources at Visakhapatnam Steel Plant are breaking records after records day after day achieving peaks of production and all round development and Turnaround of the company. Human Resource Management Human Resources are treated as the most important of all resources in the Company; its development and welfare have therefore been given the utmost emphasis in the overall policy of Human Resources Management of the Company. It is believed that people are the key to success and the performance of the Company depends on them to a great extent. Hence special attention is given towards people management. For this, the organization has developed the Human Resources Policy to achieve the plans and target of the Company. It enables individuals to work efficiency and take pride in their work besides feeling important. It make people feel safe, secure and trusted. People in the organization are encouraged for their efforts through a system of rewards and recognition. Its environment encourages team working, creativity and innovativeness. In the organization, the peoples ownership for the work and responsibility is obtained through empowerment. Employees are one of the main components.
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HR Mission Creating a highly motivated, innovative, competent and compact employees, working in a climate of relations where human dignity is respected, opportunity exists for creativity in an environment of trust, friendliness, co-operation and collaboration for Corporate Leadership to make RINL a Global Player and World Class Company. The driving force of Human Resources at VSP is its HR Mission which is directed towards making RINL a global player and a world class Company. HR Mission of VSP though not documented is as given below: Creating a highly motivated, innovative, competent and compact employees, working in a climate of relations where human dignity is respected, opportunity exists for creativity in an environment of trust, friendliness, co-operation and collaboration for Corporate Leadership to make RINL a Global Player and World Class Company. HRD Policy The HR Policy is one of the core policies of the Company in harnessing the most precious resources of the Company. The approved HR Policy of the Company is as follows: To realize the full potential of employees, the Company is committed to;
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Provide work environment that makes the employees committed and motivated for maximizing productivity. Establish systems for maintaining transparency, fairness and equality in dealing with employees. Empower employees for enhancing commitment, responsibility and accountability. Encourage team-work, creativity, innovativeness and high achievement orientation. Provide growth and opportunities for developing skill and knowledge. Ensure functioning of effective communication channels with employees.
The Company has well laid out HRD Policy and HR Policy. The HRD Policy of the Company is as follows: Focus
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Identification of Competence needs Providing Training inputs Monitoring the effectiveness of Training Creating Learning Environment Facilitating Self-development, Innovativeness and self-expressions Enabling Employees to assume higher responsibility
The Training and HRD is clearly demarcated at VSP. Separate Departments exists for Training as well as HRD, which have the requisite infrastructure facilities and demarcation of the functions of the Training and HRD are as follows:
TRAINING Skill Development Technological Courses Computer Training Safety & Health TQM & ISO Refresher Courses CMC for JOs Library & Information Service Apprentice Training Freshers Training Industrial Training & Visits
HRD Management Development Behavioral Development External Nominations O D Initiatives Surveys Performance Appraisal HRIS Expert Talks Professional Development Project based Training
Training Needs Survey Skill Analysis Nomination to External Programmes Training Ne Analysis
Annual Training Plan
Curriculum Development
Circulation of Training Plan
On-line Nominations
Feedback/ Evaluation
Delivery of Training
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Design and Delivery of Training The Training and Delivery of Training plays a pivotal role in importing requisite development to the Human Resources. A chart depicting the Design and Delivery of Training that is being imparted at VSP is as under: VSP Where Innovation Never Ends All New Concepts have been attempted for implementation at VSP. Some of such innovative practices are as given below:
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Six sigma SBG Profit Centre Concept MOU Concept 5-S Value Engineering 360 degree appraisal Business Process Re-engineering TQA TQM Balance Score Card MBO Process Management Corporate Business Systems ISO Certification Knowledge Management Competency Mapping, etc
Competency Mapping The Competency Mapping has been identified as one of the core activity at VSP. The Competency Mapping includes the following:
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Concept of Role and Competencies are understood by all. En:- G.M. Steps taken in Identifying Role Competencies Eg:- Total Roles Structure and List of Roles Define Various Roles E.g. Supervisor Job Description E.g. Duties & Responsibilities Identification of Required Competencies E.g. Communication Competency Assessment. Competency Development Implementation of Competency Mapping at VSP.
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Knowledge Management KM News is the focal point for dissemination of knowledge and knowledge sharing at VSP. Knowledge Management definition and plan at VSP is given below: KM is about being able to identify, capture, share, retrieve, disseminate & evaluate organizations intellectual assets, which can be to the Companys advantage to save cost and time.
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Provides opportunity to all to contribute Leverages employees tacit knowledge Help in: Sharing best practices Mistakes not repeated Faster decisions Creating a learning organization Establishing a culture of Excellence
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Implemented in S.M.S for Executives through KM Cell Publishing Monthly KM News Planned for implementation in entire Company through C.B.S. Group.
Performance Appraisal Performance Appraisal in respect of Executives gives a 360 degrees emphasis at VSP. Major components of Appraisal of Executives are as follows:
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Target Setting Self Appraisal Mid Year Review & Feed Back Performance and Potential Assessment Plant for Future Development Final Grading Through Performance Review Committees Training Needs
Productive Work Culture Establishing and sustaining a productive work culture has been considered of crucial importance in VSP. Several initiatives have been taken towards this end. VSP had adopted a multi-skill and multi-trade pattern of working with emphasis on flexibility in job deployment for ensuring optimum utilization of its human resources. Productive work culture has been ensured by well-planned and timely stress on attitudinal changes and positive work ethics through tailor-made human resources development programmes. Industrial Relations VSP, by following a strategy of education and persuasion of the employees and with the firm handling of indiscipline has been able to establish by and large a cordial industrial relations climate. This has seen concerted efforts for a fuller utilization of manpower, stabilization of multi-discipline approach to work, elimination of restrictive
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and wasteful work practices and inculcation of strict discipline in the organization. A constructive industrial relations climate has been evolved through a conscious policy of combining firmness with fairness. The overall Industrial Relations scenario in RINL/VSP is peaceful, cordial and healthy. A host of proactive IR measures which inter-alia include Confidence Building Measures between Union-Management, extensive communication, continuous interaction with Unions were taken for building Harmonious Industrial Relations. Participative Management To sustain the spirit of the participative culture, a total of 66 Participative Committees are being functioning with participation both from the Management and the workers. Approximately 15% employees are given an opportunity of participation in these forms at VSP including the Quality Circles and Suggestion Schemes, etc. These have helped the organization in accomplishing the organizational goals through the active employees involvement. Participative culture exists at various levels in VSP to bring out real democracy at the place of work. The process of participative form is given below:
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Functioning of 66 Committees: Participation of 15% Employees including QCs Suggestion Schemes
Canteen Managing Committee Central Safety Committee
Sports Council
Shop Floor Safety Committee
Joint Participativ Consultative Fora-manageme Representative Recognized Unio Members
Shopfloor Co-operation Committee
Management Un Interaction with Recognized Un and Two Majo Unions
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HRM Sailent Feature HRM and VSP has certain salient features with which it attempts to distinguish from Traditional Personnel Management, they are:
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Contained Manpower Knowledge Workers (Young, educated & highly skilled) Focus on ASK (Attitude, Skill & Knowledge) Integrated HRM HRM & Services at the Door Step of the Employees
HRM Major Components The major components of HRM is by and large are same as that of any professionally run company. They can be seen at an askance as given here under:
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Employee Relations Education, Training and Development Communication Performance Appraisal Shop-floor Discipline-Overlapping shift, Uniform working hours, DARS Welfare Human Resource Information Systems (HRIS) Recognition and Rewards Social Concerns Recruitment Employees Services
Out Work Culture The culture of Steel Plant is the main factor that distinguishes itself from others. It is a living, achieving and performing culture. Some of the aspects of the Work Culture are as under:
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High Levels of Motivation Total Employee Involvement Team Spirit Productive Work Culture Multi Skilling and Multi-Trade Flexible and Rotatable Deployment Elimination of Restrictive Practices Attitudinal Changes and Work Ethics
Grievances Todays Grievance is tomorrows IR Problem. VSP has carved out a unique way of dealing the grievances. The Grievance Redressal procedure at a glance is given in the diagram with grievances received and redressed during the last four years to give an idea of Grievance Management at VSP.
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Grievance Redressal: The Informal Way
Grievance of the Employee
Registration of Grievances in the Register at Shop Floor Personnel Office (Throu Telephone, Personal, Recording, Informal Interactions)
Segregation and communication to the concerned agencies
Grievances Received and Redressed
2000-01
2001-02
2002-03
Quality of Work Life Quality of Work Life decides the quality, product and the quality of people. The components of Quality of Work Life of at VSP are indicated below:
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Neat, clean & pollution free environment Occupational Health Care Canteens and Canteen extension points
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Hygienic Rest rooms Baby Creche Extension counters of Banks inside the Works
Labour Productivity Labour productivity at VSP is highest in the Indian Steel Industry. The Labour Productivity achieved during last 3 years are given below to have an idea: Labour Productivity (t/man/year)
2001-02
2002-03
2003-04
Measures Taken to Control Absenteeism Absenteeism is a menace every where. The Integrated Absenteeism Control Measures are implemented at VSP are worth emulating. They are:
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Schemes with in-built to Attendance Production Awareness on evils of Absenteeism Shop-floor Counseling Social Counseling Discussion in Participative for a (SFCC) Display in Notice Board, Names of persons who do not earn EL and written communication to such employees Disciplinary Measures Notifying Regular Employees names in House Journals
Employees Welfare With a view to develop an attitude in the minds of employees that the Company cares to its employees various Statutory and Non-Statutory welfare and Social security measures have been provided by the Company for the benefit of employees and their families.
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Welfare Facilities Unique Welfare Facilities and Social Security Schemes are implemented at VSP. The important features of welfare have been indicated below to give an idea that VSP cares for people through welfare plus policy:
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All Statutory Welfare Facilities Unique non-Statutory Benefits & Social Security: Educational Institutions Work Dress Community Welfare Centres (8 Nos.) Superannuating Benefit Fund Scheme Employees Family Benefit Scheme Settlement of Benefits on the day of Retirement Accidental Death Package
Employee Relations The Employee Relations is yet another area where VSP stands apart from other organizations and achieved excellence. The components Employee Relations have been indicated hereunder to have an idea:
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Managing 19 Unions of Regular Employees, 17 Unions of Contract Labour and 9 Mines Unions Managing Steel Executives Association 5 SC/ST Associations 100 odd Welfare Associations, Crafts Unions and Interest Groups and Social Organizations. Managing Leadership Development of Second Line Leadership Firmness with Fairness Firm handling of indiscipline Promoting Positive Discipline No Man-hours lost due to IR Problems No Work Stoppages and Sporadic Actions No disputes 3 Union Approach Majority Union Recognition
Recognising People Recognizing people at Departmental Level, Team Level and Individual Level has been a way of life at VSP and the various schemes of recognition are as listed below: i) Departmental Awards
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Safety & Housekeeping awards Environment Preservation awards Ispat Udyan Puraskar Productivity awards
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ii)
Energy Conservation awards Oil Conservation Fire Awareness awards Best Training orientation Raj Bhasha awards Best Branch award Team Awards
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iii)
Quiz, skit related safety, environment & energy Quality Circle awards Special performance awards Sports related awards Individual Awards
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Special performance award Jawaharlal Nehru award Safety, Environment, Productivity and Fire Service Awards (Essay, Debate, Slogan & Poster Competitions) Training awards Presentation Skills, essay & Slogan Sports related awards Suggestion awards Instantaneous Recognition
Continual Improvements Through Total Involvement Continual Improvement is possible only through total involvement. VSP not only believes in implementing the scheme but also improves the same in true letter and spirit.
! ! ! ! !
Quality Circles Suggestion Schemes Quality Improvement Projects Task Force for Special Assignments Internal Customer Orientation
Innovative Human Resources Practices Lot of innovative path breaking Human Resources initiatives and achievements, which are responsible for the Turnaround of the Company. Notable among them are as follows:
! ! ! ! !
Three Union approach of Industrial Relations Unique Employee Involvement Practices (Quality Circles, Suggestion Schemes, Target Setting etc). Informal Grievance Redressal System Multi-skilling and Multi-trade Concept Contained Manpower & Gate Monitoring System
17
Case Studies
! ! ! ! ! ! ! ! ! ! ! !
Special Social Security Schemes Net Work Culture Integrated Human Resource Management Focus on ASK (Attitude, Skill and Knowledge) Outsourcing of non-core activities Knowledge Management Informal collaborative approach in dealing with Unions Incentive Scheme designed to improve attendance, technological discipline, reduce accidents and produce beyond capacity. Policy intervention for elimination group sporadic action Non-executive career growth without loss of working hands. Social counseling and changing employee mind set. Reduction in Non-Executive manpower and increasing the Executive manpower as a strategy which has been followed to reduce the nonexecutive manpower and to increase the executive manpower. For instance, 15,202 non-executive manpower in the year 1994 has been reduced to 12,222. Similarly, executives strength which was at 2,281 in 1994 has been increased to 4,533 by the year 2004.
Major Achievements of the Department The major achievements of HR Department are as follows:
! ! ! ! ! ! ! ! ! !
Mandays lost due to Industrial Relations problem have been brought to minimum level Labour Productivity has been highest in the Steel Industry in India Lowest absenteeism levels in the industry Commitment of employees to the Core Values and converting threats into opportunities Introduction of Non-Unionized supervisory Cadre and strengthening of supervisory base Empowerment of Human Resources through delegation of powers Job Rotation and Redeployment for optimum utilization of manpower Right sizing through non-recruitment Leadership in Innovative Human Resources functions Total Computerization of Human Resources functions.
HR Strategies In the present day world if HR has to play pivotal role, it needs to have its own strategies. VSP is no exception to this and the HR Strategies that are being followed are indicated below:
18
! ! ! !
Collaborative Approach in dealing with Major Unions Informality in Interactions with Unions/Associations Incentive Scheme with Focus on: Needs of the Organization
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
Awards
Producing beyond capacity Generating Savings Producing Market Oriented Products Adhering to Technological and Personal Discipline Improving Attendance Periodic Review to meet changed requirements Policy Interventions for Eliminating Group Sporadic Action: Excreta Insurance of Contract Labour Unique Family Benefit Scheme Revision pf Medical Benefits Non-Executive Career Growth without loss of working hands Strengthening Supervisory Base Converting Threats into Opportunities Changing Employee Mind-set Empowerment through Delegation of Powers Job Rotation, Multiskilling and change of Work Culture Out sourcing of non-core activities.
Awarded Rs. 1.00 Crore as Prime Ministers Trophy for the year 2002-03 adjudging as Best Integrated Steel Plant in India. Besides, some of the prestigious awards bagged by the Company in the areas of the Safety, Quality Environment, Production and Productivity, Management, etc, are as follows: a) Safety
! ! ! !
Ispat Suraksha Purashkar for highest percentage reduction in accident rate for 14 times. Greentech Safety Silver Award for 2002-03 by Greentech Foundation Best Safety Award from Government of A.P. Steel Ministers Trophy for 6 times for Best Safety Performance
b) Environment
! ! ! ! !
Rolling Shield on Environment Protection for 2002. Indira Priya Darshini, Vriksha Mitra Award 1992-93 from Ministry of Environment. Nehru Memorial National Award for Pollution Control 1992 93 & 1993 94 by IIM. Award from AP Pollution Control Board for best efforts in rain water harvesting. Environment Excellence Award Green tech Silver Award for 2002 by Greentech Foundation.
19
Case Studies
c) Government
! ! ! ! ! ! ! ! ! !
Award from Ministry of Heavy Industries for achieving MOU Targets for 2002-01. Rated Excellence among all PSUs in 2002-03 for fulfilling MOU targets by Ministry of Steel. Winner of SCOPE Award for best Turn around effort by a PSU 2001-02 & 2002-03. CII Energy Conservation Award 1995-96. First Prize for Energy Conservation in 2002 & 2003 by Ministry of Power. Best Labour Management Award from Government of A.P. Best Tax Payer Award from Government of A.P. 1st Prize by Government of India Indira Gandhi Rajbhasha Shield for propagation of Official Language. Rolling Shield for Ecological Protection instituted by the Ministry of Information & Broadcasting for 2002. Udyog Excellence Gold Medal Award for excellence in Steel Industry by Ministry of Steel. in
d) Quality & Productivity
! ! ! ! !
Golden peacock (1st Prize) National Quality Award-96 from IIM. Gold Star Award for Excellent Performance in Productivity. Selected for World Quality Commitment Award 1997. Excellence Award for outstanding performance in Productivity Management, Quality and Innovation. Quality Circles & Suggestion related Awards by INSAAN.
e) Others
! ! ! ! !
EEPC Expert Excellence Award-1994-95. Best Enterprise Award from SCOPE, WIPS in 2001-02. Best HRD Practices Award by ISTD for 2002-03. 2nd Prize for RINLs Stall at the International Trade Fair. Vizag Steels Global rating has gone up to 67th position in 2002 amongst Worlds Largest Steel Producing Companies.
The Testimony The efforts of VSP have been recognized in various forums and some of the major awards received by VSP are:
! ! ! ! !
20
Indira Priya Darshini, Vriksha Mitra Award: 1992-93. Nehru Memorial National Award for Pollution Control: 1992-93 and 1993-94. EEPC Expert Excellence Award: 1994-95. CII (Southern Region) Energy Conservation Award: 1995-96. Golden Peacock (1st Prize) National Quality Award-96 IIM in the National Quality Competition 1996.
! ! ! ! ! ! ! ! ! ! ! !
Steel Ministers Trophy for Best Safety Performance for 6 times in the years: 1990, 1993, 1996, 1997, 1998 and 2002. Selected for World Quality Commitment Award - 1997. Gold Star Award for Excellent Performance in productivity. Udyog Excellence Gold Medal Award for excellence in Steel Industry. Excellence Award for outstanding performance in productivity management, Quality & Innovation. Ispat Suraksha Puraskar for highest percentage reduction in accident rate for 14 times from 1991 onwards. Best Labour Management Award from the Government of Andhra Pradesh. SCOPE Award for best turnaround for 2001. First Prize for Energy Conservation in 2002 and 2003. Best Enterprise Award from SCOPE, WIPS in 2001-02. Greentech Safety Silver Award for the year 2002-03. Best HRD Practices Award by ISTD for the year 2002-03.
This is the story of turnaround of a plant which took birth in a controlled regime, grown and spent its formative years in the era of globalization and tasted its success in the world competitive village. This path has to be treaded very carefully to achieve a status where it can leave its competitors way behind. To chalk out a growth path it is also necessary for us to understand the world steel market since the level of steel consumption in a country has long been regarded as an index of industrialization and economic maturity attained in a country. Technological Revolution Technological advancements in the recent past, especially in the field of information feature technology and communication, have changed the face of business. The industrial revolution heralded a new chapter in civilization by putting new forces in the hands of man in adapting nature to fulfill his needs. This revolution sustained and drove human society for the last three centuries or more. Today we are privileged to witness another revolution within the industrial revolution called Information Technology. The future of human society is interlinked with this emerging force. Soon, no aspect of our life can remain untouched by this omnipotent force. IT brings with it tremendous force of improving efficiency, productivity and the convenience of having the world at our finger tips. Just as the industrial revolution brought a quantum improvement in productivity through mechanization of manual activities, the IT revolution is taking productivity to new heights through automation of the industrial activity. IT is contributing towards improving human productivity as well as machine productivity. The speed at which decisions are made makes computers thousands of times more efficient than manual operations. Hence, the high precision manufacturing becomes possible. Planning, implementation and monitoring by crunching massive amounts of data are again possible through computers which if done manually would take months to complete and ultimately render the information useless. The increase in competition makes it all the more necessary for industry to adopt IT as an initiative for surviving in todays market place. This perception of a corporation as an organic being is helpful in understanding that the people, systems and technology are strongly interlinked to produce the whole which is greater than the sum of the parts.
21
Case Studies
Use of IT in HRM That IT HRM interaction can only survive us in todays Liberalised and Globalized world. Keeping this in view, extensive Use of IT has been made in HR areas at VSP. Some of the areas of usage are given below:
! ! ! ! ! ! ! !
Training Information System. On line Human Resource information System. Library Information System. Performance Appraisal System. MIS Report on Safety & Occupational Health. DARS. On Line Indent. Establishment function.
What Brought the Turnaround? Really what has brought the Turnaround? People wonder how a Company which was established with an investment of Rs. 100/- from each citizen of India has lost approximately Rs. 50/- from every citizen could make a come back and reclaim approx. Rs. 20/- on behalf of each citizen hardly in a period of 2 years. Let us look at what has brought the Turnaround. Machines Money Market Materials Methods Environment Technology Conclusion Success of Human Resources functions of Visakhapatnam Steel Plant from the relentless efforts of the VSP work force. This valuable asset of about 16775 steel employees have been contributing to positive cultural changes, increased productivity and excellence in organization. Undoubtedly employees are the driving force behind the success of VSP and will continue to play a key role in shaping the future of VSP. The HRM at VSP is the major contributor for the TURNAROUND OF THE COMPANY. The Innovative HR Practices will no doubt make VSP a WORLD CLASS COMPANY in the days to come. Issues for Discussion 1. Discuss the vision, mission and core values of Visakhapatnam Steel Plant. 2. Do you really think that vision, mission and core values should be revised from time to time. If yes, then why? Discuss. 3. Financial position is linked to other performance factors. Discuss. 4. Discuss the HR Policy of VSP.
22
Same Same
Same
Same Same Same Same
References All Published Material of VSP Annual Reports of the Company Magazine of Training & Development Vikas Dhara Personnel Manual Souvenier of Turn Around Newsletter of Suggestions Quality Circles QC Quest KM News Maintenance News Sugandh Hindi Journal Journal of Man Management MOU between RINL & Ministry UKKU Vani In Company News Letter PM Trophy Booklet, etc
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UNIT 1 PUBLIC ENTERPRISE: CONCEPT AND POLICY

Forms of Public Enterprises

1.1 PUBLIC ENTERPRISE IN ECONOMIC DEVELOPMENT

Public Enterprise: An Overview

MODELS OF ECONOMIC GROWTH

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

THE RATIONALE OF PUBLIC SECTOR

Public Enterprise: An Overview

Forms of Public Enterprises

Public Enterprise: An Overview

PUBLIC SECTOR ENTERPRISE: CONCEPT AND FORM

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

SELF ASSESSMENT QUESTIONS

Public Enterprise: An Overview

UNIT 2 PUBLIC ENTERPRISE SCENARIO: NATIONAL AND INTERNATIONAL

Forms of Public Enterprises

INTERNATIONAL SCENARIO - POST 1980s

Public Enterprise: An Overview

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

Public Enterprise: An Overview

THE INDIAN SCENARIO

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

THE IMPACT OF ECONOMIC REFORMS

Public Enterprise: An Overview

OBJECTIVES IN THE INDIAN CONTEXT

Forms of Public Enterprises

Public Enterprise: An Overview

Forms of Public Enterprises

SELF ASSESSMENT QUESTIONS

REFERENCES AND FURTHER READINGS

UNIT 3 NATURE AND SCOPE OF PUBLIC ENTERPRISE

Forms of Public Enterprises

EXTENT AND SCOPE

GROWTH OF PUBLIC ENTERPRISE

Nagaland Pulp & Paper Mills (Nagaland)

Forms of Public Enterprises

Bharat Pumps & Compressors at Naine (Uttar Pradesh)

person, which is governed by contractual obligations.

Forms of Public Enterprises

ROLE OF DEPARTMENT OF PUBLIC ENTERPRISES

Public Enterprise: An Activity Overview

SELF ASSESSMENT QUESTIONS

REFERENCES AND FURTHER READINGS

Forms of Public Enterprises

Total Investment Rs. bn

Public organisations Enterprise: An Overview

148 2 578 265 14 1169

49 3 84 304 2 1072 4787

Aluminium Nitrogenous fertilizers Phosphoric fertilizers Source: ibid

231.67 2880 479

Forms of Public Enterprises

Public Enterprise: An Source : ibid Overview

4.2 TRANSFORMATION OF PUBLIC TO PRIVATE SECTOR

Involving no change in ownership/management Offer of shares 05