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Ancillary Development & Public Sector Role in India

Prof. Nand Dhameja

IIPA New DelhiFebruary 16,2015

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Coverage

Public Sector : Forms, Significance Public Enterprises : Growth & Economic ReformsPublic Enterprise L CategoriesDisinvestment: Disinvestment : Targets &

RealisationAncillary DevelopmentSmall Industrial Units & Industrial Clusters: Size

and significancePublic Enterprises: Subsidiaries, Joint-ventures,

Memorandum of understanding: ExamplesChallenges for PEs & Ancillary Units

Public Sector

Also known as State Sector or Government Sector

Includes all activities funded out of government budget

and in India it accounts for two-fifth of total gross

investment (or gross capital formation) and contributes

a quarter of gross domestic product (GDP)

Public Sector : significanceConceived basically as an instrument of

economic development, to ensure law and order and protection of

individual property, in particular in developing economies, since attainment of political independence.

acquired a prominent place and has witnessed phenomenal growth over the years.

Public Sector : Significance contd.

To regulate private entrepreneur’s tendency to make monopolistic profits; eliminate social, economic and regional inequalities; investment in socially profitable ventures,

to speed up the rate of economic growth and technological development, so as to achieve self-sufficiency and self-reliance; to become main instrument of entrepreneurial activity; 5

Public Sector : Forms

a). Ministry/ Departmental Form

Headed by a Minister/Accountable to Parliament

b). Unincorporated enterprises, like railways & postal

dept.. operating as ‘commercial departments’,

Principle of Commercialisation, Limited Access Project or

c). Incorporated enterprises (termed as public

enterprises) set-up under the Company Act or other

enactments

Public Enterprise: CPEs & SPEs

Public Sector : Forms contd. Government administrative departments : cover

activities relating to fiscal, general administrative, community and economic services.

Commercial departments: are controlled by public authorities, are engaged in production of goods and services, Principle of ‘commercialisation’ to charge for their goods and

services and are in the nature of ‘limited access projects’; railways, postal services, dairy and milk supply units, ordnance

factories, state electricity boards, water and sewerage works are some of the examples.

Public enterprises: Incorporated enterprises include government companies wherein government holds 51

percent or more of equity, these include BHEL, ONGC, BEL, MTNL, SAIL, IOC, OIL

Public Sector : Forms contd.

Over the years a tendency, world wise, to transform government administrative departments to commercial departments or to incorporated enterprises with an objective to grant autonomy;

Separation of telecom from postal and setting-up of MTNL, VSNL, BSNL; or conversion of Indian Airlines or Air India, statutory corporations under the Civil Aviation Act to joint stock companies under the Indian companies are some examples.

Public Sector in India: Policy & Reforms

Industrial Policy Resolution 1956: Public sector had

primary responsibility for setting-up of new

industrial undertakings & all industries of basic &

strategic importance or of public service were to be

set-up in public sector

Industrial Policy 1991-- an era of economic reforms:

abolished monopoly of any sector except for

industries related to security & of strategic

importance. Reservation for small scale sector

Public Sector in India: Policy & Reforms contd.

Five Year Plans assigned strategic Role to Public Sector“….serves a twofold purpose. It helps to remove

certain basic deficiencies in the economic structure and at the same time it reduces the scope for accumulation of wealth and large incomes in private hands. As the relative share of the public sector increases, its role in economic growth will become even more strategic and the state will be in a still stronger position to determine the character and functioning of the economy as a whole”.

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Economic Reforms: Features

Industrial Policy Reforms: Licensing abolished

for all projects except for a short list of industries

List of areas reserves for public sector pruned to

eight industries from 17 as per Industrial Policy

1956

Allowing existing units to expand or produce any

article without requiring additional investment

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Economic Reforms : Features Contd.

Economic Reforms 1991 to Integrate with Global Economy to:Reduce Extent of Govt. Control over

various aspects of Domestic EconomyIncrease Role of Private SectorOpen up economy to trade & foreign

investmentTo unshackle the economy from the

cobwebs of unnecessary bureaucratic controls

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Economic Reforms: Featurescontd

Public Sector Reforms: List of industries reserved for public sector has been pruned. Public Enterprises (PEs) to run on

commercial principles; Given Autonomy- Maha-ratnas, Nav-ratnas; Mini-ratnas.

Privatization & disinvestment of PEs to raise resources & to introduce market forces

Investment plans of PEs to be funded from their reserves or capital market

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Public Sector : Forms

Administrative Depts. 22% Cover activities relating to fiscal services, general administrative services

and community services

Commercial Depts. 26% (Postal, Railways, Electricity boards, Ordnance factories

Irrigation): Principle of Commercialisation, Limited Access Projects

Public Enterprises 52%(Incorporated Enterprises)

Public Enterprises : Objectives

to help in the rapid economic growth and industrialisation of the country and create the necessary infrastructure for economic development;

to earn return on investment and thus generate resources for development, 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 and to promote import substitutions, save and earn foreign

exchange for the economy 15

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Public Enterprises

Number Capital Employed (Rs. Bln)

Employees

Centre (CPE)

259 15,103 1404,000

States (SLPE)

837 3,334 1871,805

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Central Public Enterprises(Operation * 217; $229)

2001-2 03-4 04-05 09-10 12-13

CPEs 231 230 227 249* 259$

CPEs-Profit making (Rs. Crore)

120 139 138 158 149

CPEs –Loss making (Rs. Crore)

109 89 79 59 79

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Central Public Enterprises Performance (Rs.Crore)

2001-2

02-03 03-04 04-05 05-06

Sales 534,001

587,040

699,776

778,830

CE 389,934

417,160

452,336

504,407

581,250

PBIT 63,190 72,539 95,039 108,420

106,533

PBIT/S 13.5 16.2 15.5 13.6

S/CE 1.28 1.3 1.38 1.34

PBIT/ CE % 17.56 21.86 21.86 21.49 18.33

PAT/NW % 8.5 9.7 14.0 14.9 14.5

Central Public Enterprises Performance (Rs.Crore)

2012 -13 2009-10 2008—09

Capital Employed (net fixed assets + working capital)

1510,373

910,120 793,240

Total Turnover 1931,499

1235,060

1271,529

Profit of Profit Making CPEs 143,559 108,435 98,488Loss of Loss Making CPEs 28,260 15,842 14,621Net Worth 851,245 660,245 665,686Dividend declared 49,701 33,223 25,501Contribution to Exchequer 162,761 139,828 151,529Foreign Exchange Earnings 138,150 77,745 74,206Foreign Exchange Outgo 646,262 420,415 433,332

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Economic Reforms

Economic Reforms 1991 to Integrate with Global Economy to:Reduce Extent of Govt. Control over

various aspects of Domestic Economy

Increase Role of Private SectorOpen up economy to trade & foreign

investment

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Economic Reforms: Features

Industrial Policy Reforms: Licensing

abolished except for industries

related to security & of strategic

importance. Reservation for small

scale sector

Allowing existing units to expand or

produce any article without requiring

additional investment

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Economic Reforms: FeaturescontdPublic Sector Reforms: List of industries

reserved for public sector has been

pruned.

Public Enterprises (PEs) to run on

commercial principles; Given Autonomy-

Nav-Ratnas; Mini-ratnas.

Privatization & disinvestment of PEs to

raise resources & to introduce market

forces

Investment plans of PEs to be funded

from their reserves or capital market

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Industrial Policy 1991

Abolish Monopoly of any Sector in any Field of Manufacture

Industrial Licensing Abolished Except in areas of Strategic Importance

Areas for Public Sector Pruned down to FourPublic Enterprises to Run on Business PrinciplesSick Enterprises to be Referred to BIFR (Bureau of

Industrial Financial Restructuring)

Professionals to be appointed on Boards-Given more Powers/Autonomy

Govt. Shareholding: Disinvestment to Mutual Funds, FIIs,to Raise Resources & to Introduce Market Forces & to have Wide Public Participation

CPEs : Three Categories

With an objective to grant more autonomy

for operations & investment in a project

Maharatana:

Navaratna

Miniratna

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CPE: Mini Ratna Status

Mini Ratna Status I: a) Positive NWb) Profit continuously last three yearsc) PBT >= Rs. 30 crore at least in one of three

years

Mini Ratna Status II: a) & b) above

PSUs : Disinvestment

As a part of economic reforms: since 1991-92

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CPE- Disinvestment: Categories

Period Phase I

Target (Rs.cr) Realisation Rs.cr)

1991-92 to 98-99 PhaseII

34,300 16,622

1999-00 to 03-04 Phase III

58,500 24,619

2004-05 to 15 (upto Feb. 11) Total

236,425 329,225

138,383 179,623

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Disinvestment in Central P Es Year Target (Rs.cr) Accruals (Rs.cr) 1991-92 2,500 3,038

1992-93 2,500 1,913

1993-94 3500 0

1994-95 4,000 4,843

1995-96 7,000 168

1996-97 5,000 308

1997-98 4,800 910

1998-99 5,000 5,371

1999-00 10,000 1,585

2000-01 10,000 1,871

2001-02 12,000 3,268

2002--03 1,2000 2,348

2003-04 2004-05

14,500 4,000

15,547 2,765

Disinvestment in Central P Es contd.

Year Target (Rs. Cr.) Target (Rs. Cr.)

2005-06 Nil 1,570

2006-07 0 0

2007-082008-092009-102010-112011-122012-132013-142014-15 *upto Feb 11)

0025,00040,00040,00024,00019,02743,425

4,181 0 23,553 22,763 14,035 23,857 21,321 24,338*

TOTAL 329,225 179,625 29

Disinvestment in Central P Es

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Disinvestment in Central P Es Public enterprises enjoy operational

freedom & autonomy to invest in projects so as to compete in global market

In that process, they set-up subsidiaries, JVs & enter into Memorandum of understanding

To procure material parts, components & services

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Ancillary Development & Public Sector

Public Enterprises Objectives include:

promotion of balanced regional development; and

assistance towards development of small-scale and ancillary industries

Company Act requires to disclose in B/S all total outstanding dues

to small scale industrial undertakings, giving their name(s) any sum

together with interest outstanding for more than thirty days.

It highlights the protection of the interest of small and ancillary units

Government guidelines relating to procurement of material and

equipment by inviting tenders,

also tend towards preference for small industrial establishment.

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Ancillary Development

Industrial development & setting up of big industrial units requires units for the supply of raw material, components and services.

Procurement of a part or raw material is usually subcontracted and in most cases the sub-contractor is an ancillary unit

Sub-contracting is the work of procuring the fabricated parts and components from outside sources because of price competitiveness and low investment. This necessitates the development of small and ancillary units.

As such, along with industrial units, a cluster of tiny, small and medium industrial units come up in that region. 33

Ancillary Development contd.

Takes the form of setting up of subsidiary units or a joint ventures for provision of raw material or services,

Generates employments and leads to manufacturing of parts and components,

Leads to import substitution,Generates employment.

Examples are that automobile manufacturers world-wide procure parts and components from outside which lead to development of industrial clusters and these are increasingly recognized as an effective means of industrial development and promotion of small and medium-sized enterprises.

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Ancillary Development & Industrial clusters

Industrial clusters a means of

industrial development and promotion of small and medium-sized enterprises

In India, there are around 7000 clusters in traditional handloom, handicrafts and modern SME industry segments.

About 2500 unmapped rural industry

clusters in the country35

Small Sale Sector

In developing countries, more than 90 percent of all firms, outside the agriculture sector, are MSMEs generate a significant portion of GDP.

In India MSMEs account for a large share of industrial units: in 2011-12 MSME Sector enterprises numbered 447.73 lakhs employing 1012.59 lakhs. MSMEs’ contribution to rural development as 200.19 lakhs

working enterprises were located in rural areas, 55.34% of the total working enterprises in MSME sector;

Urban areas 161.57 lakhs (44.66%) of the working enterprises The sector currently produces more than 6,000 quality products,

ranging from handloom saris, carpets and soaps to pickles, auto and machine parts targeting both domestic and international markets.

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Public Enterprises

Set-up subsidiaries, Joint venture & have memorandum of understanding, dealers net-work

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Public Enterprise: SAIL

Joint Ventures: “SAIL RITES Bengal Wagon Industry Pvt. Ltd The Steel Complex Limited (SCL) Renewable Energy Purchase Titanium Project

Strategic Alliances: Kobe Steel Limited, Japan Revival of Sindri Project Hajigak Iron Ore Deposits owned by Government of Afghanistan

Memorandum of Understanding (MOU) / Commercial Agreements entered into with various companies

Conversion Agents: SPUs and Wet Leasing Agents for TMT Bars for Regions: Eastern, Northern, Western , Southern

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Public Enterprise: BHEL

Subsidiary Companies include BHEL Electrical Machines Ltd

Joint Venture Companies: BHEL-GE Gas Turbine Services Pvt. Ltd. (BGGTS): NTPC – BHEL Power Projects Pvt. Ltd. (NBPPPL) Raichur Power Corporation Ltd Dada Dhuniwale Khandwa Power Limited Latur Power Company Ltd Power Plant Performance Improvement Ltd

Net-work of suppliers and traders

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Public Enterprise : ONGC

Subsidiaries ONGC Videsh LimitedMangalore Refinery and Petrochemicals

Limited

Joint VenturesONGC Tripura Power CompanyONGC Mangalore Petrochemicals Limited

Net-work of dealers, suppliers

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Public Enterprise: Coal India

Subsidiary Companies Eastern Coalfields Limited (ECL), Sanctoria, West Bengal Bharat Coking Coal Limited (BCCL), Dhanbad, Jharkhand Central Coalfields Limited (CCL), Ranchi, Jharkhand South Eastern Coalfields Limited (SECL), Bilaspur, Chattisgarh Western Coalfields Limited (WCL), Nagpur, Maharashtra Northern Coalfields Limited (NCL), Singrauli, Madhya Pradesh Mahanadi Coalfields Limtied (MCL), Sambalpur, Orissa Coal India Africana Limitada, Mozambique

The consultancy company is Central Mine Planning and Design Institute Limited (CMPDIL), Ranchi, Jharkhand.

North Eastern Coalfields (NEC) a small coal producing unit operating in Margherita, Assam is under direct operational control of

CIL.41

Public Enterprise :IOC

Group Companies:

Indian Subsidiaries

Foreign Subsidiaries

Joint Ventures

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Enterprise: MUL an automobile manufacturer

Sales and service network : 933 dealerships across 666 towns and cities in has 3,060 service stations (inclusive of dealer workshops and Maruti Authorised Service Stations) in 1,454 towns and cities throughout India

has 30 Express Service Stations on 30 National Highways across 1,436

cities in India. Maruti Insurance Maruti Finance Citicorp Maruti Finance Limited is a joint venture Maruti TrueValue N2N Fleet Management Maruti Accessories

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Ancillary Development & Public Enterprises

To conclude, subsidiaries, joint venture and memorandum of understanding developed by public enterprises facilitate procurement of material and components highlights the important role of public enterprises in development of ancillary industries

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Ancillary Development & Public Enterprises

However, government agencies and public enterprises should take measures towards policies development for strengthening of small and medium industrial units, public enterprise should take responsibility to provide technical knowhow and management guidance to small and ancillary units as regards the following:

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Public Enterprises Responsibility towards Ancillary Development

PEs have a catalytic role as regards: Production process/method, equipment selection and layout. Management guidance relating to design, detailed manufacturing drawing,

tooling, jigs and quality control procedure and equipment. Manpower planning. Organization and procedure for production planning, progressing and

control. Management aspects, like cost-accounting, industrial engineering, product

diversification and marketing. Sources of financing and procedures for obtaining them

Imported raw materials and components, scarce/critical indigenous raw materials and drawings

Tooling, jigs and fixtures to the extent that these are outside the capability of ancillary unit.

Process quality control, training facilities for the development of supervisory and artisan skills.

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Ancillary industrial units : ChallengesHave a clear mission and goals ;Develop strong Business Association, to have dialogue

with the GovernmentDevelop semi-private institutions such as research and

advisory centers and knowledge transfer centersUndertake market studies useful for alliance participantsHave open mind to invest in technology and innovation Improve the capacity of specialized input and service

providers Undertake joint promotion of specific products in the

local, regional and international markets

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Thank You

Good Day

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