MS 92 Complete Book

1

Forms of Public EnterprisesUNIT 1 PUBLIC ENTERPRISE: CONCEPT

AND POLICY

Objectives

After going through this unit you should be able to:

• Understand the concept of public enterprise;

• Understand the rationale of the public enterprises;

• Differentiate between the dimensions of the public sector policies.

Structure

1.1 Public Enterprise in Economic Development

1.2 Models of Economic Growth

1.3 The Rationale of Public Sector

1.4 Public Sector Enterprise: Concept and Form

1.5 Summary

1.6 Self Assessment Questions

1.7 References

1.8 Further Readings

1.1 PUBLIC ENTERPRISE IN ECONOMICDEVELOPMENT

The role of the state in the lives of the people of a country has been a matter ofintense debate ever since the institution emerged centuries ago. The functions andsystems of the state have oscillated between an autocratic or a mercantilist state(with deep penetration into the socio-economic fabrics of society) to totalunbridled laissez faire. Whenever it was found that the freedom of the weakersections of the community was threatened, the state made heavy inroads incurbing the freedom of the people who wielded dominant and disproportionateeconomic power. It generated, over a period of time, an antithesis leading to anupsurge against the overbearing power of the state.

The emergence and decline of the public sector during the 20th Century is only apart of this societal difference. The concentration of economic power in a fewhands, the marked economic inequalities and intense poverty among the millions inthe world compelled the state to intervene. The intervention was either regulatoryor participatory (or both).

The latter process took the forms of socialism, command economies andcentralised planning. The public sector is a product of this process andconsequent initiatives. The first half of the 20th Century saw the prevalence andgrowth of the public sector in a large number of economies, industrialised as wellas developing. Towards the end of the 1970s, it was discovered that the stateorgans became the instruments of uncontrolled power. The resources wereinefficiency utilized leading to low productivity and less effectiveness in mostcases. This was the experience in a number of countries necessitating a closescrutiny and examination of the public sector. The scrutiny has become muchmore imperative due to globalization and global changes in the social, political andeconomic evironments which has been a trigger - indeed a powerful one.

Looking back historically, the industrial revolution in the 18th and 19th centuries inthe West and the colonial rule in a number of countries left a part of the world

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Public Enterprise: AnOverview

undeveloped and consequently poor. As people became conscious of the starkrealities of existing economic disparities, the need for development was felt.

Economic development was sought to be achieved in different countries atdifferent stages of development through divergent economic models. Though theneed for and methods and models used, have varied from period to period andfrom one country to another. The ills and aberrations of the prevailing systemsled the policiy makers and the administrators to spell out strategies for changingthe economic and social order. Two distinct economic and political ideologiescapitalism and socialism, emerged since the second half of the 19th 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 lostits relevance due to the invention of steam and new energy sources for a host ofindustrial applications.

Capitalism (Burns etal, 1948) has been defined broadly as a system based onprivate ownership of means of production regulated by market forces, in whicheach producer seeks to maximise profit. The capital is privately owned and theowners have the freedom to allocate and dispose of resources and to employworkers to serve the owner interests. The system seeks to meet the economicneeds of the society through entrepreneurial efforts of individuals (or groups ofindividuals) who own the resources and hire the workers. Workers, like land andmachinery are just another tool of production. The basic motivation, is to makeprofit 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 createindustry and trade which would provide the nation-state with powerful economicband. 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 anation was measured largely by its merchant fleet and the gold and silver earnedfrom trading. A favourable balance of trade for a country meant that its goldand silver coffers were growing. East India Company is a classic example ofthe mercantilist government in which the United Kingdom (UK) fostered exporttrade by granting monopoly privileges to the trading company. The aim ofmercantilism 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 stateintervention to produce goods, both for domestic consumption and for exports,such as woollen textiles in the U.K. or iron in France. Production of machinesand inputs for manufacturing was encouraged by all mercantilist governments,either through subsidies or by compulsion. State regulation became the order ofthe day.

It is thus interesting that the state intervention is not a new phenomenon of the20th Century. Encouragement to and protection of domestic industry was adeliberate state policy. Gradually, the allocation of economic resources and thecomposition of national output became matters of governmental responsibility.The systems imposed by the mercantilist states weakened during the 19th

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Forms of Public EnterprisesCentury, mainly in the face of rising demand of the colonies for independence,starting from America, where the traditions of British and European mercantilismdid 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 andconsume, as he liked. Individualism was motivated by self-interest. Thegovernment’s role in people’s economic activities receded in importance withlaissez faire or ‘let alone’ style of administration. The philosophy was to allowtrade to move freely and to remove governmental restrictions on production,employment, prices, wages, and consumption. Free market economy became theguiding force. It was assumed that it would result in furthering the commonwealth (Smith Wealth of Nations). The underlying assumption was that the sumtotal of individual interests constituted the public interest. A growing segment ofthe business community saw in the economic freedom an abundant scope forprofitable ventures.

Laissez faire was dominant in Britain during the Nineteenth and early TwentiethCenturies. Even in the United States, it remained dominant as a socialphilosophy, though, it waned overtime.

The theory of laissez faire, in sum, represents the maximum degree of freedomfor the individual in economic activities (investment, production, trade, distribution,consumption), perhaps regulated only when serious concerns of national securityarose. Free enterprise system, there, is therefore the quintessence of capitalism.

This system, however, led to concentration of economic power in the hands of afew and exploitation of the labour – The workers were subject to long workinghours and harsh working conditions, with little or minimal concern for theirwelfare. Only those with advantage of wealth and concomitant social connectionssucceeded. This led to wide disparities in income and wealth among people in thesociety.

It was discovered that self interest could not be trusted to guide the processes ofproduction, income distribution and consumption. Private interest needed to bemodified, regulated and supplemented by government interventions. In Europe,two World Wars and the widespread depression led to restoration of considerableauthoritarian control over the economic processes. While North Americaremained largely wedded to free enterprise, Europe, especially, the UK, turned tosocialism.

Socialism

The ground conditions which helped sowing the seeds of socialism were theappalling living conditions imposed by industrialisation in the early 19th Century.The towns became overcrowded as people were forced out of ruraloccupations and ways of life. Profits earned by the industrialist class were highbut wages to the workers were low and the living conditions of the wageearners were miserable. Some reformist measures were set in motion in Englandafter 1832 with a slant towards humanitarianism – movements to protect childand female labour. Several social thinkers and activists, however, developed thebelief that those conditions cannot be made better under the prevailing capitalistorder. They felt the need for creation of a new social system to undo the evilscaused by the capitalistic system.

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As the capitalist model of economic development was associated with theexploitation of both workers and consumers from the very inception of theIndustrial Revolution in the 18th Century, the consequent economic and politicalpressures led to a new philosophy of social organisation. It took the form ofsocialism. It was an alternative economic social order in which a major part, ifnot all, of the economic resources came to be directly controlled by governmentthrough ownership of means of production, and meeting the needs of the societythrough regulated production and distribution.

The rationale of the socialist doctrine rests on three premises: (a) capitalism as asystem builds itself through monopolistic activities; (b) it generates glaringinequalities of income and wealth; and (c) it perpetuates poverty among a largesegment of the population. These could be ameliorated through the Governmentownership 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 dominatedby the French Catholic Church and nobility. A dominant variety of socialism,however, took shape only with the October Revolution in Russia inspired by theMarxian philosophy propounded in Marx’s The Communist Manifesto and DasKapital.

The adoption of the socialist doctrine by the Union of Soviet Socialist Republics,Eastern Europe and subsequently by China and some of the newly independentcountries of Asia, Africa and Latin America, gave fillip to the public sectorassuring greater importance and role in development..

There are a number of schools and practitioners of socialism with varyingconfigurations. The concept translated and operationalised into practice led tofurther divergencies. According to Bertrand Russell, a British philosopher,“Socialism like everything else that is vital, is rather a tendency than a strictlydefinable body of doctrines”. The essence of socialism in his view is theadvocacy of community’s ownership of land and capital by a democratic state. Aconcern for the hitherto denied or deprived section of the community is a markedfeature of socialism.

Fabian Socialism

A moderate variant of socialism is the Fabian variety. In the 1880s, a groupstyled themselves as Fabian Socialists, as opposed to Marxists following aphilosophy of overthrowing governments by violent means, emerged in the U.K.The fabians as they, came to be known, which included distinguished socialthinkers like Bernard Shaw, H.G. Wells and Sidney and Beatrice Webb. Thewritings and essays of the Fabian Society led to the formation of the LabourParty in the U.K., many of whose intellectual elite were either members of thesociety or closely associated with it. The Fabians believed in the inevitability ofsocialism sweeping the world because of the injustices of capitalism. The FabianSocialists opted for a peaceful political change sharply different from theMarxists. This evolutionary Fabian Socialism, which emerged in Britain, gotextended to Germany and some other countries of the continent (Dutt). The firstPrime Minister of independent India, Jawaharlal Nehru, broadly subscribed to theFabian philosophy and was committed to the non-violent form of socialismthrough a democratic process.

Marxism

The radical school of socialism was propounded by Karl Marx (1818 – 1893).The Europe’s movements of socialism in the late Nineteenth and early TwentiethCenturies drew inspiration from the Marxist thesis.

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Forms of Public EnterprisesMarx called his socialist doctrine as communism and scientific socialism. In theirmonumental work, The Communist Manifesto, Marx and Eagels (Mars &Engles, 1948) established that capitalism was inherently a system of exploitationand it was doomed to collapse. Labour theory of value is a marked contributionto the literature on socialism which, in essence, means that value is created onlyby human labour. Since it is only the labour-power which produces value, thecapitalist, who owns the means of production (land, buildings, machinery and rawmaterials), extracts surpluses from labour and claims these as his profit.

As an ideology, therefore, communism is based on the premise that there wouldalways be conflict of class interests between the ‘haves’ and ‘have nots’ and achange must occur - or be forced - if an equitable society has to be established.

The Communist Manifesto maintained unequivocally and forcefully that a newsocial and economic order “can be attained only by forcible overthrow of allexisting social conditions. Let the ruling classes tremble at a communistrevolution. The proletariat, that is, the wage earners, have nothing to lose buttheir chains. They have a world to win. Let the working men of all countriesunite” (Das Kapital 1867). The Manifesto states that “the history of all hithertoexisting society is the history of class struggles, implying thereby that thecapitalists and workers are opposed to each other in an adversorial position. Thecherished - but the initial phase of the communist movement was the dictatorshipof the proletariat which was anticipated eventually to lead to a classless society.The concept questions the very basis of democracy. The Soviet State symbolisedthe essence of Marxism to the world.

Other types of socialism which flourished at that time were syndicalism ofFrance or guild socialism or Fabian Socialism of Britain.

The state ownership of the means of production translates itself into the conceptof the public sector. The public sector is that segment of production anddistribution system in a country which is owned and controlled by the communitythrough the state or its organs.

The World Wars I and II ravaged a number of countries, both on the Europeanand Asian continents. Great depression was witnessed in 1930s. Employmentbecame 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 theissues of unemployment, economic disequilibria and misery of the common man.

The General Theory of Keynes was published in 1936, the seventh year of theGreat Depression, when the older policy of laissez faire (minimum intervention ofthe state and the operation of free markets) had failed. Unlike the traditionalpolicy-makers who expressed the view that depression and unemployment arecaused by supplies drying up, Keynes felt that infusion of demand for goods,services, manpower and capital would lead to growth - demand-led growth - inthe economy. The General Theory was also supported by the market collapse of1929 that wiped out a lot of savings and incomes of people. The only way toarrest the downturn in the economy, the theory envisaged, was to increasespending. It would be unrealistic to expect individuals to open their wallets duringa downturn and the only agency which could boost demand is government. Thecentrality of government making massive investments to trigger growth is thecore of the Keynesian economics of state-funded job creation - “dig trenches andfill them up”.

Mixed Economy Model

The Indian brand of socialism chose a middle path – avoiding the fundamentaldoctrines of both capitalism and communism. Violent or revolutionary path was

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not acceptable to the Indian ethos and culture. Peace and tolerance are deeplyembedded in the Indian philosophy (of different denominations).

India’s approach to economic development was a compromise between acentrally planned economy and market economy. While the public sectoremerged in the West, particularly in the U.K. and France, through nationalisationof existing industries, the approach of the Indian experiment was different. Thecountry, when it became independent in 1947, was miserably underdeveloped. Itwas considered counter-productive to destroy something that was existing andaccordingly, the country decided to focus on the creation of new productioncapacities and to accelerate development at minimal cost.

Although the Indian National Congress, as early as 1931, adopted a resolution atits Karachi session which advocated nationalisation of key industries, JawaharlalNehru, the first Prime Minister, who dominated the political scene, held the viewthat 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, fordecades after independence, envisaged that the new undertakings in defence,key and public utility industries and those which were in the nature of monopoliesor served the country as a whole, be publicly-owned. The Economic PolicyReport also recommended that private industry be subject to state control andregulation and that banking and insurance be nationalised while financialcooperatives be set up. The Report envisaged the establishment of a planningbody “to plan integrated development of the country’s economy in order toestablish a just social order eliminating exploitation in production”.

The undercurrent in the thinking was that while the existence of private sectorwas transitional in nature, a transformation of the social order should be broughtabout without upsetting the existing economic pattern. It observed that the privateunits 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 privateenterprises along with public enterprises. It, however, envisioned that the publicsector would occupy the commanding heights of the economy. The concept ofthe commanding heights was articulated further. Under the model, the role ofthe private sector would be limited and controlled through a planning system. Thefirst Industrial Policy Resolution in 1948 implicitly spelt out the mixed economyconcept combining the essentials of the American model of market economy andthe 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 orinfrastructure, which could enable the country to achieve the required rate ofeconomic development.

The private sector had neither the financial resources of the magnitude needednor the capacity or experience to manage giant projects. The government had,therefore, no option but to make investments in various socio-economic sectorslike infrastructure, industry, education, health, and other essential services. Thecountry needed massive investments in almost all sectors - agriculture, industryand other tertiary sectors, in infrastructure (power, roads and road transport,communications, railways, aviation, shipping). The development of backward andinaccessible regions was equally urgent to bring about balanced social andeconomic development of the people.

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Forms of Public EnterprisesIt was found later that, because of outdated technologies and bad managements,a large number of private sector industrial undertakings had fallen sick. Toprotect the employment of these units, it was felt that it was imperative for thegovernment 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 likeIndia. A structural shift from the agrarian economy to the industrial economycreated the base for the socio-economic structural changes. In order toaccelerate industrialisation and address other economic and social problems ofthe day, active involvement of the state in the processes of development becamean economic necessity for many countries, especially the developing countries.The historical developments of the last two centuries thus provide the backdropof how the public sector emerged as a problem-solver to the fallouts andramifications of the prevailing economic systems.

The recourse to the instrument of the public sector thus emerges from at leasttwo strategies of economic dynamics: first, to undo what the private enterprisesdo or are not able to do for the people’s welfare; and second, to accelerate theindustrial and economic development of the country in the desired direction, at theleast social and economic cost to community. The first is achieved throughtakeover (or nationalisation of the existing activity); and the second by thecreation of new production or related facilities with fresh investments.

The growth of the public sector had been a global phenomenon since the 1950sand India was no exception. By design and policy, the public sector expandedand occupied a vital position in different economies, such as Great Britain,France, Italy. Only the state, it was believed, could mobilise massive means toinvest in infrastructure and public utilities like railways, telecommunications andpower generation and distribution. The public sector became a major instrumentof planned economic development (Mohnot, 2003) and was viewed as its primemover in several countries. The state intervention was considered necessary alsoto regulate the use of scarce resources depleted by war efforts and undo orprevent the distortions arising from undiluted profit motive of privateentrepreneurs. The public sector and planned economic development becameinseparable. Bereft of ideological considerations, a practical approach adopted inmany countries through the instrumentality of state was to fill the gaps leftuncovered by private endeavours. Strategic considerations and control overnatural 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 ofinvestment, gestation period and risk factors are such as to make themunattractive to private investors;

• the industrial or other enterprises made sick by private promoters berehabilitated to ensure continued employment and production (Rolls-Royce inthe United Kingdom and textile mills in India are good examples);

• the state to take initiatives to accelerate the growth rate of the economy andto change the direction of development as required by the welfare of thepopulace at large;

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• the state to control the entity and activities of the multinationals as thesewere found to affect domestic economic interests;

• the state to take on the task of achieving some urgent social and socio-economic objectives such as creating new employment opportunities, securingbalanced regional or segmental development, reducing economic inequalitiesand mobilising scarce resources, such as capital and foreign exchange.

The Indian case provides a good illustration of the rationale or the raison d’etreof the public sector. More so, with the private sector not having the wherewithaland the will to build infrastructure – roads, railways, ports, capital intensiveindustry with long gestation period involving massive investments and generatingpoor 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 heightsof the economy’ with planned investments, creation of large scale capital-intensive basic goods sector, establishment of infrastructural facilities andprevention of the outflow of foreign exchange), was considered necessary anddesirable on economic and social considerations. It led to the establishment ofpublic enterprises in steel, heavy engineering, basic chemicals, oil and gasexploration and oil refining, fertilizers and petrochemicals, energy generation andtransport and communications. These sectors were to forge strong interlinkageswith the development of other sectors of the economy including the small scalesector.

The rationale of public enterprise thus assumed a wide spectrum of activity. Itbecame a powerful instrument of economic development. Social services likehealth and education were also promoted by the state although not distinctly inthe form of the public sector.

The public sector in India, evolved itself through three basic modes :

• the government initiative in setting up new industries and other undertakings;

• support to existing enterprises in the domain of private initiative assupplementary or complementary efforts;

• limited nationalisation with a focused objective - such as protection ofemployment.

Nonetheless, the main thrust of the public sector was to accelerate the core,basic and strategic industries, such as coal, power, steel, oil exploration andrefining, fertilizers, minerals. Economic security and national self-reliance werethe other underlying principles. Greater socio-economic equality and the buildingup of a countervailing power against the power of private individuals and groupswere the other considerations for government to be in business.

Infact, the rationale for the establishment of public enterprises are many andvaried. A catalogue compiled by an Expert Group of United Nations IndustrialDevelopment Organisation (UNIDO) (UNIDO, 1979) provides a comprehensive -although not an exhaustive - inventory of developmental objectives of the publicsector:

• 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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Forms of Public Enterprises• 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 toattend to, such as preventing the emergence of private monopolies – as distinctfrom natural monopolies, promoting import substitution, enhancing exports to saveand earn foreign exchange so vital for import of capital goods, intermediates, rawmaterials and essential goods.

Some of the major objectives in setting up public enterprises, as envisagedoriginally in India, could be broadly summed up in the following set:

••••• to help in rapid industrialization and economic growth of the country;

••••• to create the necessary infrastructure for economic development;

••••• to promote balanced regional development;

••••• to ensure 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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Public Enterprise: AnOverview 1.4 PUBLIC SECTOR ENTERPRISE: CONCEPT AND

FORM

The term public sector (sampat, 2002) has been used in different contexts bypeople of different backgrounds. It has come to mean different things indifferent countries. In its widest connotation, the public sector encompasses alleconomic 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 activitiesfunded out of the government budget. In this sense of the term, the size ofpublic sector is, indeed, very large. It includes not only the governmentcompanies but also government departments, whether in the central or statesector, irrigation and power projects, railways, posts and telegraphs, ordnancefactories, and other departmental undertakings, banking, insurance, financial andother services, especially social services (like education, health and medicare,social insurance and social security). Accordingly, public sector is a verycomprehensive term encompassing a vast array of activities undertaken throughpublic funding from resources raised mainly through fiscal efforts. In that sense,it does not have a “personality” of its own. On the other hand, publicenterprises which are set up by allocation of state’s resources with a corporateface or in any other distinctive organisational form, have their own distinctidentity. These, strictly speaking, constitute the public sector.

In many countries, economists, administrators and analysts use the terms ‘publicsector’ and ‘public enterprise’ interchangeably. Useful guidance is provided bythe International Centre of Public Enterprise. It identifies public sector by “anycommercial, financial, agricultural or promotional undertaking owned by publicauthority, either wholly or through majority shareholding engaged in sale of goodsand services”.

Public enterprise, obviously, has two facets – public and enterprise. Theownership and control of government follow public funding and theentrepreneurial effort. The government investment is through allocated resourcesin 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. Ownershipis exercised through majority holding of equity shares (or investment) by thegovernment. The debt is also often provided by the government.

The public sector takes a number of organisational forms: departmentalenterprises, 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 sectorenterprise which is owned by government, on the one hand, and a publiccompany registered under the Companies Act, but privately owned (which alsohas 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 publicsector enterprises and public companies in the private sector. A primarydistinction is that a private company owes its origin to the efforts of individualpromoters with the ownership of a sizable chunk of shares to exercise bothownership and management control. Shareholding may, however, be widelydispersed in a private sector company through public offerings. On the other

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Forms of Public Enterpriseshand, a public sector enterprise is owned dominantly by the state and comesunder the control of government as a major shareholder. Both, however, preparefor purposes of accounting, a profit and loss or income and expenditure accountand a balance sheet, which reflect their financial operations and position, to bepresented annually. The accounts are subject to statutory audit and need to beplaced before the general body of the shareholders, who have the power toapprove and adopt them.

Ownership and Management

The patterns of ownership and management of public enterprises vary fromcountry to country. In several countries, the forms of ownership and managementhave evolved over time. These varied also with the sector of activities in whichthese were located.

Management is an extension of the ownership pattern. With the involvement ofthe resources of the state, the public sector represents the extension of statepower. It imposes certain discipline on the management of these enterprises.

Generally, the public ownership implies that at least 50 per cent of capital is heldby the state itself or by any national, regional or local authority. The managementownership then falls within the domain of the state. In the Indian context, largerthan 50 per cent shareholding in an enterprise by the state determines thecharacteristic of public ownership, (Article 12 of the Constitution of India).

However, the state ownership does not mean that the subject enterprise has tobe run by government on day-to-day basis. Since it is created by theinvestments from the funds provided by the public exchequer, the enterprises are,subjected to public accountability. In a democratic state, legislative supervision isthe essential ingredient of accountability. At the same time, operational autonomyof public enterprises is also needed as the enterprise functions, especially in amixed economy, competing with private enterprises and operating in the sameenvironment.

In the management of public enterprises, the crucial aspect is of coordination andcontrol. It needs striking a balance between accountability to public and businessprinciples. Also there is a continuous conflict and quest to strike a balancebetween autonomy and accountability. Given a corporate form, public enterprise ismanaged by a board of directors. Ownership provides the authority to thegovernment to decide who should constitute the board and, as a corollary, theboard is answerable to the government. Some of the important issues confrontedare: what are the powers which should be vested with the owners? How muchauthority 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 ordiversification)?

While spelling out the characteristics of the corporate form of public enterprise orpublic company, it is interesting to comprehend the Trusteeship conceptpropounded by Mahatma Gandhi. It relies on the innate goodness of humanbeings and gives a call to all possessors of wealth to regard themselves astrustees of the people. Gandhian Trusteeship does not contemplate any change inthe structure of the society as does Socialism. It is recognised that the verynature of acquisitiveness (and possessiveness) inherent in capitalism cannottransform the system into benevolence or trusteeship. A lofty moral value isattached to the theory of Trusteeship which is almost impossible to translate intopractice. While, private profit is an anathema to the socialist philosophy, theemerging rules of corporate governance is a pointer to Gandhiji’s concept ofTrusteeship 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 apublic enterprise and a private public company.

Germany provides examples of a variant of public trust, in major enterprises suchas Salzgitter, VEBA, VW, which are integrated with market economy andoperated on commercial principles. Federal government’s participation is of avarying kind. Public – private partnership in the trust is a noteworthy feature.These trusts promote research and development in the field of technology inorder to meet competition, both national and international, while building onstrengths for the future.

Policy Dimension

Governments, in general, adopt different policies whether to take over existingenterprises or to establish new enterprises. Policies are determined by socio-economic and political factors which trigger the policies, which could be groupedas:

• 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 asBotswana, Brazil, China, India, Malaysia, Mexico, Nigeria, Pakistan, Sri Lanka,Zambia and others.

Public sector policies basically have two dimensions – exogenous andendogenous. Each one is significant. In economic sense, market structure andsupply constraints determine macro level public policies. The other aspects aresocio-political imperatives.

Public policy determinants cover issues such as :

• 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 exclusivelyin 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 theircontrol?

• What shall be the mechanism for making policy decisions?

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Forms of Public EnterprisesThese are all exogenous or macro-level questions of public enterprise policies.

Endogenous policies at micro level fall within the jurisdiction of enterprisemanagement. These reflect the day-to-day operating level. Most of these arecommon with private enterprise with the distinction that the public enterpriseshave to follow the policies and procedures laid down by the government andaccountable for promoting public interest. With the operationalisation of corporategovernance, much of the distinction between public and private enterprises willdiminish. Real value creation – as distinct from the value creation for theshareholder – will be the rendezvous of both sectors.

Activity

a) List some of the major objectives in setting up public enterprises.

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b) Think of more such objectives and list them.

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1.5 SUMMARY

Societal differences have created a large economic disparity resulting in economicinequalities. Public sector emerged in the 20th century as a formal concept butsoon declined due to non-proportionate economic power. Since then the role ofpublic sector in economic development has not found a proper place. This unitspecifically touches upon this aspect and also takes a short tour to the differentmodels of economic growth. The rationale of public sector has also beendiscussed in brief alongwith the developmental objectives of the public sector. Ithas been tried to cover the major aspects of concept and form of public sectorenterprises as a whole.

1.6 SELF ASSESSMENT QUESTIONS

1. Discuss the two facets - public and enterprises of a public enterprise.

2. Briefly discuss the role of public enterprise in economic development.

3. Discuss the concept of socialism with reference to public enterprise.

4. ‘India's approach to economic development was compromise between acentrally planed economy and a market economy’, discuss.

1.7 REFERENCES

Burns Edward Arthur, Neal C. Aflred and Watson, D.S. (1948). ModernEconomics.

ibid p,35

Smith Adam, Wealth of Nations, Cannon edition, p.508,

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18th

Century Revolution in France led to elimination of aristrocracy by publicguillotine.

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 andEconomic 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 Strategicand 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 andEconomic Research.

Mazzolini Ronalto, Government Controlled Enterprises – International Strategicand Policy Decisions, John Wiley & Sons.

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Forms of Public EnterprisesUNIT 2 PUBLIC ENTERPRISE SCENARIO:

NATIONAL AND INTERNATIONAL

Objectives

After going through this unit, you should be able to understand:

• The public sector emergence in its independent form;

• The public, sector as the global concept;

• The public sector as the rational concept.

Structure

2.1 International Scenario- Post 1980s

2.2 The Indian Scenario

2.3 The Impact of Economic Reforms

2.4 Objectives in the Indian Context

2.5 Summary


2.7 References and Further Readings

2.1 INTERNATIONAL SCENARIO - POST 1980s

The emergence of public sector, even in its independent enterprise form, hasbeen a widespread phenomenon worldwide. It covers both, the developing anddeveloped countries. It may be recapitulated that some of the countries wherethe institution of the public sector was used after the Great Depression in the1930s include France, South Korea, the U.K., Italy, Germany, and after obtainingindependence by countries like Sri Lanka, Bangladesh, Malaysia and India. This isbesides the whole host of the command economies of Eastern Europe includingthe Soviet Union and China.

The post-1980 period, however, witnessed dismantling of the public sector incountries which shifted to the market economy model with a growing emphasison private enterprise and free competition. Despite the dismantling, severalcountries like Russia, France, China and India have a strong prevalence of thepublic sector. Privatisation of state enterprises have not made deep inroads inthese and several other countries.

Selected Country Cases

A brief overview of selected countries, representative of different models, woulddemonstrate the overall environment for the public sector and its rapidtransformation through privatisation into private enterprises.

France

France provides the earliest example of growth of public sector having adoptednationalisation as a strategy. In 1936-37, under the then popular government,railways and a part of the armaments industry – with a total employment ofover 500,000 – were nationalized. In 1946, the coal mining industry wasnationalised and came to the public enterprise fold. Five main banks, thirty fourinsurance companies, privately-owned enterprises in the energy sector, airlines andtwo major industrial companies were taken over by the government.

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Controls over the public enterprises were fairly rigid in France. The controlswere 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 rolewas also significant in the manufacturing sector which included automobiles, shipbuilding, armaments and aircraft manufacture.

The developments in the public sector upto early 1980s showed that in sectorswhere it was already well-established, it played a significant role without makinginroads into large areas of economy covered by other industries. France continueseven now to have a very strong public sector in the national economy andpresents a picture of mixed economy model, despite being a major Westernindustrialised country.

Federal Republic of Germany

In the early years of the 20th Century, the government developed a nationalnetwork and established post and telegraph services, mostly to aid the wareffort. There was, however, not much of public sector activity until the end of1920s.

West Germany after World War II (when the nation was divided into two parts)possessed vibrant private sector industries. The government’s approach was notto nationalise the existing industries. Even the Social Democratic Party gave upnationalisation as a strategy as early as 1959. Case-by-case approach wasadopted 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 theresponsibilities, including the mobilisation of investment resources. Electricity,mines, public savings banks, dockyards and ship building industries were examplesof 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 ofthe Federal Republic. Among the 50 largest industrial entities, only 5 were inthe public sector. A mere 1.6 per cent of the total gross fixed assetinvestment 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 percent; cars 40.3 per cent. The government had a concentration of shareholding in6 enterprises (Salzgitter AG, VIAC, IVG, VEBA AG and VW).

A significant feature of West Germany was that public enterprises were fullyintegrated into the market economy. They operated on commercial principles likeprivate sector enterprises. A contrast is provided by East Germany which adopteda different model as a part of the Soviet Block. Practically, the entire economywas under public control engined by centralised planning system

Privatisation measures were adopted in East Germany only after reunification ofWest and East Germany. An agency, Treuhandanstalt (THA), was set up bythe government to privatise and restructure. All public enterprises were placedunder this Agency which broke the existing enterprises into small units tofacilitate restructuring and privatisation. Privatisation contracts made provisions forretraining an agreed number of employees for a specific number of years. Asocial safety net for retrenched employees was a part of the package.

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Forms of Public EnterprisesItaly

Italy provides a classic example of another industrial country in which publicenterprises contributed significantly, both quantitatively and qualitatively. Theywere concentrated in highly capital intensive sectors – iron and steel,telephones, hydrocarbons and motorways. The state-owned Institute for IndustrialRestructuring (IRI) established in 1933 became the largest industrial employer inEurope 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 themanufacturing industry. The share of the public sector in gross output wassignificant in metallurgy 40.8 per cent, food 12.8 per cent, chemicals 10.8 percent, mechanical engineering 10.5 per cent and construction industries 10.7 percent of gross output.

United Kingdom

In the United Kingdom, the world’s first industrial nation, public enterprises playeda dominant role in post World War II period until end-1970s. Nationalizedindustries were an integral part of the economy as suppliers and purchasers ofinputs from the rest of the economy. The public sector retained a strong positionin coal, iron and steel, telecommunications , railways, energy, and in automobilemanufacturing. The nationalised steel industry contributed handsomely toexports.

However, substantial subsidies were needed by the nationalised industries. Over£1000 million annually was the outgo on account of subsidies to the publicenterprises. British Rail and British Steel accounted for 70 percent of totalsubsidies 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 oftotal 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 percent in the energy sector.

Economic recession in the West in the late-1970s was attributed to an excessiveinvolvement of government. In many countries, large public, as well as private,firms came to regard government as a ‘last resort’ guarantor of corporateexistence. During the periods of stagnation, unemployment became the focus ofpolitical 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 sectorborrowing requirements.

Dismantling of the state’s ‘industrial empire’ was expected to revitalize thenational economy by reducing the level of monopolist control of the state. Thecountry took the lead in public sector reforms towards the end of 1970s underthe lead provided by Prime Minister Margarette Thatcher. The ConservativeGovernment, which took power in 1979, held the philosophy that too muchgovernment control was a major problem of the economy and the market forcescould provide the solution. The Prime Minister advocated the idea that it wasnot the business of the government to be in business.

The scope and sweep of the public sector underwent a major change mainlydue to political leadership. Privatisation became a new doctrine leading todismantling of the public sector. This led to the transfer of all the nationalizedindustries – which before nationalisation were in the private sector – into privateownership along with the public utilities. The reform process had twin objectives:

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first, to reduce the burden on the exchequer; and second, to encouragecompetition for the benefit of consumers.

A sectoral approach was adopted to carry forward economic reforms. Coalmines were the first to face the brunt. There was already a decrease in coalrequirement owing to shift from coal to gas-powered power generation. Majorcoal consumers preferred to import coal from Australia because of the pricedifferential. Many coal mines were closed through a gradual process.Redundancy was tackled by worker-friendly schemes. Retraining andredeployment of workers was also a part of the package.

The scale of dominance of the public sector was reduced through a series ofprivatisations, with the sale of nationalised industries, such as Cable and Wirelessand British Aerospace (1981), British Petroleum (1983); British Telecom (1984),utilities such as Gas (1986), Water (1989) and Electricity (1990). The privatisationof British Rail was the most significant act of the Thatcher regime.Simultaneously, a regulatory mechanism was put in place in the near monopolyutilities such as gas, telecom and power. The role of the regulator was to helpconsumers get lower price and better service.

China

China has had an economic model totally dominated by the public sector sincethe 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 likehospitals and schools, which were part of public enterprises, were separated.By 1998, most of the state-owned enterprises (SOEs) were detached from theministries. The State Economic & Trade Commission (SETC) was made thenodal agency for the SOEs. A Committee for appraisal of Chairmen and Boardsof SOEs and a Supervisory Board for Audit were integral parts of the reformmeasures. Writing-off of loans, offer of shares to banks and financialinstitutions were other highlights of the reforms process. A recent survey hadshown that the number of sick companies came down from 6000 in 1996 to 3000in 1999. Contract mechanism was adopted to improve performance.

A significant feature of the Chinese policies has been so far to avoidprivatisation of state assets in contrast with the policies adopted by othercommand economy countries of Eastern Europe and some countries of the ThirdWorld.

Malaysia

New Economic Policy adopted by the Malaysian Government in 1970 led to thecreation of public sector enterprises in the country and by 1983 there were 900such enterprises. The inability of the public sector to promote growth and themounting burden on the exchequer led to the formulation of privatisation policyin 1983. Detailed guidelines on privatisation were issued in 1985, which included(i) reduction in government’s 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 inthe organisation, management and performance of public enterprises.

The Privatisation Master Plan was drawn up in 1991 which identified a totalof 46 entities/activities to be privatised. The process of privatisation iscontinuing.

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Forms of Public EnterprisesMexico

Mexico had over 1000 public enterprises. However, Mexico is considered as oneof the success stories of privatisation policy adopted by many countries. Theprogramme began in 1983 and in a decade, the number of public enterprisesdeclined from 1155 to just over 200. A phased programme led to the divestitureof 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 choppingblock, 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 inpolicy to divest all public enterprises; (ii) setting up of a single authority with totalresponsibility for divestiture; and (iii) eliciting cooperation of workers, includinggiving stock options and the right of first refusal to workers unions, whichprevented 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 thanthe foregoing. For example, during the mid-1980s, Jamaica had 640 and Srilanka200 undertakings accounting for 20 per cent of GDP, in both countries, Malawi91 undertakings with 25 per cent of GDP, Kenya 150 undertakings with 15 percent of GDP.

And then there came a sudden change. The public sector bashing became afashion.

The prevailing opinion in early 1980s in many countries, spearheaded by thepolicies of the World Bank and the International Monetary Fund, was that thepublic sector had become a drain on national economies, which warrantedradical measures. In most countries political leadership leaned on this view inthe context of the collapse of the Soviet system, demotion of the concept ofsocialism 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 Bloccountries, the reforms were carried out through a political process. A paradigmshift was clearly in evidence.

It is widely believed that with the onslaught of globalisation and the opening upof the economies consequent to the acceptance by most countries the WTO(World Trade Organisation) regimen, only world-class standards of manufactureand services can meet the challenges. It required total reconstruction andprofessionalisation of the economy. Outsourcing and economies of scaleemerged as the mantras of global competitiveness and survival.

One could also see the emergence of Information Technology as a very strongdriving force. The convergence of computing power and telecommunicationsprovides a thrust for organisational changes leading to dismantling of thebureaucratic way of functioning. Only knowledge-based professionalised firmscan survive competition and grow. New management patterns are fast evolving.Intellectual capital, rather than asset-based capital, will dominate, leading tomore of private initiatives. As a fallout, the government’s role will be more of acatalyst rather than as an active player. Technological breakthrough, shorteningproduct cycle and rapidly changing markets will provide the momentum for

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economic development. A new market environment is emerging, rendering, inthe process, organisations subject to rigid controls of government, unviable.

This, however, is one view. The economic history has ample evidence to showthat it is only a phase.

As in the past, the pendulum could move to the other side. The managementaberrations in private enterprise (Enron, AOL–Time Warner, Merck, ArthurAnderson) have shaken the American scenario. It is increasingly being recognisedthat serious regulatory measures will have to be enforced to protect the interestsof a multitude of stakeholders - shareholders, workers, consumers and thecommunity at large. And to enforce such measures is not an easy task despitethe best intentions.

2.2 THE INDIAN SCENARIO

When India became independent in 1947, emerging from a colonial rule to asovereign state, a new era of political and economic transformation was usheredin, raising the aspirations of a substantial part – 16 per cent – of the humanity.

Even before the attainment of political independence, there was a growingrealisation that political and economic freedoms were an inseparable phenomena.The seeds of the mixed economy model, adopted by the country, could betraced back to the thinking of the then dominant political party articulated clearlyin the Karachi Resolution in 1931 which spelt out, as referred to earlier, in itsFundamental Rights Resolution, that the state would own or control keyindustries and services, mineral resources, railways, waterways, shipping andother means of transport.

The colossal problems of the Indian socio-economic conditions and deployablelimited resources needed a different approach so as to avoid the extremes of a‘free economy’ and a ‘command economy’. The principles of democracy andthe freedom of the individual were needed to be injected into the growthdynamics of development while targeting economic welfare of the masses andpreventing concentration of economic power in a few private hands. Economicplanning was the instrument used to accelerate the pace of development and toensure more equitable distribution of incomes and of essential goods and services.

It was realised that the leeway which needed to be made to ameliorate theeconomic conditions of the teeming millions and assuring them decent livingstandards could not be achieved without the full-scale intervention by the state.Private enterprise did not possess the financial resource, nor the technological andmanagement skills, to undertake the stupendous challenges faced by the nation.

The adoption of the Industrial Policy Resolution of April 1948, soon after Indianindependence, is a landmark event, which laid down the path for economicdevelopment. The state assumed the role of an entrepreneur, and not only of acatalyst, a facilitator and a regulator, allowing the private sector to operate inareas other than those reserved for the public sector. It was the first formalgreen signal to the structure of mixed economy.

The landmark enunciation of the policy observed: “The state shall play aprogressively active role in the development of industries and that, for sometimeto come, the state could contribute more quickly to the increase of nationalwealth by expanding its present activities wherever it is already operating and byconcentrating on new units of production in other fields, rather than on acquiringand running existing units. Meanwhile, private enterprise properly directed andregulated has a valuable role to play.”

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Forms of Public EnterprisesManufacture of arms and ammunition; production and control of atomic energy,and ownership and management of railways became the state monopoly. Sixbasic industries, namely, (i) iron and steel, (ii) coal; (iii) aircraft manufacture, (iv)ship building, (v) mineral oils; and (vi) manufacture of telephones, telegraph andwireless apparatus were to be developed only by the state. All other areas werethen kept open to private initiatives.

The policy direction was provided by the Constitution of India, which becameeffective 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 thecommunity are so distributed as best to serve the common good and that theoperation of the economic system does not result in the concentration of wealthand means of production to the common detriment.”

Immediately after the Constitution was adopted, an institutionalised system ofplanning was installed by the setting up of the Planning Commission to undertakemacro level planning for effective mobilisation, allocation and utilisation of thenational resources. The public sector and planned development becameinseparable. The First Five Year Plan which covered the five-year period, 1951-52 to 1955-56, made a specific reference to the role of state in the followingwords: “Whether one thinks of the problem of capital formation or of theintroduction of new techniques or of the extension of the social services or of theoverall realignment of the productive forces and class relationship within thesociety, one comes inevitably to the conclusion that a rapid expansion of theeconomic and social responsibilities of the state will alone be capable of satisfyingthe legitimate expectations”.

It followed that the state had to assume greater social and economicresponsibilities to meet the aspirations of the people without resorting tonationalisation of the existing means of production or eliminating the privatesector.

The national ruling party (Indian National Congress) adopted a Resolution – AvadiResolution in 1954 - to usher in what it called Socialist Pattern of Society as anational goal and this provided the trigger for spelling out the policy parametersby the government through the second Industry Policy Resolution adopted by theParliament. The statement in April 1956 provided the direction for the state toassume a dominant role in the years to come. A new orientation was given tothe mixed economy concept enlarging the scope and coverage of stateintervention. 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 outindustries of basic and strategic importance or public utility services which wereintended to be in the public sector. It also said that other industries which wereconsidered essential and required investment on a scale which only the statecould provide, also had to be undertaken by the public sector. Accordingly, theindustries 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, shipbuilding and telecommunication equipment.

2) Twelve industries which would be progressively state-owned and in which thestate will, therefore, generally take the initiative in establishing new

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undertakings, but in which private enterprise will also be expected tosupplement the effort of the state. These included – aluminium, fertilizers,other minerals, machine tools, ferro alloys and tools, basic and intermediateproducts required by chemical industries, antibiotics and other essential drugs,synthetic rubber, carbonisation of coal, chemical pulp, road transport and seatransport.

3) The remaining all industries were left open to private initiatives.

The state assumed a “commanding role” by virtue of the parliamentary approvalof the Industrial Policy and whatever was undertaken in regard to the nationaldevelopment stemmed from this policy direction. It opened up the possibilities ofnational investment over a wider area. A multiplicity of objectives motivated thepolicy, such as:

• to strive for reduction of regional imbalances;

• to augment the revenues of the state and providing resources for furtherdevelopment 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 differentstates constituting the body), emphasized the importance of the public sector inthe national economy.

Three major developments are noteworthy in the development of publicenterprises in India:

1) In 1955-56, some two hundred and odd life insurance companies werenationalised merging their business into a larger entity, Life InsuranceCorporation of India, which operated as a monopoly organisation untilinsurance business was opened up to private enterprise as a part of theeconomic reforms programme. Later ( in 1972) all companies doing generalinsurance business were also nationalised and formed into four companiesheaded by a fifth holding company (General Insurance Corporation of India).

2) In 1969, as a seemingly political move, 14 major private banks werenationalised. More were added later. Their identities were retained and therefunction 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 similardispensation.

These moves were milestones in the journey of public enterprise in India towardsattaining commanding heights or at least in establishing an ambience in favour ofpublic enterprise.

In 1977, a policy statement placed before the Parliament by a newly electedgovernment declared : “There will be an expanding role for the public sector inseveral fields. Not only will it be a producer of important strategic goods ofbasic nature, but it will also be used effectively as a stabilising force formanufacturing essential supplies for the country.” A new dimension thus gotadded 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 freshstatement of industrial policy was made before the Parliament. This statement,

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Forms of Public Enterpriseswhile reiterating the socio-economic objectives of the earlier industrial policy,emphasized on the efficiency in the utilisation of the resources deployed. Thegoals 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 shiftedto efficiency and effectiveness of investments as it was realised that the publicinvestments 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 in1991. The predilection for the public sector was waning in the context of globaleconomic changes and the economic (foreign exchange) crisis encountered by thecountry. The restructuring and disinvestment of the public sector became asignificant component of the economic reforms programme. A roll-back of thestate and reliance on market forces became the dominant theme. The conceptof mixed economy was redefined with a shift for a greater role to the privatesector. Reservation list of industries in the exclusive domain of the public sectorgot abridged. Presently, there are only 4 industries which are in the exclusivelist. 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 werethrown open to the private sector. Even the industrial licensing system whichregulated setting up of industries with precise capacity stipulations was dismantled(except with regard to a few industries). Some of the significant policymeasures bearing on the public sector are :

a) a review of portfolio of public sector investments to focus on strategicindustries,

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 widerparticipation;

e) bringing about greater degree of professionalisation in the public enterprises;

f) thrust on performance improvement through a system of performancecontracting called, Memorandum of Understanding (MoU), under which

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targets are set annually for achievement and evaluation, through agreementssigned by the chairman of the public enterprise and secretary of theadministrative ministry controlling the enterprise.

2.4 OBJECTIVES IN THE INDIAN CONTEXT

A fairly large spectrum of activities is covered by the public sector. Theobjectives 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 buildinginfrastructure. These help in industrialisation and development of the economywith multiplier effect. These include Steel Authority of India, Coal India, NationalThermal Power Corporation, Oil and Natural Gas Commission, Indian OilCorporation, Bharat Heavy Electricals. The strategic objectives can be identifiedin a number of undertakings – both departmental and non-departmental – whichmeet 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) andsecond reservation of posts for weaker sections of the society, Scheduled Castesand Tribes or setting up undertakings exclusively for their benefit, such asNational Scheduled Castes & Tribes Financial Corporation. This latterphenomenon is witnessed more in states, (Tamilnadu Backward ClassesDevelopment Corporation, Haryana Harijan Kalyan Nigam Ltd., Punjab Women& Children Development Corporation).

The promotional objectives have been served by setting up corporations, such asthe National Research Development Corporation, Indian Dairy Corporation. InStates, there are enterprises for development of specific industries such asleather, 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 DevelopmentBank of India, Industrial Finance Corporation of India, Small Scale IndustriesDevelopment Bank, Power Finance Corporation).

Other objectives sought to be achieved through the instrumentality of the publicsector include self-reliance, import substitution, providing infrastructural support tothe economy, development of backward regions, supply of basic materials andcapital goods, prevention of concentration of economic power, stabilisation ofmarket forces, development of technology, employment generation, generation ofresources for future development.

State Level Public Undertakings

India is a Union of 28 states and 7 centrally administered territories. India’spublic sector operates at the central, state and local self-government levels. Theforegoing covers mainly the Central public sector.

Every state is endowed with resources of one kind or the other. The exploitationof such resources falls primarily within the domain and responsibility of theconcerned states. There are some 900 to 1000 autonomous independententerprises for development of leather, meat, livestock, fisheries, poultry,sugarcane, brassware, handicrafts, minerals, textiles, films, theatres and otherservices. There are also development corporations, such as for housing and

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Forms of Public Enterprisestourism. Most of these are promotional in nature. Agro-industries corporationsare also functioning in many states, set up for promoting food processing industryand industries for the manufacture of machinery, equipments and accessoriesneeded for industries in rural areas.

Significant activities of state public undertakings in the statutory or corporate formare electricity generation, transmission and distribution, road, transport, besidesmanufacturing. Several of the state government public enterprises are mostlypromotional in nature. Illustrations:

• 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 governmentcontrol on their functioning is more pervasive and they are in a sense anextension of the respective departments of the state governments. The topexecutive functionaries are drawn from the civil services.

The state level enterprises have been plagued by political ramifications of adivergent kind. While some of the state enterprises are doing exceedingly well,most others have performed badly. A large number are closed down any way. Asa 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 levelenterprises were slated for disinvestment/winding up/restructuring.

2.5 SUMMARY

The Indian case of public enterprise is, perhaps, a unique case. Considering theproblems of a developing economy, the central public sector in particular hasmade rich contributions to the development process. Its share in several sectorsis significant. Subject to the following three conditions, it has performed well:

a) it was loaded with closed and bankrupt private undertakings to protectemployment;

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 politicaland bureaucratic interference.

A review of the performance of the Central public sector was made by a studycarried out of the Centre for Industrial & Economic Research and commissionedby the Standing Conference of Public Enterprise (apex body of the centralpublic 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 taskassigned to it reasonably well, constraints notwithstanding. There are aberrations,but all are not of its making. The acquisition and operations of bankrupt privatesector companies was, for example, a result of decision imposed on it.

The public sector’s main objective was socially-focused, in many cases bythe conception of enterprises and in others by their mechanisms. Theadministered prices were not commercially viable, which implied subsidies.Commercial enterprises could not provide large subsidies and at the same timegenerate high level of profits.

Empirically, the performance of the public sector, seen in its total perspective, iscomparable to that of the private sector, although the former’s perceived sub-standard performance has received recurrent and critical acttention. On arationally comparable basis, the profitability of the public enterprises more thanmatches with that of the total private sector.

Performance of the public sector in terms of financial parameters has beenimproving markedly since the onset of the economic reforms programme, while anumber of analysts had predicted its doom.

The government had recovered in the form of dividends, interest and taxesduring the three years ending March 2002, more than the total invested capital.

Large non-performing assets damaging the results of financial institutions andbanks are indicative of the losses incurred and defaults made by the privateenterprise entities. So are the large number of sick units. The overall dividendrecord of private corporates has been abysmally poor. More than half the numberof the listed companies do not pay any dividends.

A large number of sick units in the public sector are a legacy of the privatesector. The takenover enterprises acquired at the direction of the governmentfrom time to time and not adequately supported by the government have badlydamaged the image of the public sector.

It is universally admitted that there has been very little autonomy in publicenterprises. Vital clearances for decisions – from conception to commissioning tocurrent operations – have often been delayed for months, years and evendecades. Many turnaround programmes remain non-starters. Apart from thedilatory clearances, there has been marked positive interference.

Despite the bureaucratic procedures, which the public sector undertakings havehad to follow, a high degree of professionalism has been in evidence with farmore focused and efficient HRD interventions and R & D development.

The public sector has established management and training institutes of which anyindustrial or service organisation can be proud of.

PSUs have attended to the welfare and social dimension of the work force inparticular and the community in general in a much more effective manner.

Undeterred by the changing and highly destabilising pronouncements includingthose on privatisation and disinvestment, which have created uncertainties anddemoralisation, the public sector has produced enough evidence that it marcheson to meet the challenges of the global competition. The public enterprises areworking on a new agenda of global competitiveness and have envisioned – evenlaunched – expansion, diversification, modernisation and restructuringprogrammes. They have also entered into strategic alliances and joint ventures

13

Forms of Public Enterpriseswithin the public sector and between the public sector, on the one hand, anddomestic 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 notbasing their ambitious plans of expansion, diversification and technologyupgradation on fiscal support. They are confident of generating surpluses and ofmobilising the resources by accessing the market on their own.

Since the onset of the economic reforms programme, even the government hastaken some positive steps declaring selected CPEs as navaratna and mini-ratnas with some doses of autonomy. The structure, vision, goals and systems ofthe public sector have gone through a whole reformation.

Assured of the freedom to operate under new standards of corporategovernance now advocated by professional dispensation, the public sectorappears confident to be globally competitive.

Activity

a) List any five housing finance corporations owned by the State Government

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b) List any five state government owned industrial investment and financingcorporations.

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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 Indiancontext.

3. List any two public enterprises having economic orientation with main focuson 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 Reviewpp. 116-117.

Mohnot, S. R.(2000), Performance of Public and Private Sectors, Centre forIndustrial and Economic Research (CIER), New Delhi.

1

Forms of Public EnterprisesUNIT 3 NATURE AND SCOPE OF PUBLIC

ENTERPRISE

Objectives

After studing this unit you should be able to:

• Understand the nature of public enterprise;

• Know the growth process of public enterprise;

• Understand the role of administrative ministries.

Structure

3.1 Extent and Scope

3.2 Growth of Public Enterprise

3.3 Role of Department of Public Enterprises

3.4 Summary



3.1 EXTENT AND SCOPE

The nature and scope of public sector flows from the strategies and policiesgoverning economic development and the structure of the economic system ofa country. In developing countries, it has been targeted at acceleration ofeconomic development with social justice. In industrialised countries like France,Italy and the UK, it was intended primarily to ensure supply of essential goodsand services at reasonable prices and to augment country’s competitivecapabilities in selected areas.

In countries like India, massive investments were made in the public enterprisesas an economic strategy adopted for accelerated and equitable economicdevelopment. With every successive National Plan commencing from start ofthe First Plan (1951-56) to the end of Ninth Plan (1997-2002), progressively largeinvestments were made in the public sector. The strategy led to defining andredefining the role of the state in national development.

Economic planning served as a tool for launching relatively massive programmesand projects for economic and social development. These led to largeinvestments by the state in different sectors of the economy – primary, secondaryand tertiary. The public sector investments were not limited to enterprises whichassumed autonomous forms of organisations – in the manufacturing and servicesectors of the economy - but also extended to departmental undertakings such asthe 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 3.29mn sqkm, and a population exceeding 1000 million, with density variance rangingfrom a high of 655 persons per sqkm in one state to as low as 8 persons persqkm in another. The level of economic and human development also varies verywidely from one state to another. Inequalities are marked in all economicparameters and development coefficient are low. As a result, the public sectorengaged in the task of accelerated economic development involving one-sixth ofthe human race, took on multiple roles, multiple forms and multiple strategies ofoperation.

2

Public Enterprise: AnOverviewA wide spectrum of activities covered by the Central Government alone includedmany 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 electricalequipments;

• Manufacturing defence-oriented products;

• Manufacturing transport equipment including ships, passenger cars andaircraft; and

• Producing and marketing of consumer goods like textiles, watches.

B. Services

• Developing and operating infrastructure facilities, such as railways, roadtransport, 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, upliftmentof backward classes of society and skill upgradation;

• Promoting tourism;

• Promoting Research & Development;

• Providing institutional finance for development and exports and commercialbanking services; and

• Promotion of life and general insurance

The scope of public sector gets wider when the state level public sector isincluded. Besides service and promotional activities, the states widened the areaof manufacture and services. Nevertheless there is a qualitative and dimensionaldifference between the enterprises run by the Central Government and those bythe State Governments. While the former were established mainly to achieveindustrialisation and economic development of the country as a whole, the latter,other than the State Electricity Boards and Transport Corporation, were smaller inscale (though larger in number about 1000) and were supplementary in character.These were intended more to utilise natural resource available in the respectivestates or to develop skills and provide employment. Several of these wereestablished with social orientation; others for political reasons. These may begrouped under the following dispensations:

3

Forms of Public Enterprises• to maintain control over the natural resources of the state (forests, minerals,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, orif provided, at high prices; and

• to satisfy political pressure groups.

The state level enterprises, which have taken corporate form, include a varietyof 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

• Women’s development

• Land mortgage banks

• Electricity Boards – statutory bodies, now in the process ofcorporatisation in many states.

The number of enterprises for which returns were filed at the end 2002 was840. In terms of number of enterprises Kerala led with 109 undertakings,followed by West Bengal 82, Karnataka 76, Orissa 68, Maharashtra 65. Thestates with 50 to 60 undertakings were Gujarat, Punjab, Tamil Nadu and with 20to 50 undertakings Andhra Pradesh, Assam, Haryana, Himachal Pradesh, MadhyaPradesh and Rajasthan. Other states had less than 20 public sector undertakings.

3.2 GROWTH OF PUBLIC ENTERPRISE

The development of the public sector in India should be divided into three phases:

A. Formative Years – 1951 to 1975

B. Maturity phase – 1976 to 1990

C. Disinvestment and competitive mould – 1991

The maximum growth was witnessed during the expansion period. In a span of13 years (1972-85), employment level tripled from 0.7 mn to 2.1 million.

4

Public Enterprise: AnOverviewThe number of Central public enterprises had grown from 5 in 1951 to 244 in1990 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 (vacillatingpractically within a narrow band), the investment expanded from about Rs 1000billion to Rs 3246 bn. (See Table 1.1)

The composition of the Central public sector corporations shows wide variationsin terms of investment and turnover. The manufacturing organisations (149)reported a total investment of Rs 1974 bn in 2001-02 against Rs 1169 billion byservice and trading organisations (81). The respective turnover was of the orderof Rs 3715 bn for the former and Rs 1072 for the latter (See Table 2.2). Thetotal tunrover constituted over 22 per cent of gross domestic product (GDP) ofIndia in 2001-02.

The total investment of Rs. 3246.32 billion has two components : equity andloan. A break-up of the investment shows multiple sources from which the fundsare drawn. (See Table 3.3).

Out of a total equity of Rs. 1017 billion, the share of the Central Governmentwas of the order of Rs. 864 billion or 85 per cent. This reflects the dominantstake 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 ofkey 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 indifferent states and union territories followed no specific economic rationale (SeeTable 3.5). While there was a preferential treatment assigned to less developedstates, in practice, it all depended on the nature of projects and programmes,local and political pressures, availability of natural resources and the nature ofdevelopmental activity.

Some examples of the investments undertaken with added emphasis ondevelopment of backward regions are:

• Nagaland Pulp & Paper Mills (Nagaland)

5

Forms of Public Enterprises• 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 theCentral public enterprises, in 2001-02, some 50 per cent was accounted for bysick units takenover from private ownership.

Product Profile

The annual capacities created in the country through investments in Central publicenterprises have been the major drivers of economic growth in the country. (SeeTable 3.6). The products cover a wide spectrum from different electronic goods,cables, foundry forge items, steel products, machine tools, compressors, dieselengines, transmission line towers, conveyers, railway wagons, locomotives andcoaches, X-ray films, contraceptives, watches, lubricants, tea, drugs andpharmaceuticals, petrochemicals, phenol, DDT, LPG, propane, ethylene,polypropylene, textiles.

Financial Services

Public sector has played a catalytic role in promotion of industry by offeringcredit 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 institutionsset up by Government of India empowered by an Act of Parliament to financeall 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 smallentrepreneurs, generation and distribution of power, fishing or providing shorefacilities for fishing, maintenance, repairs, testing services of machinery orvehicles. The Bank also assists industrial concerns engaged in the research anddevelopment of any process or product or in providing special and technicalknowledge or other services for promotion of industrial growth. Tourismdevelopment and related facilities have been recognised as industrial activitywhich could be financed by IDBI. Three subsidiaries – IDBI Bank, IDBI CapitalMarket Services and IDBI Intech – offer a vast range of services to corporateand other business segments. The services offered by IDBI include projectloans, 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 2001-02amounted to Rs. 160 billion (for one year) and disbursals amounted to Rs. 112billion for the same year and the total assistance including assets given on leaseat the end of March 2002 stood at over Rs. 620 billion . Loans and advancesto industrial concerns at end-March 2002 was Rs. 450 billion. The significantfinancial support rendered for industrial development can be gauged from thescale of assistance.

Another development banking institution which is rendering financial services isSmall 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 institutionfor the promotion, financing and development of industry in the small scale sector.SIDBI has two subsidiaries – SIDBI Venture Capital Fund, and SIDBI Trustee

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Public Enterprise: AnOverviewCompany Ltd – and two associate organisations, namely, Credit Guarantee Fundfor Small Industries and Technology Bureau for Small Enterprises.

The scope of financial assistance of SIDBI covers the entire spectrum of Smallindustry sector, including tiny, village and cottage industries and assistance isrendered through suitable schemes for setting up of new projects, expansion,diversification, and modernisation of existing units. Financial services rendered bySIDBI 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 financialservices enterprises, which have taken the corporate form and are in the businessof 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 Corporationalong with four subsidiaries (GIC) were set up by Acts of Parliament as statutorycorporations, the former for life insurance activities and the latter for carrying outthe general insurance business in and outside the country. These were createdout of the nationalised private companies operating in the respective fields.

Both life insurance and general insurance businesses are now thrown open to theprivate sector. The presence of the public as well as the private insurancecompanies is expected to ensure a very healthy competition in the market in thecoming years.

Infrastructural Sector

The major segments of infrastructure are railways, civil aviation, power, roads,ports and telecommunications, in which the government has been participatingactively. Excepting for railways, which is still in the Reserved List, holding amonopoly status, the rest have shifted to a competitive mould, open to initiativesof both, the public and private sectors, some in a collaborative or partneringframework.

The Indian Railways, a public utility service organisation, is the second largestrailway systems in the world, exclusively operated as a departmental undertaking.It has an extensive network, spread over 63,000 route kilometers of which 25per cent is electrified.

A new innovation is a special purpose vehicle (SPV) with equity participation ofthe Ministry of Railways and Gujarat Pipav Port Ltd., formed to provide broadgauge connectivity to the Port of Pipav. SPV) is a firm which embodies afinancial contract. It has no management and no employees, but is a legal

7

Forms of Public Enterprisesperson, which is governed by contractual obligations.

Another innovative form is the partnership between the railways and stategovernments and users for funding of projects. Illustratively, an MoU was signedbetween the Government of Jharkhand and the Ministry of Railways forexecution of six projects at an estimated cost of about Rs. 20 billion; two-thirdsof which would be borne by the state government and one-third by the Ministryof 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 beset up with private sector participation. These airports are to be set up as jointventures where the private sector partners will hold 74 per cent of equity andstate governments and Airports Authority of India (a Central Governmentundertaking) 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 thestrengthening of existing lanes on nearly 13000 kms. The project is one of thelargest single highway projects in the world and comprises 5846 kms of GoldenQuadrilateral (GQ) connecting 4 metros of Delhi, Mumbai, corridors connectingSrinagar-Kanyakumari and Silchar-Porbander. The implementing agency for theproject is a statutory body, the National Highways Authority of India (NHAI) setup under an Act of Parliament. The NHDP is estimated to cost Rs. 540 billionof which Rs. 303 billion would be spent on Golden Quadrilateral link.

Multiple financing pattern is involved in regard to NHDP, some of which are onBOT (Build, Operate and Transfer) principle. Work on BOT projects worth overRs. 26 billion is in progress. Over 20 projects costing Rs. 68 billion are underimplementation under the BOT plan.

3.3 ROLE OF DEPARTMENT OF PUBLICENTERPRISES

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 ofHeavy Industries and Public Enterprise. The DPE was earlier known as theBureau of Public Enterprises. The DPE does not control the working ofenterprises, which function is exercised by the Ministry to which each enterpriseis distinctly assigned. It provides the guidelines and coordinates the activities ofthe Central public enterprises.

DPE serves as a nodal agency for the public enterprises and assists in policyformulation pertaining to the role of such enterprises in the economy. It laysdown policy guidelines on performance improvement and evaluation, financialaccounting, personnel management and related areas. DPE also provides aninterface between the public enterprises and other official organs such as theparliamentary committees. It is also concerned with all matters relating to MOUsbetween public enterprises and the administrative ministries/departments; overallpolicy matters relating to composition of board of directors, categorisation ofposts, delegation of powers to board of directors, and broad parametersregarding pay structure and perks of top executives.

DPE compiles regularly the Annual Survey of Public Enterprises and presentsan analysis of the data. It constitutes the principal source of information onCentral public enterprises.

8

Public Enterprise: AnOverviewDPE provides a forum in regard to settlement of commercial (except taxation)disputes between two or more enterprises and between the enterprises andexternal agencies, such as port trusts.

Role of Administrative Ministries

Central public enterprises function as separate entities but under the over allcontrol of different administrative ministries or departments to which eachenterprise is attached. These number some 35 to 40 ministries and departments.The administrative ministries and departments are accountable to the Cabinet andthe Parliament.

The respective administrative ministry processes the cases of appointment ofChairman-cum-Managing Director and board level directors through the PublicEnterprises Selection Board (PESB) and secures the approval of theAppointments Committee of the Cabinet. The budgetary support to any lossmaking enterprise and the capital expenditure beyond the limits delegated to theenterprises are processed by the ministry for getting approval of the competentauthority such as the Planning Commission or the Ministry of Finance. Theadministrative ministry has the prerogative of issuing directives to the enterprisesunder 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 anenterprise. It is commonly recognised that the public sector is intended for publicgood. The enterprise dimension is reflective of the commercial character of theactivity, again for the stated objective. Germane to this is the concept offreedom to operate in a competitive environment.

The dilemmas of the public enterprise system are the dichotomies of publicaccountability and commercial freedom, on the one hand, and socialresponsibility and profit maximisation, on the other. One has to carve outbalancing modes of accountability, with autonomy and social responsibility withprofitability 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 aconstant quest, discussion and debate. Where the accountability should end andautonomy begin or how to intermesh these two opposing stands is the milliondollar question. So is the balancing trick between the other two seeminglyopposite phenomena. The quest is universal but equally daunting.

The Administrative Reforms Commission of India observed as early as 1967 thatsince the public enterprises are financed from public funds, it is imperative thatthese operate within the confines of public accountability. The essential featureof this accountability in a democracy is the supervision and control exercised bythe Parliament (or legislature, by whatever name called). The need for suchsupervision and control is all the greater in a country like India which iscommitted to a developing and equitable society.

On the relationship of public enterprises with the government, the Commissionhad observed that excessive external control inevitably has a frustrating effect onthe management; it weakens its initiative and restrains it from taking quickdecisions on the spot. At the same time, government must have the power toissue policy directives, exercise strategic control and make the necessarycoordination keeping in view its responsibility for the effective implementation ofthe socio-economic programmes of the country. It is, therefore, necessary to

9

Forms of Public Enterprisesprovide for a proper system of coordination and control of the public undertakingswhile adequately safeguarding their operational autonomy.

Several other expert bodies have covered the subject of interface between thegovernment and public enterprises like Krishna Menon Committee, ArjunSengupta Committee, Economic Administrative Reforms Commissions. TheKrishna Menon Committee had observed, among other things, that :

“There obviously have to be limits to autonomy. At the same time, delegation ofauthority and freedom for initiative must be left to those who have to produceresults.”

On the question of accountability, the Committee had this to say : “The Minister……. is accountable under the general law and practice of the country foranything that Parliament chooses to ask him to account. The normal practice ofmaking such accountability real is provided for by the many usual methods ofexpression of public opinion. These include questions, debates on any issue undernormal Parliamentary procedures at the discretion of the Speaker, motions ofadjournment, censure, confidence, etc.”

Paul Appleby, who in the mid-1950s, examined the Indian administrative systemwith special reference to administration of government’s industrial and commercialenterprises (Appleby, 1956), pointed out that in a democratic framework, it isinevitable that Government retains powers of control to intervene, while grantingdelegation of authority consistent with accountability.

The subject of accountability was one of the main themes in a seminar organisedby the Bureau of the Public Enterprises in 1979 (Seminar, 1979). The seminardiscussed inter alia three dimensions of accountability, namely, ‘to whom’, ‘forwhat’ and ‘how’ it is to be ensured. It was recognised that public enterprisesare accountable to the public at large because it is the public money which isinvested in those enterprises, which boils down to the representatives of thepeople, in the state legislatures or in the Parliament, as the case may be. Therationale is the assumption that the accountability to Parliament or the statelegislature can ensure that the investments are optimally used for achieving theobjectives of the undertaking. To achieve this, it was recognised that suitableinformation system from the enterprise to the government and throughgovernment to the Parliament was a pre-requisite. Accountability ‘for what’underlines the need for clear cut objectives to be given for each publicundertaking. Unless the objectives are well-defined, it would be difficult to holdthe management of the enterprise accountable. In order to ensure accountability,the control system has to be so devised that both the Parliament and thegovernment are enabled to oversee the working of the enterprises withoutinterfering in the day-to-day administration of the undertakings.

In a report, the Economic Administration Reforms Commission observed thatwhat had taken place in the name of ‘accountability’ were certain distortions. Itsaid:

“There can be no accountability if there is no perception of what is to be doneand in what time frame……..what we have today (in the governmental system)is essentially accountability for error and wrong-doing and not for non-achievement and inefficiency”.

From the foregoing discussion, it appears that in a parliamentary democracy,ministerial control cannot be dispensed with in public enterprises. Autonomy of anenterprise has necessarily to be tempered with by a system of checks andbalances. What is required is a clear set of objectives for these enterprises and

10

Public Enterprise: AnOverviewwider understanding of the control system to ensure fulfilment of those objectives.The equilibrium between autonomy and control can be maintained provided thepublic enterprises, the government and legislature play their part being fullyconscious of the boundaries of each. Authority delegated to the enterprisesneeds to be exercised fully without reference to any external authority. Wherethe authority vests with outside agency, it is imperative on the enterprise to seekapproval from appropriate agency. The legislature on their part should notconcern itself with the day-to-day running of an organisation. A certain amountof 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 wheresome door is open for intervention and, therefore, for the exercise of authority.The business world is, however, changing in the global context. Even the privateenterprise is learning new rules of the game. The concern for differentstakeholders and not merely of the shareholders is emerging as a new goal.Corporate governance is making the impact. The public sector has to transformitself for survival.

While the theoretical framework is obvious, certain practices and tendencies tendto become eroding factors. This phenomenon is often termed as ‘back seatdriving’ or ‘calling the tune’. Informal and covert relationships subsist betweenthe public enterprise management and the executive arm of the government.Such interference is not open and, therefore, not susceptible for any easyidentification; nor could it be easily tackled. It prevails in the matter ofrecruitment which falls within the delegated sphere of authority of publicenterprise management or in the award of contracts or in spheres of activitieswithin the domain of an enterprise, such as expenditure on advertisement,entertainment, foreign travel. Here, the judgement of public enterprisemanagement is superimposed by an external authority. While some negativefeatures have crept in, it is important to recognise that some healthy conventionsand formalised procedures have been established with regard to central publicenterprises over time. These need to be taken note of:

1) Questions and interpellations of the concerned Minister in Parliament aregoverned by certain conventions. Questions relating to day-to-dayadministration of public enterprises or questions which tend to throw work ofthe ministries and the public enterprises incommensurate with the results tobe obtained therefrom and questions which seek to obtain information whichthe Member may obtain directly by addressing the management of publicenterprises, are not admitted.

2) The scope and functions of the Parliamentary Committees on PublicUndertakings consisting of 15 Members from Lok Sabha and 7 Membersfrom the Rajya Sabha, are well defined . The Committee inter alia is to‘examine, in the context of autonomy and efficiency of the publicundertakings, whether the affairs of the public undertakings are managed inaccordance with sound business principles and commercial practice.

3) The areas of responsibilities of the government and the public enterprises aredefined more clearly. Certain powers have been reserved for thegovernment in regard to appointment of top executives at board-level; for therest, the public enterprises themselves have been given more authority andresponsibility with regard to the affairs of those enterprises. Capitalexpenditure upto specified limits could be incurred by public enterprises underthe system of delegated authority. Unless deficit is anticipated, revenuebudget need not be placed for approval to the government.

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Forms of Public Enterprises4) In order to ensure accountability, the reporting system of enterprises to thegovernment has been streamlined and formalised. As part of the system,Quarterly Performance Reviews are conducted in the administrative ministrieswith the participation of chief executives of public enterprises andrepresentatives of Planning Commission and the Department of PublicEnterprises. The system of MOU also serves as a tool for accountability.

The question that seriously needs to be addressed along with autonomy is the oneof accountability. In the name of accountability there are many players in thefield.

Public enterprises are owned by the state. As these enterprises are created byinvestments from the funds of the exchequer, they become accountable. It is noteasy to define the precise degree of control that accountability involves. Equally,it is difficult to strike a balance between the requirements of accountabilityconsistent 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 bymembers of Parliament, debates in the House and interpellations of the ministerserve as instruments of control.

The indirect control is exercised through multiple agencies including theComptroller & 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 SenguptaCommittee is the concept of Memorandum of Understanding (MOU) – a systemwhich was conceived in early 1988 on the South Korean model of performancecontracting. It was intended to give greater autonomy to PEs and at the sametime to ensure their greater accountability.

The 1991 Industrial Policy of the Government of India envisaged that the MOUsystem needs to be extended to all public enterprises, excepting those whichbeing sick needed to be referred to the Board for Industrial and FinancialReconstruction (BFIR). One could see the reasons for the latter exclusion, but itis these enterprises which needed planning and commitment even more unlessthese were those which were non-revivable despite reasonable turnaroundstrategies.

The main objectives to be achieved through the MOU System are:

• fostering of a contractual relationship between government and Publicenterprises;

• providing an objective evaluation mechanism on agreed criterion and theactual performance of the public enterprise annually;

• achieving performance improvement through recognition of outstandingperformance through an assessment by a group of experts associated withthe MOU System (mostly retired chief executives, senior level professionalsand retired civil servants, who were associated with public sectormanagement. Some outside professionals were also included).

The thrust of the MOU system is to specify measurable goals and to assess theachievements related to targets. The system takes cognisance of the measuresaccepted both by the government and the public enterprise management.Parameters were set to measure the achievements in a 1 to 5 scale with thegrading of Excellent, Very Good, Good, Fair and Poor ratings - computed from

12

Public Enterprise: AnOverviewthe actual performance against the targets related to the various facets ofworking of the enterprise, such as financial and fiscal achievements, inventorymanagement, customer satisfaction and project management.

A High-Power Committee (HPC) is supposed to guide and oversee theoperations of the MOU system and to evaluate the performance based on actualsat the end of the year against ‘the understandings’ arrived at the beginning ofthe year. It operates- under the chairmanship of the Cabinet Secretary. Themembers include Finance Secretary, Expenditure Secretary, Planning Secretary,Secretary, Programme Implementation, Chairman, Public Enterprises SelectionBoard and Chief Economic Adviser. The Secretary, Department of PublicEnterprises is the Member-Secretary.

The HPC is assisted by an actively engaged Ad Hoc Task Force of Experts andthe Department of Public Enterprises, serves as Secretariat for the MOU system.This system included granting of Awards, called “MOU Awards” for outstandingperformance. However, it did not incorporate the much needed reward-punishment package which could provide the incentive for better performance.

The MOU system is to be viewed as a contract between the management ofpublic enterprise and the government with the latter represented by the secretaryin the concerned administrative ministry. It is an annual exercise. A significantaspect of the system is evaluation of managerial performance through objectivecriteria – both quantitative and qualitative. This system is in operation for adecade-and-a-half with refinements introduced from time to time. About 100 to108 enterprises are covered by the MOU system from year to year. While asystem like the MoU is a sine qua non for the public sector to ensure autonomyand accountability, the system has not achieved the desired results. Among others,the reasons are insistence on soft targets, non-fulfilment of conditions promisedby the government and the continuing frequent interface between the governmentand the public enterprises, and sometime frequent change of the Directors.

To sum up, the scale and dimensions of investment in the public sector makelarge claims on scarce national resources. The public enterprises could not,therefore, be left entirely free of control and accountability. The argument is notabout 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 inbalancing the two opposing concepts of autonomy and accountability. Publicenterprises have no escape from the dual role expected of them. While, theyhave to take care of public interest, these must operate as efficient commercialentities, creating value for all stakeholders. While the grant of navratna/miniratna status to selected enterprises and the system of MOU in operationover a decade are attempts to address the issue of autonomy consistent withaccountability in the public sector, these need to be streamlined and reinforcedwith commitment from both sides, the government and the management of thepublic enterprises.

The Audit Function

Public enterprises in the corporate mode operate under the provisions of theIndian Companies Act. Their accounts are to be certified by the statutoryauditors appointed by the government. The appointment of auditors, who areaccredited members of the Institution of Chartered Accountants, are always madeon the advice of the Comptroller & Auditor General of India (CAG). Theaccounts certified by the Chartered Accountants are subjected to supplementaryor test audit by officers of CAG. The Companies Act also empowers CAG to

13

Forms of Public Enterprisesissue directions to the statutory auditors on the manner in which the audit is tobe conducted.

In respect of the enterprises set up under the specific Acts, like AirportsAuthority of India, Food Corporation of India, the accounts are also required tobe audited by CAG, under the provisions of the relevant Acts. CAG presents itsreports to Parliament in three modes:

Report 1. Review of accounts (giving a critique of overall performance).

Report 2. Comments on accounts of the companies audited.

Report 3. 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 CAG’s office and twopart-time experts from outside the government. The reports of Audit Boardbased on ‘efficiency audit’ are given as a separate report, called Reviews ofSome of the Activities of Selected Public Undertakings. Report 3 brings outindividual cases of gross irregularities through audit paras. The audit paras areexamined by the Parliamentary Committee on Public Undertakings for suitabledirection.

A question that is often raised is whether the public enterprises are not beingsubjected to double audit leading to excessive control on their transactions, incomparison to companies in the private sector which are also set up under theprovisions of the Indian Companies Act. The latter are audited by the CharteredAccountants only. This view is countered by CAG, that as massive investmentsare made with public money in the public enterprises and as it is theconstitutional 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 enterprisesby the Central Vigilance Commission (CVC), a statutory authority set up with theapproval of the Parliament. CVC exercises superintendence over the vigilanceadministration of the various ministries or the corporations established by or underany Central Act and government companies. CVC has jurisdiction over theCentral Bureau of Investigation (CBI), an investigative wing with discretionarypowers of scrutiny and filing of charge sheets against various functionaries.

Vigilance angle is generally perceived as prevention and control of illegalgratification, possession of disproportionate assets, forgery, cheating, abuse ofofficial position with a view to obtaining monetary gain for self or any otherperson, lapses, such as flagrant violation of systems and procedures. It is thesweep of vigilance machinery which leads to a fear psychosis in publicenterprises, which are expected to function on commercial basis with theintention of earning maximum financial returns. The existence of multiple checks,financial and others, does affect the freedom of action which is demanded of avibrant 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 ofthe Constitution of India considers a government owned (51 per cent or more ofequity) undertaking as a part of the state and these controls cannot be dispensedwith unless the government equity stake is reduced below 51 per cent.

14

Public Enterprise: AnOverviewActivity

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. Thescope of public enterprises cannot be limited to the centre alone as the stateowned enterprises also play an important role in the economy of the nation. Thisunit tries to cover the extent and scope of the public enterprises at both, thecentral level as well as state level. The growth of public enterprises in differentsectors have been discussed in brief to give a fair idea of the progress of thepublic enterprises. It also highlights the role of different departments to monitorthe activities of public enterprises. In short, this unit covers the nature and scopeof public enterprises.

3.5 SELF ASSESSMENT QUESTIONS1. 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 publicenterprises.

3. What are the main objectives, which are to be achieved through MOU withreference to the performance contracting.


Administrative Reforms Commission Report of public sector undertakings,(October 1967), p.26.

Appleby Paul, Re-examination of India’s Administrative System with specialreference to Administration of Government’s Industrial & Commercial Enterprises,1956, Government of India, p 4, Cabinet Secretariat, O&M Division.

Seminar on Profitability, Accountability and Social Responsibility of PublicEnterprises, (August, 1979).

15

Forms of Public EnterprisesTable 3.1 : Growth of Central Public Enterprises

Periods Enterprises Total InvestmentNo. Rs. bn

At the start of

First Plan 1950-51 5 0.29Second Plan 1955-56 21 0.81Third Plan 1960-61 47 9.48

Fourth Plan 1969-70 84 38.97Fifth Plan 1974-75 122 62.37

Sixth Plan 1980-81 179 181.50Seventh Plan 1985-86 215 426.73

Eighth Plan 1992-93 246 1354.45Ninth Plan 1997-98 240 2310.24

Tenth Plan 2002-03 240 3246.32

Source: Public Enterprises Survey 2001-02, Department of Public Enterprises, Ministry ofHeavy Industries And Public Enterprises, Govt. of India.

Table 3.2: Investment and Turnover of Central Public Enterprises

Enterprises Investment (b) TurnoverNo. Rs.bn Rs. bn

1. Manufacturing organisation 149

Steel 235 212

Minerals & Metals 57 69

Coal & Lignite 273 220

Power 460 240

Petroleum 367 2598

Fertilizers 181 74

Chemicals & Pharmaceuticals 60 64

Heavy Engineering 417 79

Medium & Light Engineering 50 78

Transportation Equipment 30 61

Consumer Goods 32 12

Agro-based Industries 1 1

Textiles 187 8

Total 1974 3715

2. Service and Trading

16


organisations 81

Trading & Marketing 27 447

Transportation Services 69 160

Contracts & Construction Services 66 23

Industrial Dev. & ConsultancyServices 148 49

Tourist Services 2 3

Financial Services 578 84

Telecommunications & IT Services 265 304

Section 25 Companies 14 2

1169 1072

Total 240a

3246 4787

* Includes 10 enterprises under construction b) 2001-02Source : ibid

Table 3.3 : Sources of Investments in Central Public Sector

End 2001-02

Rs. billion

Equity Borrowings Total

Central government 864.67 567.38 1432.05

State governments 14.68 0.26 14.94

Holding companies 103.28 160.05 263.33

Foreign parties 5.75 62.69 68.44

Financial institutions and banks 24.31 1396.16 1420.47

Total 1012.69 2186.54 3246.32

Source: ibid

Table 3.4 : Central Public Sector Production in Selected Areas

2001-02

Item Unit Public sector Share of nationalproduction Production

Lignite mn MT 23.50 100

Nuclear energy MW 2620 100

Lead th MT 37.8 99

Coal mn MT 312.53 95

Crude oil mn MT 27.89 87

Natural gas mn MT 25.66 86

Zinc th MT 176.3 86

Refinery crude mn MT 72.13 67

Finished steel mn MT 9.95 33

17

Forms of Public EnterprisesAluminium th MT 231.67 36

Nitrogenous fertilizers mn MT 2880 27

Phosphoric fertilizers mn MT 479 12

Source: ibid

Table 3.5 : Investments and Employment Generated by Central Public Enterprises by States

Gross Block EmploymentRs. in thousands

1. Andaman & Nicobar Islands 1.62 2

2. Andhra Pradesh 381.72 111

3. Arunachal 17.60 1

4. Assam 211.92 60

5. Bihar 88.23 24

6. Chandigarh 1.59 4

7. Chattisgarh 110.58 112

8. Dadra Nagar Haveli 0.62 0

9. Delhi 250.35 88

10. Goa 3.15 3

11. Gujarat 344.18 63

12. Haryana 96.18 21

13. Himachal Pradesh 123.26 10

14. Jammu & Kashmir 97.05 9

15. Jharkhand 214.13 281

16. Karnataka 180.42 94

17. Kerala 135.04 49

18. Madhya Pradesh 219.92 125

19. Maharashtra 812.77 243

20. Manipur 2.25 1

21. Meghalaya 8.02 5

22. Mizoram 1.40 0

23. Nagaland 13.85 6

24. Orissa 271.31 75

25. Pondicherry 0.74 3

26. Punjab 73.54 28

27. Rajasthan 131.67 40

28. Sikkim 9.41 1

29, Tamilnadu 339.56 110

30. Tripura 13.17 2

31. Uttar Pradesh 338.52 107

32. Uttaranchal 80.74 24

33. West Bengal 267.13 285

34. Others (Unallocated) 63.54 4

18

Public Enterprise: AnOverviewSource : ibid

Table 3.6 : Annual Production Capacities in The Central Public Sector

Product/Service Unit Annual Capacity

Steel mn MT 12.8

Copper (wire rod) MT 60,000

Zinc (ingot) MT 169,000

Atomic minerals (ilmenite) MT 465,000

Iron Ore mn MT 22.2

Aluminium th MT 230

Coal mn MT 225

Lignite mn MT 18

Power (thermal, hydel, nuclear) Mn 23,674

Petroleum crude mn MT 30

Petroleum refining mn MT 78

LPG (Propone & Ethylene) mn MT 1.17

Fertilizers (nitrogen) mn MT 28.8

Heavy electricals th MT 1.65

Heavy vessels MT 24,000

Cranes MT 7,000

Conveyors MT 7,890

Mining equipment MT 5,000

Material handling equipment MT 4,000

Structurals MT 13,600

Earth moving equipment nos 1,010

1

Forms of Public Enterprisescompanies, the court decided that since the two corporations, namely, HindustanPetroleum Corporation and Bharat Petroleum Corporation, were established byActs of Parliament, the government cannot privatise them without the clearanceof the Parliament.

Government Joint Stock Company

The limited liability company in corporate mode is the most common form ofpublic sector undertakings in several countries. The setting up of such companiesdoes not require the consent of the law making authority, that is, the legislature.By executive decision and subject to the general compliance with the provisionsof the Companies Act, these government companies can be incorporated. Theseare simple joint stock, limited liability companies with a majority stake of thegovernment. This form of organisation makes it convenient to operate, expand,diversify, merge, sell, transfer (ownership or management) more easily. Thesecompanies function like any other private company except that the major or thedominant shareholder, the government, exercises substantive control over itsmanagement.

According to the definition given in the Indian Companies Act, 1956 (as amendedfrom time to time), a government company is “any Company in which not lessthan 51% of the paid-up share capital is held by the Central Government or byany State Government or Governments, or partly by one or more StateGovernments, and includes a Company which is a subsidiary of GovernmentCompany 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. Theseare also incorporated as limited liability companies since these are erstwhileprivate banks which were nationalised. The public sector banking systemcomprises The State Bank of India (the largest commercial bank) and its 7subsidiaries, 14 major commercial banks nationalised in July 1969; another 6banks nationalised with effect from April 15, 1980 and the Regional Rural Banksestablished later. These banks play a catalytic role in helping mobilisation ofsavings of the people and to utilise them for productive purposes, in accordancewith the national plans and priorities. They operate as normal banks but theiroperations 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 co-operatives get registered and operate under the Cooperative Societies Act, butfunction basically as a corporate entity. A large part of the total capital is heldby government and the rest is dispersed among cooperative federations orindividual cooperative societies. Some examples from the Indian public enterprisedomain are: Indian Farmers & Fertilisers Co-operative Ltd.(IFFCO) and KrishakBharati Cooperative Ltd. (KRIBCO), both engaged in fertilizer manufacture andowning and operating large fertiliser and chemical plants.

Holding Company

The holding company concept is only a two-tiered corporate form. Some of thecompanies falling in a cognate group are woven in a network of companies withthe entire or dominant shareholding held by the ‘parent’ or an investmentcompany.

2

Public Enterprise: AnOverviewThe concept of holding company in the Indian context can be traced back to thereform measures suggested by the Administrative Reforms Commission in the1960s. In 1967, the Commission in its Report on Management of PublicSector recommended that the industrial and manufacturing concerns in the sectorshould be grouped into 12 sectoral corporations. The Commission drew itsinspiration from the Italian experience of ENI (petroleum complex) and IRI(Institute for Reconstruction of Industry), which are statutory corporations in thatcountry. The Commission recommended setting up sectoral corporations in whichunits constituting them did not have a separate entity of their own except foraccounting purposes and decentralisation of functioning. The objective of settingup of sectoral corporation is to avoid fragmentation of industrial effort and tohelp in maintaining an arm’s length relationship between the government and thesectoral corporation. The government did not accept this recommendation butdecided that under certain conditions there could be an advantage of having asectoral corporation, depending on the merits of each case.

In 1971, the then Minister for Steel proposed a new model for the managementof iron and steel industry by combining the concept of sectoral corporation andthe holding company. All the public sector steel plants, as also other relatedpublic enterprises, were converted into subsidiary companies under the umbrellaof one holding company known as Steel Authority of India Ltd (SAIL). It wasregistered under the Indian Companies Act and continues to function as such. Adeparture was made to combine the functions of the Secretary of the Ministryof Steel as Chairman of SAIL with a few other secretaries to government asmembers of its board. The whole objective of arm’s length relationship ofgovernment and the public enterprises got totally eroded. The degree ofautonomy envisaged by providing a buffer in the nature of a sectoral corporationto allow operational distance between the public sector from the secretariatcontrol got lost. The SAIL experiment was not pursued and in later years, SAILwas restructured as a steel conglomerate and activities not directly related tosteel production (such as iron ore mining), were kept outside its purview and thesubsidiaries became independent companies.

The government set up in 1984 an Expert Committee under the Chairmanship ofArjun Sengupta, to recommend, inter alia an appropriate organisational structurefor public enterprises. In relation to holding companies, the Committee observed:

“The Committee attaches considerable importance to devising a properorganisational structure for public enterprise in the belief that certain forms oforganisations, rather than others, can be more conducive to the efficientfunctioning of public enterprises through a proper division of authority andresponsibility between the government and the public enterprise management.Given this division, the system should run by established rules and not by exerciseof discretion.

In our approach, the government should be primarily concerned with overallstrategic planning and policy rather than with day-to-day functioning of the publicenterprises.”

The Committee clarified that the government’s responsibility is to ensure thatpublic 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 industriesand efficient use of scarce resources. Once the goals have been mutuallyagreed to, the enterprises should be allowed to operate without furtherintervention by the government in day-to-day functioning. The enterprisesshould, however, be held strictly accountable for their performance in relation tothe goals set and there should be an appropriate mechanism for evaluation oftheir performance.

3

Forms of Public EnterprisesThe Committee discussed, at length, alternative models of organisational structurefor public enterprises, under which there is to be a clear division of responsibilitybetween the government, as represented by the concerned ministry ordepartment, and the management of these enterprises, as represented by theboard of directors or the chief executives. In short, the ministry should beresponsible for the implementation of that policy and the interaction with theenterprises should be such as to facilitate the exercise of overall governmentsupervision, without impairing the efficiency of operation of the enterprise. Intheir view such an organisational structure should keep the operations of anenterprise at arm’s length from the government and promote decentraliseddecision making.

The Committee was guided by the practices in many European countries wherethe holding company model was adopted to introduce an intermediate level ofmanagement between government and the individual public enterprises (constitutedas subsidiaries) so that the government’s interface is only with the parentcompany which coordinates the activities of its constituents. In other words, thegovernment’s interface is with the holding company, more or less on the basissuggested by the Administrative Reforms Commission in 1967, excepting thatthese holding companies will not have a statutory status, but will be companiesunder the company law.

While recognising that a uniform structure for all public enterprises may not bedesirable, the Committee felt that the holding companies provided a reasonableframework for organisational structure. It is useful to recognise that thesubsidiaries also have a corporate status and, therefore, there is a need fordecentralization of decision-making between the board of directors of the holdingcompany and the boards of subsidiaries. The present practice is to have theChairmen & Managing Directors of the subsidiary companies as members ofthe board of the holding company, as in the case of companies like Coal IndiaLtd.

The recommendations of the Committee led to the formation of two holdingcompanies, namely, Bharat Udyog Nigam Ltd. (BUNL) and Bharat Yantra NigamLtd. (BYNL). These were set up in 1986-87 under the administrative control ofthe Department of Heavy Industry.

No independent and incisive assessment, however, has been made so far on theimpact 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 PRIVATESECTOR

The changeover from public to private sector has taken a number of forms, TheIndustrial Policy Statement of 24 July 1991 envisaged not only increasinginvolvement of the private sector in hitherto shut-out (or reserved) areas but alsospelt out the policy in regard to disinvestment of government shareholding inpublic enterprises.

Disinvestment as a policy could be traced to the Memorandum on EconomicPolicies (1991-92 and 1992-93) sent by the then Finance Ministry in August 1991as a component of “Structural Adjustment Programme” to the then ManagingDirector of International Monetary Fund, acknowledging that the public sectorhad not generated adequate internal surpluses and because of the limited

4

Public Enterprise: AnOverviewexposure to competition, had led to high-cost structure. In order to address theseissues, a new approach would be adopted in regard to the reform of the publicsector. The key elements of that approach were:

a) existing portfolio of public investments would be reviewed, to avoid areaswhere social considerations are not predominant and where the private sectorwould be more efficient;

b) a greater degree of managerial autonomy would be provided to enterpriseswhere 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 encouragingcompetition from the private sector; and

e) chronically sick public enterprises would not be allowed to continue incurringheavy losses.

The new strategy was based on reform and restructuring through a number ofmeasures: upto 20% of government equity in selected public enterprises would bedisinvested through mutual funds.

A copy of the above Memorandum of Economic Policies was also placed on theTable of the Parliament in December 1991 from which it was evident that publicenterprises reforms and disinvestment would form part of the structuraladjustment programme.

The disinvestment policy has evolved over the last decade, by the BudgetSpeeches of the Finance Ministers and later outlined in a manual prepared by theMinistry of Disinvestment. The implementation for the policy started in 1991.

The mode of disinvestment recommended by the Disinvestment Commission (setup in 1996) in its reports indicated a shift from public offerings to strategic/tradesales along with transfer of management. The modes spelt out by theDisinvestment Commission in respect of cases referred to it may be summed upas follows:

Enterprises (no)

A. Involving change in ownership / management

1. Strategic sale 31

2. Trade sale 08

3. Employee buyout/strategic sale 02

B. Involving no change in ownership/management

Offer of shares 05

C. No change

No disinvestment 08

D. Closure /sale of assets 04

Total 58

The term of First Disinvestment Commission expired in 1999 and a newCommission was in place from July 2001. A three-tier mechanism is in place fordecision making and implementation of the policy on disinvestment:

- Cabinet Committee on Disinvestment (CCD)

- Core Group of Secretaries on Disinvestment (CGD)

5

Forms of Public Enterprises- Inter-Ministerial Group (IMG)

The disinvestment of government equity in Central public enterprises began in1991-92 and until 1999-2000, it was carried out mainly through sale of minorityshares in small lots. Including some small amounts from strategic sale, aboutRs. 300 billion were realised through disinvestment processes from 1991-92 to2002-2003 - against the total budgetary targets of over Rs 600 billion. Despite theshortfall, the budgetary targets were kept high.

The present trend is to resort to strategic sale, which means sale of shares to aprivate group or company along with transfer of management. The objective tothe best value for the shares, protecting the stipulated minimum or reserveprice.

The strategic sale route was adopted by selling substantial stakes andmanagement control to private sector companies which include Modern FoodsLtd, Bharat Aluminium Co. Ltd, Indian Petrochemicals Corporation Ltd, CMCLtd, Hindustan Teleprinters, Lagan Jute Machinery, Paradeep Phosphates.ITDC hotels in 8 different locations and 2 hotels of the Hotel Corporation ofIndia were sold through as assets.

Three other companies – IBP, Cochin Refineries and Chennai Petroleum – weresold to public sector companies.

The disinvestment policy has come in for a great deal of criticism - apart fromthe opposition from political quarters and trade unions. There is no clear road-map. The initiatives are ad hoc. There is an undue emphasis on big ticketprivatisation and not on participation by the public. The sale of shares of MarutiUdyog 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 haspenetrated fairly deeply into the economic framework. Several public sectororganisations are performing well. There are others like technical and consultancyservice companies for which there is no case for privatisation. Some of thesecompanies have performed very well and there is nothing to be gained by sellingcoveted human capital.

What is even more significant, some of these companies could give goodcompetition to the private companies. These are economically strategic companiesand have a significant role to play.

There is, nevertheless, a good case for privatisation of companies which arelosing and which have no future. The exchequer can prevent a big drain if theseare 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 notperforming and which have no future.

The much-needed redirection to the policy of privatisation based on a wellarticulated plan is the need of the hour.

4.3 NAVARATNA DISPENSATION

It may be recalled that the professionalisation of boards of public enterprises andgreater empowerment emerged as a new thrust of India’s new Industrial Policyof July 1991 enunciated as a part of the economic reforms programme. A majorstep taken by the government was to grant more operational freedom to publicenterprise managements by classifying enterprises as Navaratna (symbolisingnine jewels) and Miniratnas (symbolising semi-precious jewels).

6

Public Enterprise: AnOverviewThe basic approach was to give the boards of directors enhanced powers andoperational freedom, such as to incur capital expenditure; purchase new assets orfor replacement without any monetary ceiling; raising capital from domestic andinternational markets, creation and winding up of posts below the board level.The enhanced powers also include authority to establish joint ventures andwholly-owned subsidiaries in India or abroad, with appropriate monetary limits.However, it was also decided that these enterprises shall not depend uponbudgetary support or government guarantees.

While granting more autonomy to public enterprises leading to accountability is acontinuous process, the number of original navratna enterprises was increasedfrom 9 to 11. It came back to 9 after two companies, Videsh Sanchar NigamLtd. and Indian Petrochemicals Corporation Ltd., were privatised.

About 45 to 50 Central public enterprises, which have continuous record of profitduring the preceding 3 years are given the Miniratna status, split up into 2categories based on quantum of profit earned. Category I enterprises arepermitted to incur capital expenditure on new projects, modernisation andpurchase of equipments without government approval upto Rs. 3 billion or equalto their net worth (reserves capital and retained profits), whichever is lower.Category II enterprises are permitted to incur similar expenditure withoutgovernment approval upto Rs. 1.5 billion or upto 50% of their networth,whichever is lower. These enterprises have also been permitted to establish jointventures, subsidiaries and overseas offices subject to specified monetary limits onequity investment. The enterprises in both categories can enter into strategicalliances and obtain technology and know-how by purchase or other arrangementssubject to government guidelines.

The continuance of the status of navratna or miniratna is subject to review bythe government from time to time.

4.4 MANAGEMENT STRUCTURE

The structure of the working of the public enterprise, or for that matter, anyenterprise, determines how it is organised and managed. The organisation andmanagement of public enterprises, as distinct from control exercised by thegovernment as owners, present a varying pattern.

In this context and considering the forms of organisations, seven distinct types oforganisations exist in the public sector:

a) A set of companies in one type of activity bound together by a holdingcompany (eg, Coal India Ltd. with eight subsidiaries and the GeneralInsurance Corporation with its four subsidiaries);

b) Integrated multi-product, multi-unit enterprises (eg, Steel Authority of IndiaLtd., 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., producingmachines 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 PortTrusts);

g) Cooperatives (such as Indian Farmers’ Fertiliser Cooperative).

7

Forms of Public EnterprisesA common feature in all the enterprises, whether in the manufacturing or theservice sector, is the existence of a board of directors, appointed by thegovernment as the owners of the enterprise or as prescribed by law as in thecase of statutory corporations.

In India, Central public enterprises are classified into 4 categories with regard topay and perks of top management – Schedules A, B, C and D. TheCategorisation is based on a number of elements: investment, net fixed assets,working capital, turnover, profit, employee strength, level of technology adoptedand competition from other sectors. The image of the enterprise (such as shareprice), MOU ratings, ISO certification, productivity in terms of efficiency inutilisation of capital assets, value addition per employee are also the factorsreckoned with.

The responsibility for overall management of public enterprise rests with theboard of directors appointed by the government. The strength of the boardvaries from 5 to 15. Some large multi-unit enterprises like BHEL has, as asecond tier, a Management Committee to assist the board.

A usual pattern in Indian Central public enterprises is the combination of the twoposts of Chairman and Managing Director into a single functionary (Chairman-cum-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 sweepof the organisation. The combination of the two positions has its own pros andcons and has been a debatable issue. In some cases, the two positions are, infact, separated from each other. The Chairman and Managing Director issupported by Executive Directors and General Managers down the line. Somehave cross-functional roles.

In the Indian Central public enterprise, no Minister or Member of Parliament isappointed on the board of directors. However, secretaries and joint secretaries tothe government are nominated as members of the boards, for limited periods asthe chairman.

The Memorandum of Association and Articles of Association of the enterprises inthe corporate form spell out objects, capital structure, composition of the boardand the tenure of the directors. An over-riding power vests with the government,such as in matters of appointment on the board including Chairman & ManagingDirector, functional directors. Their terms and conditions, remuneration and tenureis determined by government – usually adopting a uniform pattern depending onthe classification of enterprises (under A,B,C and D schedules) and also have thepowers to fill in vacancies caused by removal, resignation, death or otherwise ofthe members of the board.

An important, although controversial power, which vests with the government isthe issue of directives or instructions as considered necessary in regard to theconduct of the business and affairs of the public enterprise or its directors and toannul and vary any such directive. These directives have to be complied with.

As indicated earlier, the new Economic Policy laid emphasis on theprofessionalisation of the boards of public enterprises. The guidelines issued inthis regard provide that

• every board shall have full-time functional directors, the maximum strengthrestricted 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 thetotal strength.

8

Public Enterprise: AnOverview4.5 ENTERPRISE MODELS

In the foregoing context and the ownership and management perspectives, thepublic sector’s positioning may be identified from a matrix as presented inExhibit 1 (Mohnot, 2003).

Models A and B are principally public sector enterprises in which all or majorityof ownership is held by the state. The state’s ownership could be supported bypublic financial institutions which also function under the broad umbrella of thestate. A minority of ownership could remain in the hands of employees or privateinvestors – individuals or corporates. There could also be participation, in votingequity, of special institutions, foreign investors or strategic alliance partners.

In the case of Model A, the management control remains wholly with the statewhile there could be an alliance for specific functions or activities with an outsidepartner. This is the conventional public sector model. Under Model B, while thecontrol remains with the state, the management – total or partial – is leased outfor 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 itsmajority stake and hands over the management to a private group while retaininga substantial (not majority) share of ownership. Indian privatisation moves havefollowed 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 ofArticle 12 of the Constitution of India. However, the management control isretained by the government. The proposal to reduce the government stake to33% 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 surveillancewill continue since the control is retained by the government.

Model E represents what in India has been termed as a joint sector. There area 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 thecontrolling interest. At the Central level in India, Mangalore Refinery, until itstakeover in 2002, illustrates this model. Theoretically, the management was jointbut, in practice, it was controlled by the private partner. The chairman of theboard and a minority of directors are nominated by the state while the managingdirector (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 thestate and a private party. Maruti Udyog in India until privatised represented thiscase. The voting stake is shared equally while a small percentage could remainwith odd shareholders, such as the financial institutions or the employees.Nominees of the state and of the private partner share alternately the positionsof the chairman and the managing director.

Model G represents a wholly private enterprise model where a major – notnecessarily a majority owner (along with his friends and associates andinvariably other controlled enterprises euphemistically styled as promoters) controlthe strings of management. In developing countries, like India, the state mayprovide equity participation as a matter of financial assistance.

A variant of this model is a corporate in which the principal and his associatesand nominee companies (also nominated investment companies) hold a majority ofthe stake. In these cases, the one-man – not only one group – control iscomplete. While this last model is a variant of Model G, the deviation basically isperipheral.

9

Forms of Public Enterprises

Term ‘state’ is used to distinguish government from public at large. Term ‘private’ isused to denote individuals, business firms, business houses or corporates.

Model H in the matrix is the professional model. In this enterprise model, there isno dominant stakeholder and the management is truly shared among theprofessionals. Close to the model envisaged, there do exist some robust, wellmanaged and performing companies in the Indian economy - such as Larsen &Toubro or Housing Development Finance Corporation, or until recently BSES, apower company. These have performed well over long time spans. These couldprovide the right direction which robust economically strategic public sector couldtake. A review of their significant elements would provide the basis for evolvinga truly professional enterprise model.

Exhibit 1 : Taxonomy of Enterprise Models

MajorityPrivate

SubstantialState

Ownership Enterprise Models Management

MajorityState

(with orwithout PFIs

MinorityPrivate

(EmployeesForeign)

Basicallyequal

State andprivateGroups

Statewith or without

FunctionalAlliance

Statewith Strategic

AlliancePartial or Total

ManagementLeasing

or Transfer toPrivate

State

PrimarilyPrivate

marginalsharing

with State

Joint

Private

DominantPrivate

withpublic

participation

Professional

NodominantStructure

A

B

C

E

F

G

H

D

Public Sector

Public Sector (Diluted)

Partially PrivatisedSector

Public Sector (Managed)

Joint Sector

Partnering

Private Sector

Professional sector

10

Public Enterprise: AnOverviewThe Professional Model

Given the growing demands of corporate governance in all enterprises includingthose 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 professionalorganisation?. Optimally, a professionally strategic enterprise model is anorganisation which is professionally promoted, professionally structured,professionally manned and professionally managed. Translated into anoperational mode, it takes on a form which possesses a configuration havingfour 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, inprinciple and eventually, cease to be a stake-owner in all commercially-orientedenterprises. It is obvious in a country like India that the government holdingscannot be sold in a short span of time. A way out is that the governmentholdings are transferred to a specially constituted public investment fund (PIF) ortrust (PIT) – by whatever name called. The government as such will not holdany shares except in the transitional period. Further, the government associatedagencies, apart from PIF, will collectively not hold more than 26% equity in aPrEM undertaking. Anywhere up to 50% of the equity capital – preferablymuch less – in any one PrEM undertaking may be held aggregatively byindependent financial institutions, mutual funds. FIIs (foreign financial institutions)may participate to the extent permissible under public regulations but notexceeding 26%. Participation of small and medium-sized investors could beencouraged, which could assume very large proportions.

The balance of the equity will be distributed among the employees and otherprivate non-substantial shareholders, individuals or others.

Strategic alliances may be forged as and when necessary to make theenterprises globally competitive. Strategic partners could be domestic (includingother PrEM undertakings) and foreign organisations. This could provide for equitystake of strategic partners.

Corporate Governance

The PrEM model, in order to conform to the professional structure anddynamics, 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 beapplicable only as per the laws and regulations in force and not because thePrEM undertaking possesses state or state-related stakes. This is an imperativefor ensuring freedom for the commercially-oriented enterprises in their decision-making processes.

For the period of transition, the Chairman and Directors, including non-wholetimeDirectors, could be chosen from a panel to be maintained by a Public

11

Forms of Public EnterprisesProfessional Accreditation Agency – by whatever name called. Theshareholders, however, shall be entitled to nominate individuals forelection as Directors from outside the panel, but such elected members will besubject to clearance by the Agency within a period of six months from theirelection.

All guidelines of corporate governance as developed and enforced will bescrupulously followed. In accordance with the guidelines related to corporategovernance, the board will constitute, among others, what are termed as auditand remuneration committees. The appellation of the audit committee should bechanged to management audit committee. The Management Audit Committeeshould go beyond the functions of a normal accounts and audit committee andshould 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 theentire workforce and set a vision for the undertaking. The long term vision of thePrEM undertaking could get reflected through a long-term Corporate Plan. It willreview periodically whether it is moving in that direction and whether any changeis needed. The entire organisation shall accept it as a matter of faith that it hasa 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, nooutside directives will be issued to the board to take – or refrain from taking –certain decisions. Nonetheless, certain policy guidelines in the form of Code ofConduct could be issued as a part of a broad governmental policy or consensusdeveloped by PIF.

All corporates will develop their own management systems. The undertakingswill follow best management practices. The managements will develop a qualitymanagement policy based on TQM (Total Quality Management) or any otherequivalent model in all operations.

The contemporary private sector has developed enhancement of shareholdervalue as an index of performance. It will be the endeavour of the PrEMundertaking not to be too much obsessed by the index of shareholder value – andcertainly not by market capitalisation. The latter is a highly volatile indicator andis impacted by a whole pack of factors, some completely extraneous to thefunctioning of the undertaking.

Strategic planning will be the key to performance, which will include corporatearchitectural restructuring, policy redirection and financial reform. The undertakingwill not hesitate to lose its identity by merger, amalgamation, even closure,when the situation calls for it. The exigencies of global competition demand thatit 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 whichconforms to its vision. For such action it seems appropriate to seek shareholders’approval – but not government clearance, unless the latter is a part of commonlaw and regulations and is applicable to other similar organisations in whateversector.

The PrEM undertaking will establish from its very inception a safety net for itsworkforce (covering upto the lowest) so that it is not constrained by flab. Itensures that any employee committed to it for whatever period is not

12

Public Enterprise: AnOverviewhandicapped under the worst of circumstances – even when he has to make theexit.

Communication will be taken as an instrument of management sharing andmonitoring. Transparency will be a guiding principle. The legitimate right toinformation will be guaranteed to all involved.

Mobilisation and Allocation of Resources

Resource planning will be done in conformity with medium term corporate plansand annual budgets.

The PrEM undertaking will take it as a basic premise that no budgetary supportwill be available from government unless the government decides as anindependent decision with or without the concurrence of the Planning Commissionor 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 externalresources 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. Evenoutsourcing is often both necessary and unavoidable, if the costs have to beminimised. An independent organisation must be free to forge strategic alliances ifit has to remain globally competitive. In the last few years, such alliances havebeen multiplying in all private, public and professional sectors. These need to beencouraged to the maximum. These alliances help to upgrade technology, humanresource, marketing and management systems and to slash costs. These help towiden market horizons as well.

The role of a forward-looking corporate citizen goes far beyond rewarding merelythe shareholder. All stakeholders must be serviced. No corporate which overlooksthe societal values can be considered to be performing well whatsoever high itsfinancial and economic indicators be.

4.6 SUMMARY

Once the public sector enterprise is geared to the design outlined here, itwould function on its own. It will not involve the state. While, on the one hand, itwill ensure adequate returns of and on the investments already made by thegovernment, it will, on the other, and absolve the government from makingfinancial commitments and insulate it against the oscillations of financial returns.The model will conform to new dictates and demands of corporate governanceand make the professionally-geared public enterprises really global in their visionand globally competitive in their techno-economic strengths.

This model should be satisfying even to private enterprise since it tends totransform the public sector enterprises into a model which is akin to a reformed– repeat reformed – private sector corporate model. While it will free privateenterprise from transferring huge capital resources to the government from itsresources 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.

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13

Forms of Public Enterprises4.7 SELF ASSESSMENT QUESTIONS1. What do you understand by Navratna Dispensation? Discuss in brief.

2. Write short note on the professional model.

4.8 REFERENCES

Fernandes P.J. (1975), Coordination of Public Enterprises Country Study for India,Paper prepared for the Asian Centre for Development Administration, KualaLumpur, Malaysia, for discussion in an Expert Group Meeting.

Report of UN Seminar on Management of Public Enterprises in the ECAFERegion, New Delhi, paper No. 81, p.7.

Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of IndianAdministrative System with Special Reference to Administration of Government’sIndustrial & 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 AdministrativeReforms Commission, Government of India, 1967.

Mohnot, S.R, (2003), Reinventing the Public Sector, Centre for Industrial andEconomic Research, Rajiv Gandhi Foundation for Contemporary Studies, NewDelhi.


Report of UN Seminar on Management of Public Enterprises in the ECAFERegion, New Delhi, paper No. 81, p.7.

Appleby Paul, (1956), Consultant Ford Foundation, Re-examination of IndianAdministrative System with Special Reference to Administration of Government’sIndustrial & 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 andEconomic Research, Rajiv Gandhi Foundation for Contemporary Studies, NewDelhi.

1

Corporate Governanceand Corporate Social

ResponsibilityUNIT 5 CONCEPT AND POLICY OF

ACCOUNTABILITY ANDAUTONOMY

Objectives


• Explain the concept of accountability of PEs;

• Understand the methods of securing accountability;

• Understand the elements of autonomy;

• Discuss the objectives of accountability.

Structure

5.1 Introduction

5.2 Concept of Accountability

5.3 Methods of Securing Accountability

5.4 Elements of Autonomy

5.5 Objectives of Accountability

5.6 Summary



5.1 INTRODUCTION

Accountability means to account for one’s actions and to report on the achievements(and failures, together with necessary explanations) of the prescribed objectives. Incase of Public Enterprises, the problem of accountability is high. The reason beingthat Public Enterprises are regulated by a supreme authority, the Government. In theprivate Sector the market forces keep a check but this is not the case with the publicsector.

Since liberalization, the public sector has grown in terms of investments made. Theindustrial policy statement of 1948 and 1956 clearly states the role of PEs in thedevelopment of the nation. Taking this into account, the government has sinceencouraged the PEs but then also the problem of accountability has been a debatableissue. In this unit we are going to discuss the major issues pertaining toaccountability.

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 andjustify its policies and action to the legislature, which represents the profit (Bhatia andBatra, 1996). In accountability, the legislature should be able to perceive andscrutinize the activities of the PEs so that the programmes of PEs are implementedefficiently so as to fulfill the needs and aspirations of the masses.

Three main issues in any discussion of accountability are: Accountability for what, towhom, and how, that is, methods of procedures of securing accountability.

2

Public Enterprise:Accountability andGovernance

Accountability for What?

This apparently simple question is difficult and complex in view of the multiple andsometimes conflicting objectives of PEs. PE managers often find themselves tornbetween conflicting claims of “Commercial Profitability” and “Social Profitability”.The former is easier to judge in terms of percentage return on the capital invested orby some other accepted method of measurement. But it is not so with “socialprofitability”. Thus, clear, consistent, and well-defined goals are often not availablefor holding PEs accountable.

A PE should be judged with reference to its total contribution, only a part of which isfinancial. Public policy often demands emphasis on various broader aspects, whichare very likely to conflict with commercial returns. Considerations like employmentsof backward communities, development of backward areas, import substitution andmodel employer often make an undefinable dent into the profit criterion.

If the accountability is made more definite with reference to cost control, qualitystandards, capacity utlisation, and securing other physical standards of performance,it would be easier to measure it. However, the criteria of measurement ofperformance continue to remain vague and varying, making PE accountability difficultand confused. Further, the various interests would like PEs to be accountable onmany different counts as viewed by them and PEs may emphasise different aspectsof their performance.

Accountability to Whom?

The public at large is too diverse and heterogeneous a group of holding PEsaccountable to itself. The accountability has perforce to be to the electedrepresentative of the public in the legislature. But the public in general does expressits concern over various matters by invoking the help of the press, through publicmeetings, demonstration, seminars and conferences by interested parties, pressuregroups, and in other ways. However, the accountability supposed to be secured inthese ways is mostly informal or based on traditions and conventions. On the otherhand, 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 indocuments of incorporation of PEs. These generally cover, among others, audit by apublic body and preparation of the annual report, both of which are submitted to thelegislature. Accountability is also secured when PEs on their own answer publiccriticism in the press, and keep the public informed through speeches, publications,and other publicity material. Accountability to the Government is also a part of publicaccountability because the Government is responsible to the legislature forperformance of PEs.

The Problem of Balancing Accountability and Autonomy

In the use of their productive resources, PEs are expected to operate with theefficiency of private enterprise, but with the higher accountability for results. Thelegislature and the audit at times want to concern themselves not only with the overallperformance but also with individual decisions. This runs counter to the type ofaccountability obtained in private enterprise.

One side of the problem is that individual business decisions should not be scrutinizedand the corporate personality should be respected. The other side is that PE involvespublic money, which is a sacred trust with those who handle it.

3


Responsibility

They should be above all suspicions and ready to face any reasonable scrutiny. Thepublic also feels a sense of ownership over PEs and insists on seeking the mostefficacious use of its money. Even for private enterprises, greater oneness, and ahigher degree to public control and scrutiny by external agencies are being insistedupon and accepted all over the world, including India.

As the public seeks to secure an unusually high level of accountability from PEs, theproblem is of balancing it with the need for autnomy necessary to operate a businessenterprise. Various measures have been suggested to effect a proper balancebetween autonomy and accountability, but nothing near a final or satisfactory solutionhas been obtained. One serious difficulty in striking the proper balance is that as theministers are responsible to Parliament for the performance of their PEs, theconcerned ministers often get too much and too easily involved in the working of theirPEs, resulting in serious dilution of autonomy.

The L.K. Jha commission has rightly observed that it is sometimes assumed thatthere is a conflict between autonomy and accountability. That is not so. Indeed, thetwo go together and what conflicts with both is control. The more detailed andextensive a system of control over actions and decisions of management, the lessaccountable the management becomes. If all the major decisions and even the minorones are taken by a PE with the approval or advice or guidance or concurrence ofthe government, the management cannot be held accountable for the results but onlyfor 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 befree from the influence of government and parliament. Citing the second five yearsplan, “the general policy, therefore is to confer upon their managements, the largemeasure of financial and administrative autonomy consistent with the overallresponsibility 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 ofexpenditure;

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 paysalaries 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 awell defined set of criteria to differentiate between the two.

Autonomy is important but the judgment of its importance is based on the contributionit makes to good and efficient management. In PEs the concept of autonomy isdifferent from those of its private counterparts. Here, the funds come from the pool

4


of national financial resources, hence the public is the owner of such enterprises. Toassess autonomy, it is important to differentiate between accountability to legislatureand involvement of the government in the operational decisions in the enterprise. InPEs, autonomy is effective if the management is highly effective and if not, it is adisaster. Therefore, it becomes important that more emphasis should be laid ondeveloping management talent than looking for ‘statutory autonomy’ in PEs. Thereare certain factors, which hamper the autonmy of PEs. They are as follows:

i) Continuous dependence of PEs on government for finances;

ii) 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 modeof articulation. Accountability can be formed as the basis for measurement of the topmanagement and it should be demonstrable otherwise it will be of no use. The extentof ministerial responsibility for a public enterprise differs from its form and the degreeof control also varies from organisation to organisation.

The main objectives of accountability can be stated as follows:

i) Promoting efficiency;

ii) 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


Responsibility5.6 SUMMARY

The public sector, post liberalization has occupied a dominant position in Indianeconomy and PEs like ONGC are performing at the global level as well. When wediscuss the concept of accountability, it directly relates to the concept of responsibility,defining the relationship between various authorities. It is necessary to ensureaccountability so that the policies formulated by government are implementedconsistently in order to conduct the operations with maximum efficiency.


1. What is the basic problem of striking the right balance between autonomy andaccountability?

2. Discuss the objectives of accountability.


Bhatia, B.S. & Batra, G.S. (1996). Accountability of Public Enterprises. Deep andDeep 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 Publica-tions, Jaipur.

1


ResponsibilityUNIT 6 GOVERNMENT - PUBLIC

ENTERPRISES : INTERFACE

Objectives

After reading this unit you should be able to :

• Explain the nature of Central Government’s Interface with its enterprises;

• Pin point the factors which affect Government PE relationship;

• Understand the various ways in which the government exercises control over itsenterprises ;

• Recognize the principles which ideally should guide Government PE relationship;

• Have an understanding of the Government machinery which interacts with PEs.

Structure

6.1 Introduction

6.2 Factors Affecting Government – Public Enterprise Interface

6.3 Nature of Interface

6.4 Ways in which Government Control is Exercised

6.5 Need to review Government – Public Enterprise Interface

6.6 Principles of Government – Public Enterprise Interface

6.7 Reasons for Excessive Government Control

6.8 Government Machinery which Interacts with Public Enterprises

6.9 Summary



6.1 INTRODUCTION

The government as owner has a close and continuous relationship with itsenterprises. It also oversees the working of PEs and controls their operationsbecause they are instruments of its economic and social policies. The problem is tostrike the right balance between government control and the autonomy required formanaging PEs. For example, if the government interferes in the day-to-day decisionmaking, PEs, cannot show results as commercial entities. Yet, the governmentcannot provide full freedom to its enterprises, as it is responsible for theirperformance to Parliament.

6.2 FACTORS AFFECTING GOVERNEMENT –PUBLIC ENTERPRISE INTERFACE

The Government PE relationship is affected by many factors taken together, ofwhich the personality of the chief executive of the enterprise and his equation withthe 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 havebeen able to secure greater autonomy to operate commercially, mainly based on thepersonality 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,

2


though the profit or loss may not always be due to the efficiency or inefficiency ofthe enterprise. An enterprise can make profits due to its monopoly position or mayincur losses because the government may not allow it to increase the price for itsproducts or charges for its services.

6.3 NATURE OF INTERFACE

i) Formal : The Parameters of formal relationship and the way it would operateare laid down in the Articles of Association of a Government Company, and inthe Acts of Parliament for the statutory corporations.

ii) Informal : This is exercised through personal communications, throughGovernment directors on the Board, and through written communicationssuggesting a course of action for the consideration of the enterprise. Obviously,in case of informal influence, the responsibility for the decision and for itsconsequence is of the enterprise and not of the Government.

An important aspect of informal relationship, that the Government exercises muchauthority over its enterprises without accepting responsibility of its consequences.For example, the government may suggest to the enterprise to award a contract to aparty, 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 adviceand suffers a loss, the Government official or the minister could deny his role, or saythat he never ordered the course but had only suggested it for the consideration of theenterprise.

But the wishes of the senior officials of the Government or of the concerned ministerare in practice or less than orders. It is so because PEs often depend heavily on thegovernment 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 threecapacities. First, as owner for most PEs, the government supplies the whole ormajority of the capital, and is therefore interested in getting an adequate return on itsinvestment and also for the safety of its funds.

Government as Government : Secondly as regulator of the economy, theGovernment would like PEs to follow various policies, rules and regulations as in caseof private enterprises, for example, policy regarding foreign collaboration, location ofunit, price control, import substitution, etc. similarly, laws of the land including labourlaws are applicable to both the sectors.

Government as Lender of Funds : Thirdly, as lender of funds, the Governmentas 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 : theownership is widely distributed among the public at large, the regulation is with theGovernment and its agencies, and the financier’s role is played by the public financialinstitutions, banks and the capital market.

In PEs, the three roles converge into one body, namely, the Government. And thismakes a qualitative difference : the PEs get unduly and excessively regulated,controlled and overseen by the government. The Government also imposes variousobligations on PEs which may be incompatible with their efficient management asindustrial and commercial entities.

3


Responsibility6.4 WAYS IN WHICH GOVERNMENT CONTROL IS

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 ormajority owner of PEs appoints their Board of Directors. However, the exercise ofthis power has often not been in the best interest of PEs.

The main problems have been :

i) Delays in filing Board level vacancies;

ii) Presence of too many officials on the Board who tend to bureaucratizedecision-making;

iii) Inadequate part-time professional experts on the Board.

Prior Approval for Important Matters : The Government as owner has reservedmany matters to itself, on which decisions can be taken only after its approval.These matters have been listed in the Articles of Association of Governmentcompanies, and in the Acts or the rules made under them in respect of statutorycorporations. Some of the important matters for which prior approval of thegovernment 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 buthave to get the government’s approval beyond it.

ii) Formation of a subsidiary company by the enterprise.

iii) Making of rules governing the conditions of service of the employees’ providentfunds 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 therevenue , budget, if there is an element of deficit in it, which is proposed to bemet by the government

It may be noted that PEs generally prepare two types of budgets, i) capitalii) revenue. All budgets involving capital expenditure must be approved by theGovernment, but budgets for revenue expenditure like purchase, wages, salaries,overheads, etc., need Government approval only if they show a deficit, which theenterprise 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 statedin the Articles or the Acts of Parliament. The Department of Public enterprises hasissued many circulars containing Government decisions. These refer to matters forwhich the enterprises have to secure approval of the Government. Two exampleswhere prior approval of the Government is required are i) Wage settlement with theemployees beyond the guidelines issued by the Department of Public Enterprises, andii) Visit of the chief executive of a PE abroad.

Government’s Power to Issue Directives: The Government has a right to issuedirective to PEs in regard to their affairs, and the enterprises are bound to complywith them. The directives could be general or specific. Two important examples ofgeneral directives are : i) reservation of posts for Scheduled Castes and Tribes andii) for ex-servicemen and dependents of those killed in action.

4


Examples of specific directives are i) The NTPC was once asked not to enforceservice agreement bonds against seven executive trainees who had abandoned theservice of the corporation to join another Government department, ii) the Indian OilCorporation was asked to conduct departmental enquires against Officers of theBarauni 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 theArticles of Association of Government companies is as follows :

“The President may, from time to time, issue such directives of instructions as may beconsidered necessary in regard to the finances, conduct of business and affairs of thecompany or the direction thereof. The directors shall give immediate effect to thedirectives so issued”.

There are many important variations in the language used. For example, in the caseof SAIL and the NTPC, there is a rider which states : “Provided that all directivesissues by the President shall be in writing addressed to the Chairman. The Boardshall, except where the President considers the national security or interest requiresotherwise, incorporate the contents of the directive issued by the President in theannual report of the company and also indicate its impact on the financial position ofthe company”.

The last part of the directive is important. If the directives were published in theannual report along with financial implications to the enterprise, it would do a lot ofgood to the PE system. But the government sometimes managers the situation by notissuing written directives, and uses office orders, circulars, expression of opinion andthrough official directors on the Board of the enterprise.

Circulars and Office Orders Issued by the Government: Government PErelationship is also regulated through circulars issued by the Department of PublicEnterprises and by some ministries and departments from time to time. Thesecirculars have no legal sanction. But as they are a formal expression of the wish ofthe owner, they are given due weight by PEs. Moreover, Government directors onthe Board often insists on compliance with these circulars.

Hundreds of circulars, demi-official letters, office orders etc., which deal with almostall the important (and not so important) aspects of PE working have been compiled inthe form of a book by the Bureau of Public Enterprises and published by the StandingConference of Public Enterprise (a formal body of chief executives of Central PEs),New Delhi, under the title “Government Policy for the Management of PublicEnterprise”, 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 generalMeeting of the Company ;

iv) Details of voluntary retirement schemes adopted by PEs;

v) Delegation of powers regarding capital expenditure which can be incurred by theBoard of an enterprise;

vi) Instruction to PEs to effect economy in the provision of residential telephones onthe same lines as in the Government;

vii) Details of consideration to be kept in view, while fixing remuneration payable toconsultants;

viii) Advice to PEs to adopt a comprehensive budgetary control system.

As the circulars are not legally binding, many PEs do not follow them, dependingupon their circumstance and courage. The Government also rightly leaves the matterto the good sense and judgement of PEs, except where important issues like pay andbenefits to the employees are involved, which may have wide repercussions.

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Responsibility

Report and Returns Obtained from PEs: The Government has statutory right tocall for such returns and other information in respect of an enterprise. Detailedformats have been prescribed for this purpose.

The following is a summary of main reports which PEs submit to the Governmentregarding their operations.

Subject Periodicity Broad Coverage

1) Summary Information Quarterly Production, sales capacity utilization andimports and exports

2-A-1) Physical Production Monthly Production of major products andvariations between targeted and actualproduction

2-A2) Physical Production Monthly Reasons for loss of production andactoins for rectifying the position

2-B1) Machine utilization Monthly Machine hours targeted and utilized byshop principal machines.

2- B2) Machine hours Monthly Loss of machine hours, causes thereofand action taken

3) Sales Monthly With reference to major products –planned and achieved

4) Profit and Loss Position Quarterly Summary of various figures beforearriving at the Profit/Loss, as compared tobudget and the previous year/quarter.

5) Order book position Half yearly Growth potential and efforts to secureorders

6) Inventories Half yearly Norms and actual stock of finishedgoods, raw materials, spares and stores(separate figures for imported andindigenous)

7) Exports Half yearly Growth potential and efforts to secureorders

8) Employment Half yearly Employees in various categoriesshowing increase over the previousperiod

9) Internal resources Yearly Generation and utilization as comparedto the budget

10) Township and social Yearly Details of expenditure on these items,overheads compared with the budget and previous

year

11) Management ratios Yearly Eight ratios regarding production (e.g.value added per man month, and cost ofsales to sales), inventories (4 ratios).Personnel 3 ratios (average sales peremployee average emolument peremployee, and mandays lost mandaysscheduled), finance (6 ratios), and R & Dexpenditure to net sales (22 ratios in all).

6

Public Enterprise:Accountability andGovernanceThe government does not make the best of the report received by it because it lackssufficient manpower/and expertise to analyze the data received and to take thenecessary follow-up action. It is sometimes asked whether it should at all benecessary of the Government to receive numerous reports except for statisticalpurposes.

6.5 NEED TO REVIEW GOVERNMENT – PUBLICENTERPRISE INTERFACE

The Economic and Administration Reforms Commission (Chairman L. K. Jha) wasrightly of the view that “there should be a radical re-examination of the nature of theGovernment’s relationship with PEs. The concept of ‘administrative control’ shouldbe thoroughly reconsidered. PEs should be distanced from the Ministries and thelatter confined to periodical reviews of overall objectives. The constant stream ofinstructions, questions, requests for information, summons to meetings, telephone callsetc., should be drastically curtailed. The detailed supervision of operational mattersshould be stopped. Determined efforts should be made to get away from thetendency on the part of administrative Ministries to treat public enterprises assubordinate offices”.

The above view sum up the situation in regard to Government – PE interface. MostPEs though meant to operate as autonomous commercial entitles, are not so in actualpractice. One of the ways to meet the situation is the institution of Memorandum ofUnderstanding (MOU). However, it is yet to be seen how far the MOU would beable to streamline the Government-PE interface and improve PE performance.

6.6 PRINCIPLES OF GOVERNMENT – PUBLICENTERPRISE INTERFACE

The ideal way in which the Government should interact with its enterprise is difficultachieve. But it should be attempted with all sincerity and seriousness. This idealway is summed up in the following ten principles. These were stated by the SelectCommittee on Nationlized Industries (U. K.) nearly four decades back:

1) The Government should be concerned with securing that PEs operate in thepublic interest. And for this purpose, it should decide the broad policies to bepursued including their financial and economic obligations.

2) The Government should seek to ensure the efficiency of PEs by exercising abroad 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 ofthem as efficiently as possible.

4) There should be clear demarcation of responsibilities, both between Governmentdepartments and PEs. An important part of this principle is that if the enterprisesare not able to deliver the goods, the Government would not do the enterprise jobitself.

5) The methods of Government control should be mainly strategic rather thantactical PEs can have a clearer idea of what the Government requires of them,if they do not subject to frequent, ad hoc, tactical control.

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Responsibility6) The nature of government control need not be wholly formal. Althoughinformality has its dangers, a close intimate and informal relationship cannotavoided, and is even beneficial.

7) The Government and PEs should be publicly accountable. It means thatresponsibility for actions, successes and failures should be publicly identifiable.

8) The measure of management should not be purely commercial successful orsocial achievement, but should be efficient with which the enterprises carry outthe joint commercial/social duties given to them. The efficiency is compoundedof two factors : success in giving customers the goods and services they wantand success in minimizing the cost of doing so.

9) The ultimate sanction for bad management may be dismissal or non-reappointment in the post, but improvement of management should be the firstobjective.

10) Proper and fruitful exercise of Government control depends on the attitudes andability 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 beright”.

Though the above principles are sound and meaningful, they are generally notobserved in practice. They often get distorted by the troubles of individualenterprises, and the government’s disinclination for transparency in its relationshipwith PEs.

The Parliamentary Committee on Public Undertakings of the eighth Lok Sabha in its32nd report emphasized streamlining of the Government PE relationship. It is saidthat “as against excessive control, the Government should restrict itself to issuingpolicy directives, exercising strategic control”. It wanted the areas of power andauthority between PEs and the administrative Ministries to be clearly delineated. TheCommittee felt “concerned over the growing tendency on the part of the Ministriesto interfere into the working of the enterprises” and it wanted “the ground rules tobe laid down to restrict the Government directives only to maters of policy withouttransgressing into the sphere of detailed administration”. But nothing has come outso far from these views. The Government continues to exercise a lot of unnecessary,and undesirable control over its enterprises.

6.7 REASONS FOR EXCESSIVE GOVERNMENTCONTROL

The main reasons why the government has not been able to maintain the requireddistance 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 Governmenttherefore finds it difficult to keep away from PEs. PEs however greatly suffer inthe process and get damned when they fail to show result in competition withprivate enterprise.

8

Public Enterprise:Accountability andGovernance6.8 GOVERNMENT MACHINERY WHICH

INTERACTS WITH PUBLIC ENTERPRISES

In the context of government PE interface, it is necessary to have an appreciation ofthe Government machinery which interacts with PEs. Some important organs of thismachinery 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 Airlinesand 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 directorsof the enterprise, in providing finance, in policy formulation, and in overseeing theperformance of the enterprise. This ministry also provides link for the enterprise withParliament, with the Comptroller and Auditor General, and with other national andinternational agencies. (providing the link means that these bodies, interact with PEsvia the administrative ministry. For example, if there is a question in Parliament, it isreceived by the administrative ministry which obtain the reply from the enterprise forthe concerned minister).

All policy and financial matters which need clearance from the Government have tobe routed by the enterprise through the administrative ministry. For example, if theenterprise wants to raise money in the market by issuing bonds or it wants to enterinto a foreign collaboration, it has to get clearance of its administrative ministry, whichmay also send the proposals to the concerned Government departments.

It is the administrative ministry/department which is responsible for the performanceof the enterprise. Therefore, the administrative ministries have a close andcontinuous interaction with their enterprises.

There is much confusion about the division of responsibilities between the ministriesand PEs. PEs also often play safe and refer many matters to the Government whichmay not be necessary under the rules providing them autonomy. But the PEs do sobecause in this way, the Government become a partner in the decision-making andPEs 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 in1965, as a part of the Ministry of Finance. In 1985, it was transferred to the Ministryof industry.

Some of the important functions of DPE are as follows :

1) To give policy guidelines to PEs in areas like industrial relations, wages andbenefits, organization structure, administrative vigilance, sound managementpractices, 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 levelappointee in a PE is to be given a higher scale, the matter is also examined bythe DPE.)

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Responsibility

4) To organise training programmes for senior PE executive with the help oftraining institution in the country.

5) To examine all cases of policy where decisions of one PE have repercussions onother PEs.

6) To act as a nodal agency for co-ordinating all activities relating to theMemorandum of Understanding which various ministries enter into with the PEs.

7) To prepare a comprehensive report on the working of PEs and to submit itannually to Parliament (this three-volume report is entitled ‘Public EnterprisesSurvey’).

8) To conduct in-depth studies to identify weak areas with the object of improvingproductivity and performance of PEs.

Ministry of Finance

Whenever PEs have to get funds for meeting their losses or for expansion andgrowth, the Ministry of Finance comes into the picture.

All proposals for capital expenditure beyond Rs. 50 crore are cleared by the PublicInvestment Board, which is chaired by the Secretary (Expenditure) in the Ministry ofFinance.

PEs have to interact a lot with the Ministry of Finance whenever proposals sent tothe 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 withcorruption. According to a Government decision of October, 1986, the Board of theenterprise would function as vigilance body for employees below the Board level andthe CVC would launch proceedings only for the Board level appointees. The CBIhowever has jurisdiction over all the employees of PEs. We will discuss CVC inUnit 8.

Other Ministries and Departments

PEs have to interact with the Planning Commission, if their expenditure proposals areto be included in the plant estimates, and they hold discussion with the ProjectAppraisal Division of the Planning Commission, if they submit proposals for clearanceby the Public Investment Board.

The Labour Ministry comes into picture in regard to labour polices, wages andincentives, and for schemes of employees’ participation in management, andvoluntary retirement. The Home Ministry is concerned with reservations for variouscategories, 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.

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Activity 2

State two ways in which Government exercises control over its enterprises.

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6.9 SUMMARY

The Government controls, guides and finances PEs. A complaint often heard fromPEs is that corporate business entities, they do not get adequate autonomy to showresults. 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 needarises, (iv) to guide PEs through office orders and circulars on various matters ofpolicy and day-to-day operations, and (v) to receive the prescribed reports andreturns from the PEs. The Government also has large informal powers over itsenterprises.

There is a need to be clear about the role of the Government in respect of itsenterprises. 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 socio-political implications. This makes it difficult for the Government to distance itselffrom PEs. But it is necessary that PEs have adequate managerial autonomy tooperate successfully. How can the requires autonomy can be secured ? It continuesto be a big dilemma of PE management.

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Responsibility

All PEs are under one or the other ministry of the Government called theadministrative ministry. In addition, PEs have to interact with the Department ofPublic Enterprises, Ministry of Finance, Vigilance Agencies and various otherdepartments.


Treat each of the objectives listed above as a question and write a few points foreach one so that you may assess whether you can recall the main points discussed inthe Unit.


Narain, Laxmi, (1995). Principles and Practice of Public Enterprise ManagementS. Chand & Co. , New Delhi.

United Nations, (1974). Organization, Management and Supervision of PublicEnterprises in Developing Countries, New York.

Iyer, R. Ramaswamy, (1991). A Grammar of Public Enterprises, RawatPublications, Jaipur, Chapter IV, The Relationship between the Government andPublic Enterprises.

Economic Administration Reforms Commission, (Chm L. K. Jha), (1984). ReportNo. 4 on Government and Public Enterprises : Autonomy and Accountability.

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ResponsibilityUNIT 7 ACCOUNTABILITY TO LEGISLATURE

Objectives


• Understand the concept of accountability to parliament;

• Discuss the ways and extent to which PEs are held accountable throughparliament;

• Understand the importance of different legislative committees.

Structure

7.1 Introduction7.2 Accountability to Parliament7.3 Methods of Parliamentary Control7.4 Legislative Committees7.5 Summary7.6 Self Assessment Questions7.7 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 thegrowth of PEs in India, the significance of sufficient and effective accountability andcontrol over these enterprises has increased manifolds. To have a check over PEs,different agencies are operating so as to ensure public accountability. Out of theseagencies, parliamentary, ministerial, audit-control and control through Bureau of publicenterprises seem to be more effective as compared to the other agencies.

The crux of all this is that government agencies and public enterprises areaccountable to the government, the legislature, in turn becoming accountable to thepeople. The existence of PEs, all along depends on the government and legislaturebeing satisfied with their performance within the objectives set taking intoconsideration the public interest.

In this unit we will confine our discussion to accountability to legislature, whereby wewill discuss different aspects like legislative questions, legislative debates andlegislative 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 policiesfollowed by the PEs are sound and effective. Therefore, legislature control becomesone 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 publicmoney or that of a shareholder. The difference in these two roles is importantbecause as a trustee, it would be more or less satisfied with seeing that the public

22


funds are properly utilised, and from this standpoint, parliament should not beprepared to take any risk with the public money, but prefer safety and security. Onthe other hand, as a shareholder it can exercise all powers and privileges that vest ina shareholder. In this case, it should also be prepared to take all reasonable risks withits investments, if necessary even by increasing investment in a losing concern toenable the enterprise to become economically viable and to turn the corner.Therefore, it becomes important to understand these two roles of parliament, whichare not necessarily conflicting.

Another point about parliamentary control is that the more social or macro-economicthe role of a public enterprise is, the greater is the need for parliamentary concernwith its operation, and this concern is bound to end in control. Therefore, the questionof parliamentary accountability must be considered with reference to the nature ofthe enterprise, and the social and public policy contents which go into the decision-making. Enterprises like LIC and the Food Corporation of India are likely to havemore policy implications as compared to, say, enterprises like the Indian telephoneIndustries Ltd., and the Electronic Corporation of India Ltd. However the socialcontent of an enterprise may change over a period of time and with the change ofcircumstances.

Limitations of Parliamentary Accountability

a) Parliament is very much hard pressed for time and it is often not able to devotethe necessary attention to complex and important issues involved in theManagement 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 strikea balance between the autonomy necessary for commercial operations and the rightof parliament to discuss the working and performance of PEs. Theoretically,parliament will concern itself with matters of overall policy and achievement of broadgeneral objectives, leaving the enterprises free to carry on their day-to-dayoperations. This however, does not work in practice because of the difficulty ofdistinguishing with any clarity between “matters of policy” and “day-to-dayoperations”.

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 andconvenient way to open to MPs to obtain information about public matters. It broadlyserves the following purposes :

i) It enables the MPs to ventilate grievances against the working of PEs or obtaininformation which may not be available in the published documents andreports;

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Responsibility

ii) It is an effective way to keeping the minister on his toes as regards his formalinterventions as well as his informal contact with a PE, for which hisresponsibility 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 governmentin the policy implementation.

Rules Regarding Admissibility of Questions

In accordance with the parliamentary procedure, questions relating to policy, to an actor omission of an act on the part of the minister or to a matter of public interest areordinarily admitted, and questions which clearly relate to day-to-day administrationare normally disallowed. The final admissibility of questions is a matter for theSpeaker 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 publicinterest (although seemingly it may pertain to a matter of day-to-dayadministration or an individual case), it is ordinarily admitted for oral answer, thatis, as a starred question.

ii) A question which calls for information of statistical or descriptive nature isgeneral admitted for written reply, that is, as an unstarred question.

iii) Questions which clearly relate to day-to-day administration and tend to throwwork on the ministers and PEs incommensurate with the results to be obtainedthere from, are normally disallowed.

iv) Questions seeking statistical information available in the published documents arenormally disallowed.

The Speaker, in his discretion, can admit a question involving a point of principle ormatter 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, answeredby the Department of Public Enterprises, during March-September, 1990, found thatthe questions did not reflect any in-depth understanding of the problems besetting PEperformance. In answering questions, the government adopted the line of leastresistance. Questions such as number of quest houses hired by PEs and the rentpaid, the amount spent on maintenance and fuel of cars could have been easilyavoided, as they hardly serve any purpose from the stand-point of control andaccountability.

Another study of 151 question on SAIL, asked in the Lok Sabha during 1988, foundthat 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 muchvaluable 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 whythe public sector SAIL, which operates in competition with TISCO and other privatesector 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 notallow 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. Thedebates, inter alia, may be on motion of Thanks on the President’s address, at thetime 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 exceptcase of few members who take pain to study the problem. It is hoped that thecommittee system introduced in 1993 will take care for the situation and the problemafflicting PEs would get better attention.

In addition to debates, matters to PEs are raised in many other ways including theZero Hour. An MP may move a resolution relating to a Matter of General PublicInterest involving a PE, PE problems are also discussed under rules which allow theCalling 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 affectingtheir constituencies or State. Serious matter of policy hardly get attention ofParliament. The MPs, it seems are more concerned with the survival than long-termhealth of PEs. Most PEs have inherent strength to turn the corner provided therequired autonomy and adequate and continuous top management is ensured by thegovernment. 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 legislativeaccountability and control over public enterprises. Here, we are going to discuss thefollowing three committees in brief :

i) Public Accounts Committee (PAC)ii) Estimates Committeeiii) Committee on Public Undertakings

i) Public Accounts Committee (PAC)

Public accounts committee as the name suggest plays an important role in enforcingaccountability over PEs. It is the oldest of the three committees and was the first oneto raise the question of exercising parliamentary control over the accounts of PEs.

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Responsibility

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 assistanceis provided by the Lok Sabha Secretariat.

Functions of PAC

The functions of PAC are stated in Rule 308 of the procedure and conduct ofBusiness in Lok Sabha (Shrivastava, 1992).

The Following are the Main Functions of PAC :

• To examine the appropriation accounts showing the appropriation of the sumsgranted by the parliament for the expenditure ;

• To satisfy itself that the money shown in the accounts as having been disbursedwere legally available for, and application, to the service or purpose to which theyhave 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 ofpublic corporations, government companies, trading and manufacturing schemesand reports of C & AG;

• To examine the statement of accounts showing income the expenditure ofautomounous bodies, the audit of which may be conducted by C & AG; toconsider the report of C & AG, the President may have required to conduct andaudit 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 ofthe amount granted by the parliament for that purpose.

The PAC works on the report the controller and Auditor, General, who acts as itsadvisor/comptroller and expert guide. The approach and conclusion of thecommittee, are therefore not much different.

ii) Estimates Committee

It was constituted on April 10, 1950 for examination of the estimates and theproblems of the government companies. It was the most powerful committee toreview the operations of most of the public enterprises before the establishment ofCPU.

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, maybe effected;

• To suggest alternative policies in order to bring about efficiency and economy inadministration;

• To examine whether the money is well laid out within the limits of the policyimplied 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 itsrecommendations are the only source of objective and critical information aboutpublic enterprises.

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iii) Committee on Public Undertakings (CPU)

The most effective and important instrument of parliamentary control is the Standingcommittee of Parliament, which comprises 22MPs, 15 from the Lok Sabha and 7from the Rajya Sabha. Functions To examine the reports of accounts of PEs, Toexamine the report of the comptroller and Auditor General of India on PEs , Toexamine, in the context of autonomy and efficiency of PEs, whether their affairs arebeing managed in accordance with sound business principles and prudent commercialpractices.

The CPU shall not examine (i) matters of major government policy as distinct frombusiness or commercial functions of PEs and (ii) matters of day-to-dayadministration.

Working of the Committee

The term of the Committee does not exceed one year, though the chairman, who isappointed 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 deemsfit. The committee asks the ministry/enterprise to furnish necessary material relatingto the subjects chosen. The Committee often visits the enterprises chosen forscrutiny. After the study tours, and after receiving memoranda and other informationfrom concerned parties, witness from the Government and the enterprise are invitedto 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 aview to making an evaluation of their performance. The reports of the Committeeprovide much useful data and analysis of the enterprises studied by it. TheCommittee makes recommendations which are replied by the Government. Thereplies along with the comments of the committee, if any, are published by theCommittee in what is called “Action taken Reports”. A great advantage of thesereports is that they commit the Government in respect of the action promised to beundertaken on a particular recommendations.

All Central Government companies and statutory corporations established by CentralActs, e.g. Airports Authority, Food Corporation and Life Insurance Corporation, arecovered by the Committee.

Since its inception in May, 1964, till the end of the Ninth Lok Sabha, the Committeeproduced over 400 reports. Of these about half are “action taken reports:. A newreports cover some specific aspects with reference to all PEs. These are called“horizontal reports”. Some examples of these reports are : Materials Management inPEs (40th Report, 3rd Lok Sabha), Financial Management in PEs (15th report, 4th

Lok Sabha), foreign Collaboration in PEs (89th report, 5th Lok Sabha), Appointment ofAuditors 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 bringabout the necessary changes in its policy. For instance, it recommended against theappointment of secretaries to the Government on the boards; for providing a minimumtenure of five years to full-time board members, for a successor for the top postsbeing designated well in advance; for avoiding frequent changes in the board

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Responsibility

membership; and for laying down of PE objectives with clarity. All these are criticalfor PE performance, and coming from a parliamentary Committee are of much value.The committee also provides counsel or advice to PEs on any matters includingpolicies, programmes, and day-to-day operations. All extract from a report isillustrative : “develop an efficient commercial culture… the proposed incentivescheme should be introduced without further delay…. Aim at complete customersatisfaction…. Norms should be evolved for inventory holding and should be strictlyenforced … adopt a system for securing prompt payment of dues by customers anddisincentive for delayed payment … get over the losses by an imaginative marketsurvey and sales promotion.. avoid building up of inventory … charge interest at themarket rate on outstanding….” In a developing country with a serious shortage ofmanagerial expertise, many obvious and important managerial issues do not often getadequate attention from those in charge of PEs and a reminder from a high poweredbody like the CPU is of great value.

The CPU has not been able to cover every year more than 5 to 6 PEs, on anaverage. Thus, a large number of PEs remain unscrutinised or are covered veryinfrequently. 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 inpreventing inefficiency, and whether PE behaviour pattern is influenced by theexistence of the committee, A survey of 92 top and senior executives in 41 PEsfound in 1991 that PEs consider the CPU’s role as positive, and most of therespondents would like their PEs to be examined by the committee. But thecommittee has a long a way to go to achieve the objectives stated by the KrishnaMenon Committee (1959), on whose recommendation it was established, namely, thecommittee “should encourage both initiative and long-term planning” in regard towhich” government undertakings are normally backward or very shy” and “it wouldtake 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 publicaccountability affects PE performance. Accountability to Parliament throughquestions, debates and discussions provides a feedback to PEs on many matters ofpolicy and operations. The questions also have a moral influence on PE managers inas much as any of their actions can be questioned on the floor of the House. But theserious problem is that much valuable time of the PE management is wasted inreplying to questions which are routine, superficial and fall into the realm of day-to-day management rather than deal with matter of policy. Sometimes, motivatedquestions are also asked, PEs are not happy with the way the ‘question device’ ofpublic accountability operates at present. So far as the debates and discussions areconcerned PEs are almost neutral to the situation.

The accountability secured through CPU is useful and substantial. Manyimprovements 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 largenumber of enterprises are either never covered or are covered only after a long timegap. To this extent, the accountability gets diluted.

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1. Comment on the effectiveness of the questions and debates as instruments ofparliamentary 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 PublicEnterprises in Developing Countries, New York.

Narain, Laxmi and Murthy, B. S. (1984). Public Enterprise and FundamentalRights, N. M. Tripathi (P) Ltd., Mumbai.

Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises, Rawatpublications, Jaipur.

Standing Conference of Public Enterprises. (1990). Reports/Recommendations ofvarious Committees on Public Enterprises, New Delhi, Chapter one :Recommendations of the COPU on Accountability and Autonomy of PublicUndertakings

Shrivastava, M.P. (1992). Parliamentary Accountability and Supervision over PEs.Deep and Deep Publications, New Delhi.

1


ResponsibilityUNIT 8 RELATIONSHIP WITH OTHER

AGENCIES

Objectives


• Discuss the ways to which PEs are held accountable through Comptroller andAuditor General of India;

• Understand the concept of accountability through courts;

• Discuss the role of Chief Vigilance Commissioner.

Structure

8.1 Introduction

8.2 Accountability Through Audit

8.3 Accountability Through Courts

8.4 Central Vigilance Commission (CVC)

8.5 Impact of Public Accountability

8.6 Summary



8.1 INTRODUCTION

Accountability when studied in the context of public enterprises have manyparameters. Accountability, thus can be of different forms like parliamentaryaccountability, ministerial accountability, audit accountability, social accountability,judiciary accountability. We have already discussed some of the accountabilityconcepts. In this we would stress upon audit accountability and the judiciaryaccountability.

Audit accountability or accountability through audit is important because it ensuresthat the expenditure of the government funds have been made according to thenorms. Henceforth, the role of audit becomes increasingly important as controlmechanism.

Judiciary accountability or accountability through courts is also important as it takesinto account all the legal aspects of the public enterprises. The judiciary mayentertain suits, proceedings and can give remedial measures such as damages andinjunction, under the ordinary laws. In this unit we will also discuss some aspectsrelated to the Central Vigilance Commission (CVC).

8.2 ACCOUNTABILITY THROUGH AUDIT

PEs being owned by the nation have a much higher degree of accountability. Unlikeprivate enterprise, they cannot get away just by earning adequate profits anddistributing high dividends. Parliament has to be satisfied with their performance andthe Comptroller and Auditor-General of India (C &AG) assists Parliament in thisregard.

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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 anindependent authority. This authority is the C & AG for PEs. Auditors of allGovernment companies are appointed by the Government on the advice of the C &AG. These auditors are chartered accountants as in the case of private sectorcompanies. But the similarity ends here. The chartered accountant of a Governmentcompany 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 theshareholders in the Annual General Meeting of a company, for all practical purposeshe is the nominee of the management. The board of directors of the company canchange the auditor if he is critical of the behaviour of the management. This is not sofor PEs, where continuance of auditors is beyond the control of the board of directorsof the enterprise. This makes all the difference in the role which auditors play insecuring public accountability of PEs.

As a part of his financial audit, the C & AG reviews the report of charteredaccountants which certify that the final accounts of a government company representa true and fair view of its affairs for a given period. The government companies areunhappy about this double audit as this adds to their work and may hinder holding theAnnual General Meeting of the Company in time.

Under the liberalized dispensation, it would be unfair to PEs to have their accountscertified by the C & AG, which does not happen in case of equivalent privateenterprises. Chartered accountants have been empowered by Parliament to certifythe accounts. A check on their certification is uncalled for and unnecessary.

For statutory corporation, e.g., Airports authority of India, where the certification ofthe accounts is done by the C & AG himself, the audit certificate is about the sameas 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 partof the annual reports of the concerned enterprise.

Efficiency Audit

It may be noted that private sector enterprises are not subject to any efficiencyevaluation by an external agency as in the case of PEs. PEs are accountable toParliament and the C & AG assists. Parliament in evaluating PE efficiency. Hisreports relating to PEs, entitle “Audit Report (Commercial)”, are presented toParliament from time to time. On an average, the C & AG presents five to sixreports on various PEs every Year. These reports stand referred to the CPU whichis expected to judge efficiency and performance of PEs with reference to theinformation 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 ofmachines. The C & AG also reviews general management efficiency with referenceto: (a) achievement of targets of physical production, (b) fulfillment of projections ofcommencement of production, (c) fixation of targets in terms of designed capacity,(d) comparison of various project cost estimates with the actual, (e) calculation offinancial ratios showing profitability with reference to sales, gross fixed assets, capitalemployed, net worth, etc., over a period of time. The C & AG audit also refers toachievement of overall objectives for which an enterprise was set up.

An argument against efficiency audit is that evaluation of performance is basicallythe job of management and an external agency would not generally be able to get

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Responsibility

down to the grass roots where ultimately the inefficiencies thrive and where, in thelast resort, the money is made or lost. However, for a PE, the public and parliamentwill not be satisfied only by the assertions of the management that is its operatingefficiently. As efficiency is always comparative, some independent external publicagency is needed to certify it with reference to inter-firm and intra-firm comparisonof certain acceptable indices.

As regards the point that the C & AG cannot evaluate efficiency because it does notpossess other than the financial skills, it may be pointed out that most of the technicalevaluation eventually gets reflected in financial and other statistical data which can beinterpreted by an accountant with reference to the norms laid down by technicalexperts and management of the enterprise. This, to a large extent, is apparentlybeing done successfully by the C & AG in his reports.

Proprietary Audit

This dimension of the C & AG audit extends beyond the formality of expenditure toits wisdom, faithfulness, and economy. Here the audit claims to ask every questionthat 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 nodirect personal interest in the gainfulness or otherwise of their decisions, and eitherdue 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, andalso whether it is fair to question managerial decisions after the event, takingadvantage of the hindsight, unless prima facie malafide act is involved.

What is needed is an overall review of performance. Individual decisions should notbe called into questions just because the PE manager has no direct personal financialstake. It is well known that all the world over, top professional managers do not havemuch personal financial stake in the companies they manage. What is at stake istheir public position, respect, and ego. It may be noted that no separate reportscovering propriety audit are prepared. The audit Report (commercial), referred toabove covers both the efficiency and proprietary stand points.

Audit by the C & AG is playing a useful role as an instrument of accountability andcontrol on behalf of the legislature. However, it would serve a more useful purpose ifthe audit shifts its emphasis from methods, procedures or individual decisions tooverall results, and to failures in achieving specified goals.

Evaluation by the audit provides a picture of PE operations to Parliament, essential ina democracy. But in the process, the audit should not demoralize the PE managernor spoil the PE image.

8.3 ACCOUNTABILITY THROUGH COURTS

It has been held by the Supreme Court in many cases that an autonomous PE wouldbe considered as State and the courts can hold PEs responsible to observefundamental rights through an order of the court called the writ. This has greatlyenhanced public accountability of PEs. PEs are now open to scrutiny by the courtsin 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 affectsfundamental rights of the employees or any citizen having dealings with a PE. Thisnew dimension of public accountability of PEs which has come on the scene duringthe last 10 years, has affected their operations adversely. Some actual cases of thecourt’s intervention are given below to illustrate the ways they affect PEs.

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It is important to note that here the court’s intervention is through a writ petition,resulting in immediate action. This unlike a civil suit, which takes an indefinitely longtime before the court issues an order.

Recruitment Case

A PE which wanted to recruit stenos, got names from the local employmentexchange 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 orderbased on a writ petition was brought by an individual from the High Court directingthe PE to “give appropriate publicity of number of vacancies and eligibility criteriaand give reasonable time to eligible candidates to apply for the post”. The court feltthat the way PE was filling the post did not give a fair opportunity to every eligiblecandidate to compete for the job.

Promotion Case

A writ petition was filed questioning management’s policy of promoting purchaseofficers to the next higher post after five years if they were engineering graduatesand after seven years if they were non-engineering graduates. The high court did notaccept the management’s argument that promotions in the enterprise were linkedwith qualifications and functions, and the classification to the engineering and non-engineering graduates was reasonable, and ordered parity of non-engineeringgraduates with those of engineering graduates.

Service Conditions Case

A PE manager who was posted abroad, resigned from his job about two years afterhis return to India. The company’s regulation, inter-alia, provided that gratuity will beadmitted to a manager posted in a foreign office who resigned during the period ofhis posting or within three years of his posting back to India. The High Court upheldthe contention of the manager on a writ petition that the regulation was illegal and themanager was entitled on gratuity.

Dealings with Supplier Case

A PE suspended dealings with a supplier who tried to cheat the enterprise. Thesupplier got a court order stating that the PE could not stop dealings with him becausehe was not given an opportunity of being heard and that this violated Article 14 of theConstitution. Thus, PEs’ dealings with their suppliers, dealers and customers areopen to scrutiny by the courts, which is not the case so far as private sectorcompanies are concerned.

Superannuation Case

A PE employee went to the High Court a few days before his superannuation statingthat the official record was incorrect and according to his birth horoscope he had fivemore years to go. The court granted stay against superannuation. The managementhad to fight the case for 5 months for getting the writ vacated and eventually had topay 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 ofthe citizen because they treat PEs as State, against which all fundamental rights canbe enforced. Further, action against PEs for the infringement of fundamental rights isthrough writ petitions and not through a civil case. As is well known, the remedyunder a civil suit is expensive as well as very time consuming as compared to thewrit. The courts feel that PEs are instruments of the State and should have all theobligations which the Government/State has in regard to its employees and citizens.

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Responsibility

PEs rightly contend that it is discriminating to have two different sets of rules to thetwo corporate sector entities in similar manufacturing or trading activities. Thefreedom in commercial dealings and personnel matters available to private enterpriseshould also be available to PEs. Regarding the argument of special obligations forusing the public funds, it may be noted that in most private enterprises, the fundsbelong either to the public financial institutions or to the public at large who havevirtually no control over their use.

Sometimes, it is argued that the cases of interference by the courts is sporadic andperipheral, not seriously affecting PE operations. This ignores the government’spromise of a ‘Level playing field’ to both the sectors. Further, even a few courtcases are enough to cramp the managerial style, and thus affect the right decisionsdue to the fear of a possible writ which may be issued by the court. It is extremelydifficult to make an assessment of the adverse impact on decision-making of this fearpsychosis.

It is therefore necessary that the central government amends article 12 of theconstitution of excluding commercial autonomous corporations and governmentcompanies, from the definition of ‘state’. Alternatively, the Supreme Court may beapproached to review the matter in the context of the liberalized economic policy andthe 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 thepunishments. CVC is not an investigating agency but usually gets the investigationdone through agencies like CBI or through the Departmental Chief Vigilance officersand orders investigation into cases of officials of Central Government. In case ofPEs, 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 intooffences alleged to have been committed under the Prevention of corruption Act,1988 by certain categories of public servants. The following categories of publicservants 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 controlledby the Central Government, as that Government may, by notification in theofficial Gazette, specify in this behalf.

Chief Vigilance Officers (CVO)

CVC has CVOs as its extended hands and are quite higher level officers who areappointed in each and every Department/Organisation to assist the Head of theDepartment/Organisation in all vigilance matters.

Role and Functions of CVOs

CVOs detect and decide punishment for corruption but also take preventivemeasures at the post corruption stage and therefore their role and functions arebifurcated into two

i) Preventive;

ii) Punitive.

6


Preventive Functions include taking preventive measures so as to minimize thescope for corruption or malpractices by maintaining proper surveillance.

Punitive Functions include ensuring speedy processing of vigilance cases at allstages. It also ensures that charge-sheet, statement of imputations, list of witness anddocuments 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-proneareas and prevent malpractices.

8.5 IMPACT OF PUBLIC ACCOUNTABILITY

PEs accountability through the C & AG audit is useful, in as much as it improvesfinancial 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 theway of business like decision-making. The approach in PEs also becomes rule-oriented rather than result or performance oriented due to audit.

So far as accountability through courts is concerned, it is a comparatively newphenomenon and its impact has not yet been assessed. The available data howevershows that decisions of the courts to treat PEs as State would come in the way oftheir business-like operations. The court decisions infact go against the very purposeof PEs being established as autonomous commercial enterprises under theCompanies Act or under special statutes.

The impact of Parliament, audit and courts would obviously vary from enterprise toenterprise depending, among others, upon the personality of the chief executive andthe success with which the enterprise is operating. Some PEs take the publicaccountability in their stride, many have learnt to live with it, but a good number ofPEs feel demoralized in various measures due to what they think ‘oppressive’ publicaccountability.

Activity

From your experience, give an example of public accountability through courts.

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Responsibility8.6 SUMMARY

The C & AG audit covers financial, efficiency and proprietary aspects of PEworking. The audit reports provide an in-depth analysis of PE operations. The auditis serving a useful role as an instrument of accountability and control over PEs. Butit should shift its emphasis from procedures or review of individual decisions tofailures to achieve specified goals. It is necessary to ensure that the C & AG auditdoes not demoralize PE mangers.

The court is a new dimension to PE accountability. The courts consider PEs asextensions of the State, and the fundamental rights can be enforced against PEsthrough a writ petition. PEs are open to scrutiny by the courts for all their actionswhere infringement of any fundamental right is alleged. CVC also plays an importantrole in PEs as it keeps a check on the corruption and malpractices.


1. What is the nature of PEs’ accountability to the courts?

2. Discuss the role of CVOs in PEs.


United Nations. (1974). Organisation, Management and Supervision of PublicEnterprises in Developing Countries, New York, Chapter VII: Parliament andPublic Enterprise and chapter VIII: Audit an Public Enterprise.

Narain, Laxmi and Murthy, B.S. (1984). Public Enterprise and FundamentalRights, N.M. Tripathi (P) Ltd., Bombay.

Iyer, R. Ramaswamy. (1991). A Grammar of Pubic Enterprises, RawatPublications, Jaipur. Chapter V: Public Enterprise and Article 1 of the Constitution,Chapter VII: Accountability and Evaluation, the Chapter VIII: Public Enterprise andthe 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 ofvarious Committees on Public Enterprises, New Delhi. Chapter one:Recommendations of the COPU on Accountability and autonomy of PubicUndertakings.

www.cvc.nic.in (2004)

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UNIT 9 CORPORATE GOVERNANCE ANDCORPORATE SOCIALRESPONSIBILITY

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 SocialResponsibility in the changes Scenario; and

• Discuss the Social Responsibility in PEs.

Structure

9.1 Corporate Governance: Concept

9.2 Committee Recommendations on Corporate Governance

9.3 Coporate Governance in Public Enterprises

9.4 Social Responsibility Strategies

9.5 Social Audit- Introduction

9.6 What is Social Audit

9.7 Social Audit in India

9.8 Benefits of Social Audit

9.9 Summary


9.11 References


9.1 CORPORATE GOVERNANCE : CONCEPT

“A code of corporate governance cannot be imported from outside, it has to bedeveloped based on the country’s experience. There cannot be any compulsion on thecorporate sector to follow a particular code. An equilibrium should be struck so thatcorporate governance is not achieved at the cost of the growth of the corporatesector.” —Sir Adian Cadbury

What is Corporate Governance?

Corporate Governance has succeeded in attracting a good deal of public interestbecause of its importance for the economic health of corporation and the welfare ofsociety, in general. However, the concept of corporate governance is defined inseveral ways because it potentially covers the entire gamut of activities having director indirect influence on the financial health of the corporate entities. As a result,different people have come up with different definition, which basically reflect theirspecial interests in the field. The best way to define the concept is perhaps to list afew of the different definitions rather than mentioning just one or two.

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Responsibility

Definitions

Adolf Berle has defined social responsibility as “the manager’s responsiveness topublic consensus” (www.bharatpetroleum.com).

Koontz and O’Donnell have given the definition of social responsibility thus: “Thepersonal obligation of the people as they act in their own interests to assure that therights and legitimate interests of others are not infringed”

(Hindu business line, 1998).

Corporate Governance can be defined as a systematic process by which companiesare directed and controlled to enhance their wealth generating capacity. Since largecorporations employ vast quantum of societal resources, we believe that thegovernance process should ensure that these companies are managed in a mannerthat meets stakeholders aspirations and societal expectations.

(Chartered Secretary, Oct, 1997).

9.2 COMMITTEE RECOMMENDATIONS ONCORPORATE GOVERNANCE

Cadbury Committee (1991)

The Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set upby the London Stock Exchange in May 1991. The committee, consisting ofrepresentatives drawn from the top levels of British industry, was given the task ofdrafting a code of practices to assist public enterprise. In defining and applyinginternal 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 BirlaCommittee). This was set up after the CII code on corporate governance wasframed; to study the corporate governance from listed companies’ perspective andculminated 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 otherbodies corporate.

The major recommendations of Birla Committee on corporate governance were:

• The Board of directors of a company should have an optimum combination ofexecutive and non-executive directors with not less than 50% of the Boardconsisting of non-executive directors. In case the company has a non-executivechairman, 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 timegap of four months between any two meetings.

• The Board should set up a remuneration committee to determine the company’spolicy 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 theirsubsidiaries. A company having multiple lines of business should be segmentalreporting.

• A management discussion and analysis report should form part of the annualreport 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 regardingcompliance of corporate governance provisions and the certificates should besent 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 aprovisions in the Companies (Amendment) Act, 2000.

Naresh Chandra Committee (2002)

Following the Enron fiasco and subsequent enactment of Sarbanes-Oxley Act in theUS, Government of India [Department of Company Affairs (DCA)] had set upanother committee to study corporate governance. This committee was formed underthe Chairmanship of Naresh Chandra (known as Naresh Chandra Committee/NCCommittee).

This committee examined various governance issues, such as:

a) Statutory Auditor – company relationship including independence of Auditfunctions 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 madethe following recommendations.

• Disqualification for audit assignments like prohibition of non-audit services andany direct financial interest or any other business relationship with the audit clientby the audit firm.

• Prohibition of service during cooling off period i.e., no partner or member of theaudit team can joint the audit client nor any key officers of the client can join theaudit firm during this cooling off period (two years)

• Prohibition of undue dependence on an audit client; audit fee received from anyone audit client and its subsidiaries should not exceed 25% of the total revenuesof the audit firm.

• A special resolution should be passed in case an auditor is to be replaced, who isotherwise eligible for re-appointment and an explanatory statement shoulddisclose management’s reasons for such replacement.

• In case of all listed companies and companies whose paid up capital and freereserves exceeds Rs. 10 crore or a turnover of Rs. 50 crore, there should becertification by the CEO and the CFO to the effect that they have reviewed thefinancial statements and that these statements reflect a true and fair picture ofthe company.

• Independent directors should play a vital role in the board and all the committeesshould be constituted of independent directors.

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Responsibility

• The minimum Board size should be at least seven, of which four should beindependent directors.

• To specifically exempt independent directors from certain criminal and civilliabilities.

• DCA should encourage institutions to have regular training programs forindependent directors and make it mandatory for such directors to attend thesetraining sessions before assuming responsibilities.

Unlike the Birla committee, this committee focused on corporate governance fromthe 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.RNarayana Murthy to analyze the compliances of clause 49. Narayana Murthycommittee focused mainly on the role of the audit committee and the boardcomposition, particularly independent directors. The objective of this committee wasto examine and recommend amendments to the law in order to maintain highstandards of corporate governance and also to ensure that corporate governance islooked beyond mere procedures and is implemented by companies to is protect theinterests 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 andcertify that they are true and report any material deviations from prescribedaccounting standards if any.

• A statement of all transactions with related parties should be placed before auditcommittee for formal approval.

• Procedures should be in place to inform board members about the riskassessment and minimization procedures.

• To lay down the code of conduct for all the board members and seniormanagement.

• Nominee directors, if appointed, shall be only by the shareholders and institutionaldirectors shall be subject to same liabilities as other directors.

• Non-executive director’s compensation should be fixed by the board and shouldbe approved by the shareholders.

• Companies to frame policies, where by personnel who observe any unethical orimproper 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, 2003reveals that the changes proposed are based upon the recommendations of NareshChandra Committee and Narayana Murthy Committee.

Hopefully, these recommendations when accepted in true spirit, should raise thestandards of corporate governance in Indian firms and make them attractive fordomestic and global capital and should form as base for further evolution of structureof corporate governance.

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9.3 CORPORATE GOVERNANCE IN PUBLICENTERPRISES

Public sector enterprises are ‘generally autonomous bodies’ which are owned andmanaged by the government and which provide goods or services for a price. Theownership of the government extends to 51 percent, or more, in order to make it apublic enterprise/entity. Public enterprises are considered as important instruments forself-reliant economic growth. They also help speed up economic growth, provide therequired infrastructure, act as tools to achieve various social objectives like betterdistribution of income, expansion of employees’ employment opportunities, removal ofregional imbalances, reducing concentration etc. From a paltry Rs. 29 crore in 1951-52, with 29 PEs the investment in the central public sector went up to well overRs. 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 autonomouslegal entity is established by an Act of Parliament or legislature, it is called ‘publiccorporation’ or ‘statutory corporation’. These are the principally chosen asinstruments for the management of nationalized industries. The other popular methodfollowed is forming government companies under the provisions of the CompaniesAct, 1956 (Sec. 617), in which not less than 51 percent of the paid-up share capitalhe held by the central or the state governments, or jointly by the central and stategovernments. A subsidiary of a government company is also a governmentcompany.

The Board of Directors is the top management organ, and is responsible forimplementing the objectives of an enterprise. The board members are nominated bythe shareholders, i.e., government. Under the normal pattern, it includes theChairman-cum-Managing Director, one or more full-time functional directors,officials representing and administrative ministry of finance, and sometimes one ortwo other relate ministries, and lastly, one or two non-officials, selected for theirexpertise and business experience. Under the trusteeship and entrepreneurialfunctions concept, the board looks after its various categories of functions –establishment of basic policies including corporate strategies, decisions on majorfinancial matters, selection of key personnel, receiving working reports and, reviewingand passing judgment upon them.

The functioning of PE boards has been subjected to criticism on various grounds. Thevarious practices followed, it is complained, do not facilitate the emergence of anautonomous enterprise management with initiative and operating effectiveness, andyet be responsible and responsive to the government guidelines and policies. The 40th

Report of the Committee on Public Undertaking (73-74) regretted that theperformance of public undertakings continues to be judged by a variety of vagueobjects and considerations. It recommended government presenting a white paperwhich can set out the framework of governments general, economic, financial andsocial strategy for public sector undertakings, micro-objects – both financial andeconomic – of each public undertaking and their review, and also qualification of theirsocial objectives and obligations and the issue of government directives in appropriatecases. The nomination of government officials, according to experience, has also tobe termed as superfluous and non-functional. The enterprises are also facingproblems as the government is not strictly adhering to the policy that all heads ofpublic enterprises will have a five-year tenure. This was accepted to improve theefficiency of top management.

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Responsibility

Obligation to the Public Sector Enterprise

a) The role of the executives is to assist the PSE to achieve its objectives as speltout in the charter constituting the setting up of the enterprise.

b) It is the obligation of every employee of the public sector administrative ministryto uphold the Rule of Law and respect for human rights solely in the publicinterest while making recommendations or exercising administrative authority. Heor she must maintain the highest standards of probity and integrity.

c) In relation to the general public, the employees in the PSE and administrativeministries should conduct themselves in such a manner that the public feels thatthe decisions taken or the recommendations made by them are objective andtransparent and are not calculated to promote improper gains for the politicalparty in power or for themselves or for any third party. This would be particularlysignificant so far as the customers of the public service are concerned. This willapply also mutatis mutandis to the employee in the administrative ministryconcerned with the PSE.

d) Employees of the PSEs/administrative ministries should not seek to frustrate orundermine the policies, decisions and action taken in the public interest by themanagement decision. Where following the instruction of the superior authoritywould appear to conflict with the exercise of impartial professional judgment oraffect the efficient working of the enterprises, he/she should set out points ofdisagreement clearly in writing to the superior authority or seek explicit writteninstruction. This will apply also mutatis mutandis to the employee in theadministrative ministry concerned with the PSE.

e) Where an employee of the PSE has reasonable ground to believe that he or sheis being required by the superior authority to act in a manner which is illegal oragainst the prescribed rules and regulations or if any legal infringement comes tohis or her notice, he or she should decline to implement the instruction, and wouldalso have a right to bring the facts to the notice of the Chairman / ManagingDirector of the enterprise or the Secretary of the Administrative Ministry / theCabinet Secretary to examine the issue carefully to concerned employees in theadministrative ministry.

Accountability and Responsiveness to the Public

a) Consistent with accountability to the superior officers and the ministers inaccordance with provisions governing PSE/administrative ministry, the employeesin the public sector should practice accountability to the people in terms of qualityof service, timeliness, courtesy, people orientation on readiness to encourageparticipation of and form partnership with citizen groups, for responsive management.

b) Employees in the PSE/administrative ministry should be consistent, equitable andhonest in their treatment of the members of the public, with particular care forthe weaker section of society and should not even be or appear to be unfair ordiscriminatory. Decision in pursuit of discretionary powers should be justifiable onthe basis of non arbitrary and objective criteria.

c) Employees in the PSE/administrative ministry should accept the obligation torecognize and enforce customers right for speedy redressal of grievance andcommit themselves to provide services of declared quality and standard to customers.

d) Employment in the PSE/administrative ministry should respect the right of publicto information on all activities and transactions of the organizations except wherethey are debarred in the public interest from releasing information by provisionsof 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 andextravagance and ensure effective and efficient use of the public money within theircontrol.

Non Abuse of Official Position

Employees of PSE/administrative ministry have a responsibility to make decisions onmerits. They are in a position of trust. They must not use their official position toinfluence any person to enter into financial or arrangements with them or with anyone else. They must not abuse their official position to obtain a benefit for themselvesor for someone else in financial or some other forms. This will apply also mutatismutandis 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 tocontinuously upgrade his/her skills and knowledge, strive for creativity and innovationand nurture the values of team working and harmony. He / she should promote andexhibit public and private conduct in keeping with the appropriate behaviour andstandards of excellence and integrity. He / she should support the junior in the latter’sefforts to resist wrong or illegal directives and in abiding by the Code of ethics. At thesame time, they should reward good work and publish any dereliction of duty andobligations based on objectives and transparent criteria.

Public Accountability

For accountability in the case of central government enterprises, the appropriatelegislature is Parliament, and for state-owned enterprises, the respective stateassemblies. The principle followed here is, as Mr Appleby observes: “Parliamentperforms quite admirably when it debates the important questions of Policy. Thewisdom of non individual is substitute for the general wisdom of society, and thegeneral judgment of society is more closely approximated by a representativelegislature than by any other entity”.

PEs come in for parliamentary consideration through debates, short discussion,questions, Committee on Pubic Undertakings, and also public inquiryrecommendations made by COPU. The feeling is that MPs are mostly interested inraising issues of topical nature and those effecting their constituency / state and donot raise critical issues, such as the government’s failure to fulfil promises made invarious policy statements, eg., Policy Statement of July 1991. The COPU examinesthe reports and accounts of PEs, examines the Management Review andResponsibility

Appropriate Governance Model for PEs

In the literature on corporate governance a distinction is drawn between the “insidermodel” and the “outsider model” of corporate governance. The insider model is onein which a compact group of shareholders business families/houses in India and EastAsia exercise full control over the corporate entity in such a way that the professionalmanagers hardly enjoy any decision making powers. Overwhelming part of the Indiancorporate economy has adopted the insider model of corporate governance. Theboard of directors of such companies are often rubber-stamping authorities with theboards concurring with almost all the proposals made by the controlling families. Theoutsider 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 widelydispersed equity ownership among large number of institutional and innumerable smallshareholders. Consequently governance such corporate entities vests withprofessional managers and their board of directors. Growing importance of theeconomies of scale and scope has necessitated birth of the large firm with itsnecessitated birth of the large with its distant shareholders and professional managerswho have to handle complex tasks and responsibilities.

In the case of insider model, the debate on good governance is concentrated onensuring 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 modelof corporate governance prevalent in these countries was largely responsible foraggravating the seriousness of this crisis. In the case of the outsider model, the mainconcerns relate to devising mechanisms to tackle what is known as the agencyproblem viz., how to ensure that professional managers function in the interests ofshareholders and the stakeholders.

In the case of PEs ascertaining wishes of the ultimate shareholders (Voters) isdifficult since it is not a practical proposition to put board resolutions for voting at theAGME/EGM in the same manner as in the case of typical listed company. Thecommon voters elect their representatives who in turn form a government in turn issupposed to ensure that voters wishes are translated into concentrate actions.

“In reality far more complex problems arise especially because the layered andhierarchical principal-agent structure that characterizes the public sector ownership.The ultimate owners of the public sector entities viz., the voters express theirinterests / objectives in a diffuse, indirect and cultured up manner. However, whenthe governments/ politicians act on behalf of the owners or the voters to crystallizeowners/voters’ interests in terms of specific objectives, they are prone to could theseobjectives to the extent that their self interests influence interpretation of votersobjectives. Since governments / politicians act as principals through civil service,another layer is added to the principal-agent chain. Civil servants too are liable to actas agents by allowing their own objectives to dominate their own actions duringadministration of public entities.

One may argue that already we have eminent bodies like the Public EnterpriseSelection Board (PESB). The PESB recommends personnel for the posts ofChairman, Managing Director, Chairman & Managing Director (CMD) andFunctional Directors in PEs as well as posts at any other level. PESB is alsoexpected to advise the government on such matters as (A) the desired structure ofthe boards, (b) performance appraisal system for both PEs and their managerialpersonnel, (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 personneland (e) suitable training and development programmes for management personnel inPEs. Despite all these lofty goals placed before the PSEB, the matters have notimproved much in regard to the PEs. Complaints about their performance in all thematters vested with the PESB continue to be voiced, sometimes loudly even in highlyrespectable and responsible quarters. Instances of PEs remaining headless for longperiods of their boards not being constituted with adequate number of functional andindependent directors continue to be frequent and numerous. Quite often theappointment process gets bogged down because of complaints with regard to integrityof the candidates being considered for the PEs boards. There are also instances ofspurious complaints lodged by competing candidates, thereby necessitating vigilanceinquiries. In many instances it is a hurdle race especially for competent and cleancandidates, who often prefer to remain out of the race if they attack higher value toenjoying peace of mind.

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9.3 SOCIAL RESPONSIBILITY OF BUSINESS

The growth of large corporations with their professional managers has changed thenature of society through its effect on competitive forces and the ownership ofprivate property. With their increases power in society, they are forced to concernthemselves with the nature of social responsibilities. Management must take decisionsinvolving moral issues and must adapt itself to the social forces that affect it. Theidea of social responsibility of business is based upon the concept that business issomething more than a purely economic institution.

Public Enterprises operates within the precincts of the society. While its immediatesociety, where it operates, provides its environment, material, manpower, market etc.the whole global society provides for its global corporate citizenship and ensures itsfacilities in terms of environment, market, perspectives, exposure to technology andintegration with priorities in the business scenario. The social responsibility of PublicEnterprises 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. Socialresponsibility of business is not new to our country. In the olden days, whenever therewas a famine, the leading businessmen of the area would literally throw open theirgodowns 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 magnificentmanner in which businessmen rose to the occasion in times of calamity. Even inordinary 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 andso on. So to accept social responsibility is no more than rededicating ourselves to thecherished values in the field of business. Gandhiji reminded of these values when hepropounded the theory of trusteeship. India is a democratic welfare state. She wantsto achieve welfare through democratic means. Business organization, which fit inwith such a specification, would have a better scope to survive and grow here. Inorder to make them suitable for such a business environment, they should foster acorporate objective of maximizing social benefit. This must be considered as thesocial responsibility of business. It pertinently means that every business enterprisehas a responsibility to take care of the society’s interest.

Though the fundamental purpose of Public Enterprises is to produce and distributegoods and services in such a manner that income exceeds costs, society expects thatbusiness is conducted in a socially responsible manner. Social responsibility embracesmultitude of internal and external relationships of the firm. Business enterprises,conscious of their social responsibility, would seek to comply with the laws concernedwith employment of women, non-discrimination in employment, ecological effects ofproduction, consumers, and employee welfare, and in general they would think of theimpact their action on the community.

Social and ethical aspects of business impinge upon the choice of strategy. Howsocietal values and expectations after business and how a firm perceives its socialand ethical obligations are interactive in character and both of these may becomeconstraints in strategy formation. That how consumerism, occupational health andsafety, product safety, concern for environmental protection, nutritional issues, beliefsabout ethics and morals and other for environmental protection, nutritional issues,beliefs about ethics and morals and other similar societal based factors impact uponthe 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. Cigarettemanufacturers have reduced the tar and nicotine content of cigarettes. Foodprocessors have altered the use of preservatives in food products and have begun topromote nutritional content and “natural” flavours.

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Responsibility

The lending institutions have given up their overly concern with safety or security ofmoney advanced and are now more concentrating on the competence of theentrepreneure and commercial viability of the project. All these instances demonstratehow business has adapted itself to changing social values and expectations.

Running the enterprise in a “socially responsible” manner implies that the activities ofthe organizational are in tune with what is generally perceived as in the publicinterest. It also implies that the firm responds positively to emerging societal prioritiesand balances the interests of its various stakeholders. Further, it realizes theimportance of being “good citizen” in the community and makes social and ethicalobligations an explicit and high priority consideration in conducting its affairs.

Being “socially responsible” has a positive appeal. The organization improves itsstanding in the public, which has the effect of enhancing its own performanceopportunities. 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) formalprocedures to monitor corporate compliance with changing demands. One suchprocedure is “social audit”. It is also common knowledge these days that business hasattempted through advertising and public relations activity to explain and accentuateits consistency with various social objectives. Recognition of the need for socialresponsibility has also led several large enterprises to make intentional efforts to increasetheir 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 socialresponsibility, it is not surprising to find a wide range of industry responses to theissue. 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 tohigh levels of socially responsible behaviour.

Figure: 9.1: Approaches to Social Responsibility

Source: Gene Burton and Manab Thakur, Management Today

Degree ofSocial

Responsibility

SocialContribution

SocialResponse

SoOblig

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Social opposition: This view is taken by the business which feel that they have noobligation 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. Initially founded by far-sighted people who visibly set the firms moral tone.

2. Stuck to the basics and produced only high quality goods and services for specificmarket niches.

3. Developed a public image that emphasized that commitment to quality and often usednon-traditional means to promote it.

4. Firmly practiced the dual principles of self-management and decentralization.

5. Brought in outside people to provide needed talent and additional perspectives.

6. Encouraged all employees to become part of the shared mission through full workerparticipation in decisions.

7. Paid fairly and usually offered benefit packages exceeding the competition.

8. Emphasized a democratic people orientation and did without executive perks.

9. Constantly solicited feedback from customers on all subjects from product directionto corporate donations.

10. Top managers possessed an extensive knowledge of current events and took awide-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 justand humane, as well as efficient and dynamic. The modern business has manifoldresponsibilities (a) it self, (b) to its customers; (c) employees; (d) owners,shareholders and partners, (e) community and (f) the state. The task ofmanagement is to reconcile and harmonise these separate and sometimesconflicting responsibilities.

2. The S.R. of Business can best be assumed in an atmosphere of freedom with theleast possible restraint on healthy competition. Concentration and monopoly haveto be watched and guarded, and wherever necessary, dispersed.

3. Every business has an overriding responsibility to make the fullest possible use ofits resources, both human and capital. Management has the responsibility toprovide security of employment with fair wages and equal opportunity forpersonal growth and advancement within the business, which is a requirement ofjustice, 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 ofmanagement is to fulfill the fair first needs of these claimants besides, providingconsumer satisfaction.

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Responsibility

5. It laid emphasis on the reciprocal duties between business and the communitythrough laying down of practical measures like reliable means of communication,better education of he citizens about civil responsibilities, local meetings and socialaudit.

On the basis of the above seminar report, we may put down the social responsibilitiesof Business, in the Indian context in the flow chart given below

We discuss, in the paragraphs that follow, the S.R. of business towards thesedifferent groups. The following flowchart presents business’s social responsibilitiestowards different groups.

Business Firm’s Responsibilities

Towards Owners/ Towards Employees Towards CustomersShareholders

• Fair Dividend • Meaningful Work • Fair price

• Solvent and Efficient • Job Satisfaction • Superior QualityBusiness

• Optimum use of • Fairness Salaries • Superior ServiceResources & Benefits

• Planned Growth • Best Quality of • Superior Product DesignWork life

• Effective • Succession Planning • Quick and CompleteCommunication and Development Information

Towards Government Towards Society Towards Inter-Business

• Payment of Taxes, • Employment without • Fair CompetitionCustom Duties etc Discrimination

• Abide by the Laws • Employment to • Cooperation for SharingDisadvantaged Persons of Scarce Resources and

Facilities

• Observe the Policies • Community Welfare • Collaboration forServices Maximisation of Business

efficiency

• Maintain Law & • Business MoralitySecurity • Maintaining Pollution free

Environment

• Maintaining EcologicalBalance

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Social Audit, which is a tool for evaluating, verifying and reporting the performanceof the firm in the sphere of social responsibility. It will help a “socially consciousorganization” to bring about greater strategic articulation and desirable modificationsin its social policies and programs. In this unit the term social audit is defined and thedesirability of undertaking social audit by a business enterprise is discussed. Thevarious frameworks or methodologies for conducting social audit are explained. Thepotential difficulties that could be faced by an organization adopting social audit arediscussed and critically evaluated. The status and the state of art of social audit inrelation to India is examined and analysed. Finally, what looks like the future of socialaudit 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 refiningand marketing company. The company has its network spread over all the fourregions in India and is represented in almost all markets. It caters to differentpetroleum sectors – Liquefied Petroleum Gas (LPG) and Kerosene fordomestic consumption, automotive fuels and lubricants for vehicles, andfeedstock and fuels for industrial applications. The company also manufacturepetrochemicals like Benzene, Toluene, Linear Alkyl Benzene feedstock etc.With a sales turnover of Rs. 25,650 crore and profits of Rs. 701.30 crore in1999, BPCL is the 5th largest company by sales in India. Its strength lies in anefficient refinery and strong distribution network, which has given it a 20%market share in petroleum products in India. BPCL has a tie up with ShellPetroleum Co. of Netherlands to manufacture and market Shell lubricants inIndia. In a major expansion move, BPCL is increasing its refining capacitythrough 3 joint ventures and also adding on to its distribution strength by layinga similar number of pipelines. BPCL is also planning a foray intopetrochemicals through a 1.8 million tonnes (mt) naphtha craker plant in TamilNadu for around Rs. 7,000 crore and this project is scheduled to go on streamby 2002.

Ecological Concern

BPCL has been continuously striving towards conservation and improvementof the environment by adopting new technologies. In March 2003, BPCLintroduced low lead MS (with 0.15 gm of lead per liter) in the country. FromApril 1996, HSD with a maximum sulphur content of 0.5% by weight, wasintroduced 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 inthe Taj Trapezium. To meet the requirement of HSD all over the country withthe revised specification of maximum sulphur content of 0.25% by weight,from April 1999, facilities for Diesel Hydro De-sulphurisation are being put upin the refinery. Distribution of other low sulphur fuels (which has maximumsulphur content of 1.8% by weight) was started in the National capital regionfrom October 1996, which ended the use on High Sulphur FO and RFO. BPCLconducted two advertising compaigns of behalf of the industry – the first on theimportance of LPG conservation and the second on the introduction of lowleaded petrol. On the pollution control front, BPCL has set up a specialsophisticated plant to meet the stringent standards set by Minimum NationalStandards for Effluents from Oil Refineries (MINAS). BPCL’s emissionstandards are far more stringent than the limits laid down by the PollutionControl Board. BPCL had also invested around Rs. 220 crore, in pollutionabatement and energy conservation systems.

Contd....

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Safety and Social Commitments.

Safety continued to be accorded the highest priority in BPCL both in refiningand marketing operations. In 2002-03, its refinery achieved 3 million man-hourswithout Lost Time Accident (LTA) on one occasion and one million man-hourswithout LTA on two occasions. The microprocessor based control system asits refinery monitors the operating conditions for safety hazards and therefinery is divided into three separate areas as high risk, low risk and mediumrisk. Each employee, irrespective of levels, is given fire-fighting training andmock drills are carried out at quarterly intervals for different range fires.Employees are given training on simulators so that they learn by committingmistakes on simulators and not in real conditions. BPCL’s Mumbai refinery hasa Mutual Aid agreement along with the neighboring 9 industries for fightingmajor fires.

As a result of higher exposure to various safety awareness programs, therehas been a reduction of injuries in BPCL’s refinery by 34% for its ownemployees, and 43% for contractors’ employees, in 1996-97. Moreover thefrequency of LTA has come down from 1.5% to 0.6% for its employees andfrom 5.6% to 1.7% for contractors employees. To enhance safetyperformance, BPCL introduced ‘safety by walk-around’ concept whereinexperienced officers were appointed as safety surveyors and safety samplingwas done by senior management staff. It also organized a safety symposium atits refinery in which members from the oil industry, government bodies. Oilawareness on LPG safety, BPCL also screened one-minute films on the safehandling of LPG, on popular TV channels.

BPCL sponsors many sporting events like Santosh Trophy, National FootballTournament, and also coaching camps for youngsters. Lifeline Express wascontributed to social welfare – a fully equipped train, which look the latestmedical technology to remote villages of India. The company has also adopted11 Scheduled caste/Scheduled tribes villages under the Component and Tribalsub-plan. The facilities provided by the company include community centers,tube/borewells, educational support medical facilities, vocational guidance andtraining to make villagers self-reliant and improve their standard of living.

Achievements

BPCL was adjudged the winner of the ‘Oil Industry Safety Awards’ for itssafety performance being the best among all the “LPG Marketing Organizationin 1995-96” for the fourth year in succession. BPCL’s annual report for 1994-95 was selected by ICAI as the best presented amongst the public sector/jointsector companies for the second year in succession. The South AsianFederation of Accountants also adjudged the same as the second bestpresented in the non-financial sector in the SAARC region. BPCL receivedISO-9002 certification from Bureau Veritas Quality International (BVQI) for15 out of its 22 bottling plants. BPCL has also received ISO-9002 accrediationfor its refinery, aviation service stations at Mumbai, Delhi, Calcutta andBangalore depots at Miraj and Mysore and lubricants blending plant atWadilube.

Contd....

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Case Study 2

SOCIAL RESPONSIBILITYAFFLUENCE FROM EFFLUENTS

The Rashtriya Chemicals and Fertilizer’s Chembur plant is one of Bombay’smost well known cases of industrial pollution. The company, in the face ofsustained 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, RCFentered into an agreement with the financial institution for a DM 12.5 million(approximately, Rs. 45 crore) loan at 15.5 percent.

RCF’s problem was its two ammonia plants. These plants have been scorespot for the company and have been shut down on more than one occasion. Atthe time the plants were setup, it was not mandatory, to include cost of pollutioncontrol equipment in the project cost. But as local residents started complainingabout the pollution levels, RCF started looking for alternatives.

There were modifications going on in both plants. RCF had to wait till thesewere complete to be able to estimate the volume of pollutants that wouldrequire treatment. Finally a Ministry of Environment notification in the late1980’s ordering them to clean up forced RCF into action.

In the process of manufacturing ammonia, certain gases are accumulatedwhich need to be removed by purging. Using cryogenic technology boughtfrom a German firm, RCF decided to set up a purge gas recovery plant, whichwould in the process of treating ane-rich fuel, both of which can be soldcommercially, thereby making pollution control not just pay for itself but alsogenerate additional resources. And at the end of the process, the plantproduces no effluents.

RCF’s choice of technology is determined by financial considerations. Theyhad three options. In the first case, they could simply treat the ammonia, whichis 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. Theirsecond option was to choose ammonia and synthetic gas recovery, for whichthe IRR was 27 percent. The final option, the one they chose, includes therecovery of liquid argon and gives them an IRR of 46.3 per cent. Pay backperiod is a brisk 26 months.

Whether RCF will actually earn its projected income is doubtful. Since the timethe plant has come up, argon prices have crashed due to excess capacity andintense competiters are mainly the steel and automobile industry, which useargon for welding. RCF officials however, say they are safe, because evenrecovery to synthetic gas stage gives them an IRR of 27 percent, leaving RCFa comfortable profit margin.

Social Opposition: This view is taken by the business which feel that they have noobligation 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 toensure 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 businessshould not cause pollution, should not discriminate in employment, should not makemoney from insavoury or immoral activities and should not withhold information fromconsumers about their products. It is also expected that they should make positivecontribution 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 itoperates. The society therefore expects the corporate business to assumeresponsibility towards it. Earlier it had been assumed that the vast material resourceslike water, land and air could absorb the wastes of production and neutralise anypotential harmful effects. Man assumed that the natural environment would alwaysrenew itself. It is abundantly clear now that this is not so. It is common knowledgethat society is being threatened by pollution of land, sea and air. To an increasingdegree, 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 behaviorof business leaders. Most would agree that if these conditions are permitted tocontinue it must inevitably lead to social suicide. Steps must be taken to correct theabuses.

With changing social and economic values and with increasing expectations of societyfrom corporate business, the companies that adjust to the rational changes and help inpioneering 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 goalsor corporate business can no longer be separated from social goals.

Firms have to recognize their due responsibilities and consider these in the planningand action stages. They must have a social policy which means that they mustinclude in their accounting the direct costs to society of their operations to the extentpossible. They should communicate their social policy not only to the members of theorganization but also to outside groups. Social audit is a tool for judging how acorporate entity has implemented its social policy.

The increasing demand for socially oriented programmes of one kind or another andfor measurement and disclosure of environmental effects of organizational behaviourhas created pressure for adopting some kind of social auditing procedure. This unitattempts to provide a general definition of social audit, discusses the variousapproaches or methodologies for conducting social audit and points out the difficultiesencountered in measuring social performance etc.

9.6 WHAT IS SOCIAL AUDIT?

Social audit has been variously defined. As it happens with any new managementtechnique, there is not yet any definition which has gained acceptance. Bauer andFenn define Social audit as “a commitment to systematic assessment of and reportingof some meaningful definable domain of a company’s activities that have socialimpact”. The author’s emphasis is on the assessment and reporting of corporatesocial programmes.

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Responsibility

Dilley defines the social audit as “investigation of an enterprise’s performance as amember of the community in which it has its primary impact: such investigationsconsisting of the preparation of an inventory of the socially relevant activities of theenterprise, qualification (to the extent possible) of the social costs and benefitsresulting from those activities and compilation of the other quantitative informationproviding insight into the social performance of the enterprise” (Hindu Business Line,1997). Dilley’s definition highlights the making of an inventory of the socially relevantactivities and their quantification in terms of costs and benefits.

Caroll and Bailer, describe social auditing “as a form of measurement”. According tothem “Social audit is a natural evolutionary step in the concern for operationalisingcorporate social responsibilities and, in its essence, represents a managerial effort todevelop a calculus for gauging the firm’s socially oriented activities. That, it is anattempt to measure, monitor and evaluate the organizations performance with respectto its social programmes and social objectives” (Chartered Secretary, Oct, 1997)Ahmed Belkaoui has attempted to collate the definitions by Bauer and Fenn, and byDilley. He states that “Social Audit – much like the financial audit – is anidentification 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 someelaboration.

1. Identification assures a tracking down and inventory of all the firms activitieshaving potential impact on the firms environment identification will result in adefinition of the social dimensions of the firms activities in terms of social costsor social benefits depending on the nature of their impact on the socialenvironment.

2. Assessment and Evaluation imply the categorisation of the firms impact on itsenvironment as either positive social benefits or negative social costs.

3. Measurement implies the assignment of a quantitative or qualitative score tothe social costs and benefits identified in assessment and evaluation.

4. Reporting assumes the disclosure of the firms performance as measured.

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 significantsocial 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 anorganization is doing in social areas, not the amount of social good that results fromthese 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 socialactivities occur beyond the company’s gate and the company has no means ofsecuring data on the results. Even if data are available it is difficult to establish howmany of them have occurred due.

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Table 9.2 Activities Covered by Social Audit

A. Ecology and Environmental Quality:

• Clear-up of existing pollution

• Design of processes to prevent pollution

• Aesthetic improvements

• Noise control

• Dispersion of industry

• Control of land use

• Required recycling

B. 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 lawlabour 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

Contd....

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ResponsibilityH. Shareholder Relations

• Opening of boards of directors to members of public representing various interestgroups

• Prohibitions of operations in nations with “racist” or “colonial” governments

• Improvement of financial disclosure

• Disclosure of activities affecting the environment and social issues

I. Economic Activities

• Control of conglomerates

• Breakup of giant industry

• Restriction of patent use

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 andfinancial results of its working. Such information should be disclosed, as mentioned bythe National Association of Accountants’ Committee on Accounting for CorporateSocial Performance in Canada, for four major categories as below:

1) Community Involvement: Socially-oriented activities that are primarily ofbenefit to the general public. Examples include : general corporate philanthropy,housing construction, and financing, health, services, volunteer activities amongemployees, food programmes and community planning and improvement.

2) Human Resources: Social performance directed to the well-being ofemployees. Categories in this area include employment practices, trainingprogrammes, job enrichment, working conditions, promotion policies andemployee benefits.

3) Physical Resources and Environmental Contributions: Activities directedtowards alleviating or preventing environmental deterioration (pollution). Thiscategory includes the adherence to the law and going beyond it in areas such asair quality, water quality. Also included is the conservation of scare resourcesand the disposal of solid waste.

4) Production or Service Contribution: Concerned with the impact of thecompany’s product or service on society. This includes consumerism, productquality, packaging, advertising, warranty provisions and product safety.

In India, the companies in general and the public sector undertakings in particularshould make disclosure of information for the use of people outside the enterprise,which include:

i) financial institutions and creditors (who are interested in financial position, fund-flow and debt-paying capacity of the enterprise);

ii) shareholders, academic institutions and consultants (who are interested inquantitative and qualitative information regarding proper utilization of resourcestransferred to the concern);

iii) the government (for knowing about financial and statistical information forplanning and operating of those enterprises and initiating and administeringfinancial and economic polices and programmes at state and national levels

Contd....

56


iv) trade unions, political leaders (require information for broad labour policydecisions, for etc); and

v) environments (who need information regarding air and water pollution ecologicalimbalances, 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 balancesheet, profit and loss accounts, special accounts, audit reports. Such information ismainly disclosed in quantitative form, such as income and expenditure of thecompany, sources and uses of funds, details about assets and liabilities, workingcapital, new capital investment, outstanding distribution of earnings, interest taxespaid, liquidity position and incentives. Financial information reveals the true position ofa company regarding its liquidity and bankruptcy.

Non-Financial Information

This includes information relating to social performance, human resources, marketingactivities, business environment, production etc. Such information may be disclosed inquantitative and qualitative terms, but the disclosure of information is to influenceprofitability in the long run and to build the company’s image.

Information on social performance generally includes various activities regardingemployee welfare, community work and involvement, social cultural programmes,role of company in solving social problems of the area, programmes dealing withtraining and developing human resources etc. Social programmes are specified inannual 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, sponsoringexecutives for delivering lectures in universities, educational institutions and forforeign training. Such information is disclosed in the Directors’ Report and theChairman’s speech.

Information on marketing includes sales figures product-wise and plant-wise, cashand credit sales, pricing and impact of competition on pricing, product innovations anddevelopment, quality of product advertising and promotional efforts for distribution ofthe products, selling commission traveling expenditure of marketing personnel, etc.Such information is disclosed in the Directors report. Chairman’s statement or inadvertisements etc.

Environment information includes information about the political, economic, socio-cultural and technological environment, especially on such items as inflation,unemployment, impact of changes on taxes, changes in legal requirements of businessactivities, contribution and participation in company in community development,technological development, pollution control measures, use of indigenous materialsand efforts at conservation of natural and human resources. The disclosure ofinformation finds place in the annual reports and chairman’s speech.

57


Responsibility9.7 SOCIAL AUDIT IN INDIA

In India, the TISCO has been the first company to set up a Social Audit Committeefor 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 committeewas entrusted with the task of “examining and reporting whether, and the extent towhich, the TISCO has fulfilled the objectives contained in Clause 3A of its Articles ofAssociation regarding its social and moral responsibilities to the consumers,employees, shareholders, and the local community”. The Committee opined, “On anexamination of all aspects, the company has fulfilled its obligations to all concerned.”

Started with TISCO the social audit has picked up. UTI, the premier financialinstitution has also planned for a social audit. In the report for 1993-94, the chairmanof UTI has declared that “to address the question as to what extent this uniqueorganization has been able to fulfill its responsibilities vis-à-vis its various publics andsociety at large. And independent social audit committee of five eminent citizens hasbeen 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 understandhow far the company has lived up to its social objectives.

2. Related to the first benefit is the fact that social audit encourages greaterconcern for social performance throughout the organization.

3. Social audit provides data for comparing effectiveness of the different types ofprogrammes.

4. Social audit provides cost data on social programmes so that management canrelate the data to budgets, available resources, company objectives, andprojected benefits of programmes.

5. Social audit provides information for effective response to external claimantsthat make demands on the organization. News know what a business is doingin areas of their special interest, and a business needs to respond as effectivelyas possible. The social audit shows a business where it is vulnerable to publicpressure and where its strengths lie.

Activities

a) What activities of the organization in which you are working (or with which youhave been associated) fall, in your view, in the area of social audit?

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58


b) Discuss the social reporting done by your organization.

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9.9 SUMMARY

In recent times corporate governance and corporate social responsibility havebecome the talk of the day. In almost all business organizations, this concept is nowbeing used formally. This has gained a wide recognition as it is important for theeconomic health of the organization and the welfare of the society at large. Sinceearly 90s recommendations of different committees have been taken intoconsideration to understand the practical approach to the concept of corporategovernance.

Social responsibility in business or more popularly known as corporate socialresponsibility 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 thepublic 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 today’s 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?

59


Responsibility9.11 REFERENCES

www.bharatpetroleum.com

The Hindu business line, (1997).

Corporate Governance. (October, 1997). The New Paradigm, Chartered SecretaryOctober.

The Freedom to be Giants. (July 1997). in Leash, The Economic Times.

Reddy, B. Rathan. (1999). Essentials of Business Environment. Institute of PublicEnterprise.

Mishra, R.K. (2002). Restructuring of State Level Public Enterprise. Institute ofPublic Enterprise.

Mishra, R. K. & Reddy, Venugopal. (1995). Public Enterprises towards a WhitePaper.

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).


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, 2002Institute of Public Enterprise.

Mishra, R. K.& Venugopal Y. (1995). Public Enterprises towards a White Paper.

1

Dimensions and Methods ofEvaluating Enterprises

PerformanceUNIT 10 APPRAISAL OF PUBLIC

ENTERPRISE PERFORMANCE-I

Objectives


• 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 privatesector;

• Learn about various reform measures of PEs.

Structure

10.1 Growth of Central Public Enterprises

10.2 Investment and Financial Performance in Central Public Sector Enterprises

10.3 Comparison of Public Sector with the Private Sector

10.4 Reform Measures and their Impact on Public Enterprises

10.5 Summary


10.7 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 werevarious problems faced by the Indian economy at this stage. Some of them are asfollows:• 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 inwhich both private and public enterprises would march hand in hand to accelerate thepace 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 entrepreneur’s tendency to make monopolistic profits;

• eliminate social, economic and regional inequalities;

2

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 1956which assigned the public sector a strategic role in the economy. The majorobjectives 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 raiseresources, encourage wider participation and promote greater accountability, thegovernment equity in selected public enterprises was to be offered to Mutual Funds,Financial Investment Institutions, workers and general public. The main elements ofthis policy towards Public Sector Enterprises are:

• bring down government equity in all non-strategic PSEs to 26 per cent or lower,if necessary;

• restructure and review potentially viable PSEs;

• fully protect the interest of workers.

The Policy in 2000-01 added the following objectives:

• To put in place mechanisms to raise resources from the market against thesecurity 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 expenditurein social sector, restructuring of CPEs and retiring public debt.

In 1956, there were 5 Central Government Enterprises. It grew to 179 in 1980. In2001, there were 242 Central Public Enterprises according to the Public EnterprisesSurvey 2001, excluding 6 insurance companies and 2 financial institutions as shown inTable 10.1

Table 10.1 : Growth in number of CPEs

Year No. of Units

1951 5

1961 47

1980 179

1990 244

2001 242

2002 240

Source: GDI, Public Enterprise Survey, 2001-2002

3


Performance

The 240 Central Public Sector Enterprises of 2002 can be classified under followinggroups:

Group Total Enterprises (2002)

I. Enterprises under Construction 10

II. Enterprises Manufacturing / Producing Goods 149

III. Enterprises Rendering Services 81

Total 240


The basis of grouping will be clear from the following examples of sectors included inthe groups. The largest group is of the CPEs in the area of manufacturing andproducing goods.

Table 10.2 shows the various sector of public enterprises and their numbers in eachgroup.

Table 10.2 : Sectoral Distribution of PEs

Group Total Enterprises (2002)

I. Enterprises under Construction 10

II. 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


4

Public Enterprise:Performance and Evaluation 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 theenterprise goes with the ownership of equity, which in PEs is held by the governmentor by holding or by apex body for its subsidiaries, or partly by public and financialinstitutions. A part of the capital, generally 50% is generated as long-term loans fromgovernment, whose rate of interest vary as per the loan period. The chief source offinance for a business enterprise should be its own resources. PEs are also expectedto operate in a way so as to meet their full cost of production and make substantialcontribution towards the cost of their capital development out of their own earnings.This will reduce the claim upon the nation’s savings and burden on the exchequer.After liberalisation, the government not only went in for partial disinvestment ofequity in select PEs, it also allowed PEs to raise resources through the issue of equityin the capital market. Public deposits provide a good source of short and mediumterm finance. Public financial institutions were also allowed in 1971 to provideassistance to government companies. Similarly bonds and debentures are also amajor source of finance for public enterprises. The Indian Railways FinanceCorporation and Power Finance Corporation were set up in 1986 for the purpose ofraising funds.

Growth of Investment: The total investment in central government enterprises inshown 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 No. of Units Total Investment (Rs. crores)

1951 5 29

1961 47 960

1980 179 18,150

1990 244 99,330

2001 242 2,74,189

2002 240 3,24,632

5


Performance

Figure 10.1 : Growth of Investment in CPEs

Table 10.4 : Division of Investment Groupwise

Group % Share of Investment in 2002

I. Enterprises under Construction 3.19

II. Enterprises Manufacturing / Producing Goods1. Steel 7.252. Minerals & Metals 1.753. Coal & Lignite 8.404. Power 14.175. Petroleum 11.326. Fertilizers 5.587. Chemicals and Pharmaceuticals 1.848. Heavy Engineering 1.259. Medium and Light Engineering 1.5310. Transportation Equipment 0.9211. Consumer Goods 0.9912. Agro-Based Industries 0.0413. Textiles 5.77Total II 60.81

III. Enterprises Rendering Services

1. Trading and Marketing Services 0.832. Transportation Services 2.133. Contract and Construction Services 2.034. Industrial Development and Technical Consultancy Services 4.555. Tourist Services 0.066. Financial Services 17.827. Telecommunication and Information Technology Services 8.168. Section – 25 Companies 0.42Total III 36.00Grand Total ( I + II + III ) 100.00

No. ofPSEs

Growth of Inv

29 81 948

2410

3897

6237 15

534

1815

0

0

50000

100000

150000

200000

250000

300000

350000

1.4.

1951

1.4.

1956

1.4.

1961

31.3

-196

6

1.4.

1969

1.4.

1974

31.3

.197

9

1.4.

1980

2 21 47 73 84 122

169

179

6


Investment is the aggregate of paid up share capital, share application money, pendingallotment and long term loans. Due to the policy of encouraging public sector, heavyinvestment 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 industrieslike steel, coal, power, petroleum, fertilizers etc.;

• the investment pattern shows that the thrust was to create infrastructure ofpower, transport and electricity;

• the average rate of growth of investment was 16 and 19 per cent per annumexcept during 1968-74 when it was 10%.

The Central Government has contributed a major share of investment in publicenterprises. Some State Governments, holding companies which are themselvespublic sector undertakings, financial institutions, banks and private funds (both Indianand foreign) have also contributed to the investment of these enterprises. Table 10.5shows different sources of Investment.

Table 10.5 : Sources of Investment

Year Control State Holding Foreign FI / Banks Share TotalGovt. Govt. Company Funds + others Appli-

cationMoney

1997 94,470 540 18,198 4,499 93,428 2,475 2,13,610

1998 99,954 785 17,748 5,852 1,02,054 4,631 2,31,024

1999 1,03,049 981 20,252 6,569 1,04,907 3,409 2,39,167

2000 1,11,112 1,111 20,704 8,001 10,981 2,006 2,52,745

2001 1,20,839 1,389 23,049 4,513 1,20,283 3,225 2,74,198

2002 1,43,205 1,494 26,333 6,844 1,42,047 4,709 3,24,632

Source: PE Survey, 2002-03

Long-term Funding: Public enterprise’s reliance on government funding isdecreasing continuously. As against this, the non-government funding like foreignloans and deferred credits, loans from banks and financial institutions has beenconstantly increasing. In view of the present policy of non-availability of budgetarysupport, Public Enterprises would have to raise more and more long term finance ontheir own.

7


Performance

Internal Resources: PSEs have to generate resources internally to finance theirdevelopmental activities. They are also expected to generate surplus for financing theneeds of priority sectors. It is worth while to note that the public enterprises havemanaged to increase their internal resource generation over the year. However thepercentage of total internal resources available for utilization after repayment ofloans, and internal use, is still very small in comparison to the extra budgetaryresources raised by public enterprises, budgetary support received from thegovernment 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 Amount

III 287

IV 1,260

V 3,439

VI 13,768

VII 37,678

VIII 1,01,212

IX 1,88,774

Share of Internal Resources in comparison to Extra budgetary, budgetary and Planoutlay.

(Rs. in crores)

Plan Internal Resources Extra Budgetary support +Budgetary support + Plan Outlay

VIII 46760 2,51,191

IX 98444 3,17,873

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. Bharat Sanchar Nigam Ltd. 23,129

2. National Thermal Power Corporation Ltd. 19,394

3. Housing & Urban Development Corporation Ltd. 18,046

4. Steel Authority of India 13,571

5. Power Grid Corporation of India Ltd. 13,342

6. Indian Railway Finance Corporation 13,130

7. Rural Electrification Corporation Ltd. 12,322

8. National Hydro-electric Power Corporation Ltd. 11,906

9. Power Finance Corporation 11,870

10. Indian Oil Corporation Ltd. 11,481

8


Certain Financial Parameters: The performance analysis done by the public sectorenterprise survey indicates the following trends:

• Fixed Assets Ratio: The ratio of fixed assets to long term funds indicates thathow much long term funds have been utilised to finance the fixed assets. Fixedassets need to be financed through long term funds only and part of workingcapital should also be financed through long term funds. PEs have shown anincrease in this ratio which is a healthy trend.

Year Fixed Asset Ratio

2000-01 0.57 : 1

2001-02 0.60 : 1

• Debt Equity Ratio: The ratio of total loans to shareholder’s funds is the debtequity ratio. This ratio indicates the dependence of the PSEs on borrowed fundsviz-à-viz own funds. A decrease in this ratio indicates that PSEs are graduallymoving towards internal resource generation.

Year Debt Equity Ratio

2000-01 0.021 : 1

2001-02 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.

Figure 10.2 : Turnover/Operating Income

Over the period 1992-2002, it has increased from Rs. 1,47,266 crore in 1992-93 toRs. 4,78,728 crore during 2001-02. The increase in turnover during this period worksout to be 258%.

147266

158049

187355

226919

260735

27600

0 50000 100000 150000 200000 250000 30000

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

9


Performance

Table 10.8 : Percentage Growth of Turnover

Year Turnover / Operating Income

1991-92 12.83

1992-93 9.98

1993-94 7.32

1994-95 18.54

1995-96 21.12

1996-97 14.90

1997-98 5.86

1998-99 12.38

1999-00 25.48

2000-01 1.40

2001-02 4.47


A group wise analysis done by Public Enterprise survey indicates that the growth ofturnover is higher for enterprises rendering services as compared to the enterprisesproducing and selling goods (Table 10.8). Top 10 enterprises contribute 69.11% ofthe turnover of all enterprises (Table 10.9).

Table 10.9 : Top Ten Enterprises in terms of Turnover

Sl. Name of the Enterprises Amount % of TotalNo. Rs./crore Turnover

1. Indian Oil Corporation Ltd. 1,14,863.95 23.99

2. Hindustan Petroleum Corporation Ltd. 44,433.84 9.28

3. Bharat Petroleum Corporation Ltd. 39,829.48 8.32

4. Food Corporation of India 31,556.22 6.59

5. Bharat Sanchar Nigam Ltd. 24,299.89 5.08

6. Oil & Natural Gas Corporation Ltd. 23,233.77 4.85

7. National Thermal Power Corporation Ltd. 17,911.05 3.74

8. Steel Authority of India Ltd. 15,683.68 3.28

9. Gas Authority of India Ltd. 10,572.95 2.21

10. I.B.P. Co. Ltd. 8,452.57 1.77

Total 3,30,837.40 69.11

Total Turnover 4,78,727.77 100.00

Source: PE Survey, 2002

• Dividend Declared and Export Earnings: Though PEs have shown an increasein the dividend declared by them in the last three years, the amount of increase hasdeclined. 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 Dividend Declared Export Earnings

1999-00 5,455 19737

2000-01 8,260 24772

2001-02 8,067 20886


10

Public Enterprise:Performance and Evaluation 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 withprivate sector. This will help us to understand the larger role played by public sectorin 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 publicsector has been increasing. The public sector account for about 70% of totalemployment (Table 10.11).

Table 10.11 : Public & Private Sector Employment in India

Year Public Sector Private Sector Total % of employment(in lakhs) (in lakhs) in public sector

1971 71 121 192 55

1981 155 74 229 68

1991 190 77 267 71

2001 191 87 278 70

Source: Economic Survey, 2002

Saving: The share of public sector to national savings is not very encouraging. Itcontributed only 5.63% in 1997-98 while the private sector contribution was about94%. Further the share of public sector in total savings has been declining over theyears (Table 10.12).

Table 10.12: Share of Public and Private Sectors in Gross Domestic Savings

Plan As % of GDP at Market Prices Total

Public Sector Private Sector

I 1.7 8.7 10.4

II 2.0 10.4 12.4

III 3.4 10.9 14.3

IV 3.0 14.4 17.4

V 4.6 17.0 21.6

VI 3.6 16.5 20.1

VII 2.3 18.1 20.4

VIII 1.4 21.9 23.3

1997-98 1.0 22.1 23.1

2000-01 –1.7 25.1 23.4

Source: CMIE, 2002

11


Performance

The basic causes for decrease in share of public sector in savings is – rapid increasein state expenditure, excessive borrowings from the banking sector and lessgeneration of internal resource.

GDP: The share of public sector in Gross Domestic Product has grown, but it is verylow compared to the private sector. This share has been rising since 1970 while thatof private sector has been declining. However, since 1993-94, the share of bothenterprises in GDP has remained more or less constant (See Table 10.13).

Table 10.13 : Contribution to GDP

Year Public Sector % Private Sector %

1971 13.84 86.16

1981 19.74 80.26

1991 26.31 73.69

1992 27.24 72.76

1993 27.32 71.68

New Series

1994 25.92 74.08

1995 25.59 74.41

1996 25.24 74.77

1997 23.98 76.02

1998 25.31 74.69

Saving-Investment Gap: The public sector has been generating low savings. Butthere has been an increase in investment over the years. This is just the opposite inthe private sector. Thus there has always been a negative saving – investment gap inthe public sector.

Profitability: Trend analysis of profitability of PSEs on the basis of financial ratiosindicates an impressive trend of improvement in the financial performance.

Financial Meaning Increase in % fromRatio 1991-92 to 2001-02

PBDIT Profit before depreciation, interest and tax 255.25%

PBIT Profit before interest and tax 296.42%

NP Net profit 696.24%

Sector wise analysis of profitability indicates that profitability has declined over theyears, in particular for the enterprises involved in manufacturing of goods. Thesector-wise analysis of profitability indicates that gross profitability declined forvarious sectors except those for power as well as petroleum companies; agrobaseand textile enterprises reported loss. Further, net profitability reduced over the years

12


and turned out to be negative for engineering, fertilizers, chemicals andpharmaceuticals, textiles and agro-based industries. Power and petroleum sectorsmaintained their positive profitability. Comparison of manufacturing public sectorenterprises with private manufacturing companies has shown that wage costs inpublic 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 responsibilityof developing capital – intensive infrastructure and social sector. Figure 10.2 showsprofitability in terms of PBDIT, PBIT and Net profit.

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 enterprisesrespectively.

Table 10.14 : Top ten profit making enterprises (2001-02)(Rs. in crore)

Sl. No. Name of the Enterprises Net Profit

1. Bharat Sanchar Nigam Ltd. 6,312

2. Oil & Natural Gas Corporation Ltd. 6,198

3. National Thermal Power Corporation Ltd. 3,540

4. Indian Oil Corporation Ltd. 2,885

5. Nuclear Power Corporation of India Ltd. 1,549

6. Mahanagar Telephone Nigam Ltd. 1,301

7. Gas Authority of India Ltd. 1,186

8. Northern Coalfields Ltd. 900

9. Bharat Petroleum Corporation Ltd. 850

10. Neyveli Lignite Corporation Ltd. 819

2522

7

2770

7

3338

4 4016

1

4445

7 5306

2

1595

7

1855

6

2263

0

2757

8

3091

5

3271

4545 71

78 9574

1018

6

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

1992-93 1993-94 1994-95 1995-96 1996-97 1

PBDIT PBIT

13


Performance

Total 25,540

Table 10.15 : Top Ten Loss Incurring Enterprises (2001-02)(Rs. in crore)

Sl. No. Name of the Enterprises Net Profit

1. Steel Authority of India Ltd. 1,706.89

2. Fertilizer Corporation of India Ltd. 1,104.10

3. Bharat Coking Coal Ltd. 755.00

4. Hindustan Fertilizer Corporation Ltd. 572.71

5. Konkan Railway Corporation Ltd. 369.81

6. National Jute Manufacturers Corporation Ltd. 364.33

7. Hindustan Photo Films Manufacturing Corporation Ltd. 353.72

8. Bharat Gold Mines Ltd. 283.45

9. Eastern Coalfields Ltd. 277.64

10. Indian Drugs & Pharmaceuticals Ltd. 250.57

Total 6,038.22

PSEs have been responsible for a considerable increase in internal resourcesgenerated in the post reform programme. These enterprises have also fulfilled theirsocial 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 reducedand the number of industries reserved for the public sector reduced from 17 to justfour. 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 stateutilities continue to shoulder the increased burden to energise this sector. A largechunk of the Rs. 800,000 crore investment estimated by 2012 to add 1,00,00 MWcapacity is expected to come from the public sector.

10.4 REFORM MEASURES AND THEIR IMPACT ONPUBLIC ENTERPRISES

Public sector reforms were introduced in India in 1991 as part of process ofeconomic liberalisation. The Industrial Policy 1991, envisaged that, “In order to raiseresources and encourage wider public participation, a part of the government’s share– holding in the public sector would be offered to mutual funds, financial institutions,general public and workers.” The Disinvestment Commission was constituted by thegovernment in 1996 to advice the government on the extent, mode, timing and pricingof disinvestment. The commission submitted 12 reports to the government covering58 PSUs. These reports contain specific recommendations, including disinvestmentthrough strategic sale in 29 PSUs, trade sale in 8 PSUs, offer of share through GDRand domestic route for 5 PSEs, no disinvestment for 1 PSU, disinvestment deferred in11 PSUs and closure in respect to 4 PSUs. The commission term expired in 1998 andthe Department of Disinvestment (DOD) was constituted as a nodal department tostreamline and speed up the process of disinvestment. This department has been

14


made responsible for decisions on the modalities of disinvestment, includingrestructuring.

The various reform measures initiated by the government after 1991 are beingdiscussed below in short.

• It was decided to review the portfolio of public sector investments with a view offocus on strategic and essential infrastructure. This policy pronouncementprovided a forceful hint to public enterprises to review their activities with theobjective of unloading non-core and peripheral functions. It was expected thatthe follow up of this measure would result in making public enterprises lean andmean. It would bring down the transaction costs, improve the quality of controland add to the efficiency of the public enterprise system. The public enterpriseportfolio has not suffered any set back as the various governments in powerhave lacked willingness to divest themselves of certain public enterprises.However, public enterprises have indirectly benefited from this policy measure. Alarge number of public enterprises have been practicing cold privatisation. Theyare divesting themselves of unimportant activities such as maintenance of a fleetof vehicles, contracting out canteens, etc.

• A large number of public enterprises had become sick at the beginning of the1990s. The government, therefore decided to use the BIFR route, whichprovided a fair opportunity to public enterprises to evolve suitable revivalpackages and implement them or else wind up with a social safety net. Eachenterprise was directed to formulate its own social safety net comprisingvoluntary retirement, and retaining and redeployment schemes for workers. Thegovernment made an announcement to set up the National Renewal Fund(NRF), the finances for which had to be gathered from global agencies, whilepart of the proceeds were to come from disinvestments. The governmentdecided to discontinue the NRF in its present form and place the funds requiredfor retraining or rehabilitation of employees who had available VRS under theDepartment of Public Enterprises (DPE). In the budget 2000-01, the governmentdecided 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 entirereceipts from disinvestment and privatisation will be used for meetingexpenditure in social sectors, restructuring of PEs and retiring public debt.

• The constant increase in social sector spending and the move to curtail fiscaldeficits did not leave much scope for public enterprise to depend on thegovernment for funding. The government permitted public enterprises to accessinternational capital markets and make forays into the Indian capital market. Thepartial disinvestment in public enterprises was introduced. Under the newdispensation, public enterprises are reducing their dependence on governmentfunding. Instead of assistance and budgetary support they are now approachingnational and international capital markets. The infusion of government equity anddebt add up to 4 per cent of the total investments in public enterprises as opposedto about 15 per cent earlier. The internal resources and the extra budgetarysources now fund about 70 per cent of the annual funding needs. For workingcapital support, public enterprises are reducing their dependence on the medium-term loans from the government and approaching commercial banks and the All-India Development banks. Now more and more public enterprises are gettinglisted on stock exchanges. The government’s new strategy of disinvestmentcentres around identifying strategic buyers who could eventually take over theownership and control of public enterprises.

• For the introduction of the state-of-the-art technology, it was decided that publicenterprises would be given a free hand and the funds for such upgradation would

15


Performance

come from the disinvestment. To become global giants, it is necessary that publicenterprises acquire new technologies and brands. One of the ways to keep up-to-date with technology is to promote tie-ups and joint ventures with thetechnology leaders. BHEL has been trying to have such an agreement withleading technology firms concerning its various products.

• Strengthening the institution of the Governing Boards was necessary in order toprofessionalise public enterprises and make them effective business entities. Itwas decided that the number of government nominees was not to exceed two.More room was made for the representation of professionals, who wereexcepted to provide sound business advice. The representation of differentinterest groups also received attention and the worker’s representation on theBoards was accepted in principle. Despite the government’s announcement of itsbeset intention of according the rightful place to the governing boards. Theseveral positions of the functional directors have remained awfully short. Theboards in public enterprises have yet to provide any evidence that they realise theimportance of corporate governance. No public enterprise board has presentedso far an evaluation of its functioning by a third agency.

• In 1997-98, the government announced several initiates and reform measures tocontinue the process of changing public enterprise policy. In order to preparegiant public enterprises for global competition and enable them to assume the roleof Indian multinationals, the government identified 9 enterprises as “navratnas”.

Name of the Navratna PSUs:

1. Bharat Heavy Electricals Ltd.

2. Bharat Petroleum Corporation Ltd.

3. Gas Authority of India Ltd.

4. Hindustan Petroleum Corporation Ltd.

5. Indian Oil Corporation Ltd.

6. Mahanagar Telephone Nigam Ltd.

7. National Thermal Power Corporation Ltd.

8. Oil & Natural Gas Corporation Ltd.

9. Steel Authority of India Ltd.

Later the list of navratnas was extended from 9 to 11 to accommodate thefollowing 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. Thegrouping of navratnas and miniratnas was based on their record with regard toconstant profitability and size of capital. The rationale behind the identification ofthese enterprises as navratnas and miniratnas was to increase their economic andoperational autonomy is proportion to their financial and commercial success, as alsoto provide them special leverage to face competition in Indian and global markets byfreeing them from bureaucratic and procedural hurdles.

The government appointed the Vittal committee to examine the guidelines issued topublic enterprises from time to time. The profit-making public enterprises had todeclare 30 per cent of the net profits as dividends as opposed to the earlier practiceof capitalising profits. The government decided to prepare rehabilitation packages forsick public enterprises to give them a change of revival.

16


The government in its budget used the word “privatisation” for the first time in the1990s. The government went all out to show its commitment to privatise publicenterprises and initiated the process of evolving a competition policy. It exhortedpublic enterprises to be competitive. While accepting the Mohan committee report anwage revision in public enterprises, the government left it to each and every publicenterprise to examine its paying capacity to meet the burden arising out of itsimplementation.

The government emphasised the need for widening and deepening the concept ofMemorandum of Understanding (MOU). It wanted the contracts to be negotiatedwell in advance and subsequent delegation and decentralisation of powers within theenterprise. It advocated sincere involvement of public enterprise in the formulationand implementation of MOU to thwart unnecessary public criticism on the count ofpublic accountability, conferment of greater autonomy to these enterprises graduallyover a period of time with regard to matters concerning capital expenditure,mobilisation of funds, formulation of incentive schemes, joint ventures, etc. Though, alarge number of public enterprises have been awarded an ‘A’ grade subsequent to thefulfillment of targets set out in MOUs, the total factor productivity has not registeredany 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 countryneeded various improvements in the field of infrastructure, social sector, economicdevelopment etc. after Independence. The public sector was conceived with thisbasic principle. There has been a constant increase in the number of CPEs. It hasincreased from 5 in 1951 to 240 in 2002. The Government also has changed its policyalong with the growth of PEs to decrease the dependence of PEs and state funds andto increase the performance of these enterprises. Central Public Enterprises aregrouped in Enterprises Under Construction, Manufacturing enterprises andEnterprises 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, publicdeposits, bonds and foreign finance.

17


Performance

There has been a content increase in investment of CPEs. The bulk of thisinvestment (60.8%) is in producing and selling goods. The investment pattern ofdifferent groups showed that the thrust was to create infrastructure of power,transport and electricity. The Central Government has been the major contributor ininvestment of CPEs. However, long-term funding of PEs shows that theirdependence on government funding is decreasing gradually. Public enterprises hasmanaged to increase their internal resources but it is still small. Financial performanceof PEs have shown some healthy signs like – increase in fixed assets ratio, decreasein debt equity ratio, consistent growth in turnover/operating income. On the otherhand, there is scope for improvement in the area of dividend declared and exportearnings, both of which have been decreasing.

Public sector has played a major role of social developer with employment of about70% in comparison of private sector. However, the contribution of public sector indomestic savings and GDP has been very small. These has thus always been anegative saving – investment gap in the public sector.

Public sector reforms were initiated in India in 1991. The important reform measuresare the divestment programme, setting of BIFR for sick units, withdrawal ofbudgetary support in phases, portfolio changes, access to open market, MoU system,declaration of navratnas and mininavratnas, strategic alliances and strengthening ofgoverning boards. PEs have responded to varying degrees to various reformmeasures.

Activity

‘Public sector has played the role of a social developer’. Justify

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1. What was the need and objectives for setting of the public sector afterIndependence?

2. Differentiate between equity and loans provided by the Government.

3. Mention four improvement trends of investment in Public Enterprises.

4. Do you think that there has been a change in the long-term funding pattern inPEs? How?

5. Why is generation of internal resources necessary for PEs? Discuss.


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.

1


PerformanceUNIT 11 APPRAISAL OF PUBLIC

ENTERPRISE PERFORMANCE-II

Objectives


• 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 Role of State Level Public Enterprises

11.2 Growth of State Level Public Enterprises

11.3 Investment in SLPEs

11.4 Financial Performance of SLPEs

11.5 Performance of State Electricity Boards

11.6 Performance of Transport Sector

11.7 Performance Evaluation of the Postal System

11.8 Performance of Ports

11.9 Performance Evaluation of Railways

11.10 Summary



11.1 ROLE OF STATE LEVEL PUBLIC ENTERPRISES

Public Enterprise System in our mixed economic system has been considered as anengine of development. It has a pivotal role to play in the attainment of the nationalobjectives and the establishment of a socialistic pattern of society .The pre-eminentrole for the Public Enterprises was assigned in the Industrial Policy Resolution, firstenunciated in the year 1948. Eight years later, in 1956, a comprehensive policydocument on Industrial Policy was adopted. Till date, inspite of certain changes inaccent, the Industrial Policy Resolution of 1956, continues to be the cornerstone ofthe nation’s industrial policy. Unlike in the west, where the public sector hasdeveloped in phases, the public enterprises in India, particularly the CentralGovernment 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 forthe public sector. This policy also envisaged a “commanding role” for the state incertain 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 startingthese major enterprises. In fact, most of the Central Public Enterprises were createdwith 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 toindicate its preference between the public and private sectors. Quite interestingly, inspite of differing political views of the various State Governments, one does not seethe growth or reduction of the public enterprises as a direct result of politicalphilosophy.

2

Public Enterprise:Performance and EvaluationNeed for SLPEs

As already indicated, the Industrial Policy Resolution of 1956 continues to form thebasis of public sector policy of the Government of India. It envisages them to play therole of nation building and the establishment of an egalitarian society. This ideologicalcommitment can be realised more through the role of the State Level PublicEnterprises (SLPEs). Public enterprises are the tested instruments for the socio-economic development of any region. Balanced Regional Development has been thecore consideration in the Industrial Policy Resolutions of the Government of India.This statement of Balanced Regional Development by the centre is a sort of apaternalistic overlord approach to issues and an effort of coordination in order toarrive at uniformity in development devoid of pragmatism. It is actually the RegionalDevelopment, balanced or not, that is the main concern of every state government,which is committed to its region and naturally interested in its development. Anoverview approach of Balanced Regional Development at best can be used only as apolitical lever to acquire control over the regions and influence the voters.

All regions cannot develop equally, nor can the rate of development of the alreadydeveloped regions be suppressed. All that can be done is to speed up the rate ofdevelopment of the underdeveloped regions so as to raise them to the socio-economicstandards conceived as a necessary minimum. The relationship between PublicEnterprises and the regional development is that the former is an important agency ofplanned development and the latter is an important aspect of such development.Identifying the backward region means, infact identifying the locations for publicinvestment, for no entrepreneur would willingly volunteer to invest in those regions. Insuch cases, it becomes inevitable for the Government to step in solely or throughmajor participation by the Government in conjunction with private enterprises. Thelatter, thus, has a restricted or no opportunity in those fields and the prospect ofregional development, depends on the floating of Public Enterprises. Since theeconomic activities, so nearly reserved for the state, are basic in stimulating regionaldevelopment, SLPEs become pivotal as an agency.

The state as a region for development assessment becomes relevant because of twomain reasons. Firstly, statistical evidence, to the extent available is more reliablyavailable in terms of states. Secondly, the states happen to be importantAdministrative Units for effectuating several programmes of development. Wideregions within state, whose level of economic prosperity is perceptibly poorer thanelse where in the same state, have the same significance of a problem as theunderdeveloped states vis-à-vis the country.

In terms of economic development through industrialization, contribution to the statecould 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 musthave had a hey-day or vice-versa. Industrialization of any region depends on theentrepreneurial bent of mind of the people of that region, risk taking capacity of thepeople and availability and easy accessibility to either raw material or theinfrastructure for starting industries. The cultural background of the region also hasan influence on this aspect. If outside capital is invited, there is always anapprehension that the profits may be taken away by those entrepreneurs for their useelsewhere, while at the same time, the very industrial activity in the state by anyonewill produce certain other advantages like employment opportunities a number ofancillaries coming up and the whole thing accelerating more and more economicdevelopment. But for some reason if outside private investment is not encouragedand if local private investment is not forthcoming, then it becomes, the responsibilityof the state Government to step into the field.

It is also possible that the private entrepreneur may opt for a location of his choiceand not necessarily a place which is backward and needs to be developed. Undersuch circumstances, it becomes the responsibility of the Government to exercise

3


Performance

some sort of regulatory control, so that the industry is steered to a specified location.Alternately, the government may adopt a more positive stance and offer variousincentives to encourage industrialization at places, so earmarked. The government,therefore, has to play its part in different ways through different instruments atdifferent times. Regulation of Industries Act 1951 and licensing procedures are toolsfor this purpose. While the licensing issuing authority is the central government,processing of the applications is done by the state government. The stategovernment’s opinion in this respect, therefore, carries considerable weight.However, the extent to which the state may succeed depends on its politicalrelationship with the central government and the encouragement and guidelines givenby the central government with regard to the state. But the very basis for all these isthe Industrial Policy Resolution of 1948 which was revised and restated in 1956 andthe subsequent modified statements.

The state government has a set of corporate reasons for entering into andencouraging Public Enterprises, some initiated by the Central Government constitutingthe 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, stateand 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 andbridges, the provision of electricity for the industry and for irrigation foragriculture;

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 societyin general in the form of adequate efficient and economic road transport;

e) Setting up of manufacturing corporations to take over and revive sick industrialunits;

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 ofSLPEs.

Policy Determinants in SLPEs

The first link in the development of SLPEs is to examine whether State Governmenthas a clearly defined policy. Unlike private enterprises the establishment of SLPEs isnot a market phenomenon but the outcome of deliberate policy measures. Thisnecessarily implies that the State Government has enunciated clear policies on SLPEsdefining the objectives to be fulfilled. The objectives can be both commercial andsocial. But a policy approach facilitates the definition of objectives in order todemarcate the areas for private investment and public. Further, distinction has also tobe made between areas for investment by central PEs and those reserved forSLPEs. A policy is not a once-for-all document but subject to regular scrutiny andchanges.

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 majoradvantage over the centre in being closer to the society. This advantage enables aquick recognition of the problems likely to come up and also the ability to tackle theproblems more effectively. A policy approach can, therefore, be divided into short-term policies and long term policies. Long term policies identify the means to achieve

4

Public Enterprise:Performance and Evaluationthis vision. The relationship between the two time policies is symbolic, whereflexibility does not mean generality. Clearly defined policies enumerate the objectivesof SLPEs, policies and objectives are, however, not the same thing. Policy is broad-based and general but not ambiguous while objectives are specific and clear .Thedifference between policy and objectives has often led to confusion in assessingSLPEs.

While formulating the policies and objectives of PEs the following considerations arerelevant:

a) They should have a demonstrable link with the socio-economic mission whichlead to the creation of the enterprise and / or other officially declared policies ofthe Government;

b) They should be laid down clearly and communicated to the enterprise by theGovernment in writing and not unofficially or informally;

c) They should be compatible with the basic socio-economic mission of theenterprise; and

d) If the basic mission of the enterprise is predominantly social and is likely to makethe enterprise financially unviable, this should be specifically recognised andprovided for and the trade-off between social benefits and financial inviabilitydelimited.

Objectives of SLPEs

The Central Public Enterprises have been set up in pursuance of an explicit publicpolicy (Industrial Policy Resolution, 1956) to occupy the commanding heights of theeconomy, to fill the gaps in areas critical for the development of the country andprovide wherewithal to finance its planned economic growth. The SPLEs owe theirexistence not so much to a coherent policy as to historical factors and pragmaticadjustments to demands of the environment. A large number of the SLPEs came intobeing on account of historical necessity, in that, the erstwhile princely states wereowning them prior to the formation of the present states of the Indian Union. Some ofthe SLPEs were born on account of the decisions of the State Governments to windup their departmental economic activities and instead organise them in the form ofPublic Enterprises so as to increase their commercial competence. A large number ofthese enterprises were set up as public organisation to take advantage of the fundingfrom the financial institutions and development banks. These institutions as a policymeasure do not extend financial support to the government departments. ManySLPEs were setup in pursuance of the enactment’s legislated by the centralgovernment to make the states of the union partners in propelling such activities, onthe one hand, and evolving a uniform framework for the control and implementationof policies with respect to such sectors, on the other. Examples are AgroDevelopment Corporation and Fisheries Corporation. Another type of SLPEs in thiscategory is the Welfare Corporations, which have come up almost in all the statesfollowing the all-India pattern. Finally, a considerable chunk of the SLPEs have comeinto being on account of the decisions of the various state governments to assume theentrepreneurial responsibilities to commercially exploit certain local resources or toseed the industrial growth in some backward areas. Control of inflation, equitabledistribution of scarce commodities, mopping up of monopoly profits, creation of jobopportunities, exploitation of local resources extension of balancing facilities andintermediate inputs and raising of revenues have weighed heavily in favour of thisentrepreneurial role. To sum up, there have been some very specific reasonsresponsible for establishing the SLPEs. The performance of these enterprises couldbe judged in terms of indicators having appropriate linkages with their objectives.

5


Performance

Thus, SLPEs, except the Electricity Boards are smaller companies set up for entirelydifferent purposes. The growth of the SLPEs is the result of a mix of socio-ecomonicand 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 fundsthrough exploitation of these resources. This has led to the formation ofcorporation in the areas like forests, minerals and fisheries;

c) To intervene in some sectors to ensure availability of inputs and remunerativeprices for products in the agricultural sector;

d) To provide credit at reasonable rate without exploitative elements, which doesnot 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 projectswere conceived. This was done partly on the insistence of the financialinstitutions which were willing to loan further sums to a newly formed subsidiarycompany rather than to the existing loss making corporation;

i) To satisfy the political pressure groups and lobbies;

j) To decentralise some of the corporate activities. For example, some StateGovernments have further broken up the Industrial development Corporationsinto Regional development Corporations;

k) To ensure administrative convenience as corporate form provides flexibility inmanagement 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 widelydiffering nature lack of commonality in objectives and disparate origins are the majorcontributory factors to the complexity of the task. Some efforts have been made toclassify the enterprises. The State Bureau of Public Enterprises in Andhra Pradesh.Karnataka, Rajasthan, Kerala and Tamil Nadu, classify their enterprises in variouscategories. The classification of the SLPEs in Andhra Pradesh has undergonechanges from departmental basis to the nature of activity basis. In the case ofKarnataka and Tamil Nadu, the classification of the SLPEs has been attempted onthe central pattern wherein the enterprises have been divided into two majorcategories:

i) Enterprises producing goods and services, and

ii) 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 activityclassification. The academic research on SLPEs has adopted the classificationfollowed by the Central Bureau of Public Enterprises.

Any effort to classify the SLPEs should have in the backdrop, the motive orobjectives for making such an attempt. The purposes for classifying the SLPEs mayrange from suggesting the rate of return and the extent of subsidy to understandingtheir organisation and evolving of appropriate control structures. In each case theapproach to the classification matrix will be different. As far as the rate of return isconcerned, it seems appropriate to classify the SLPEs in the five-fold divisions. TheStanding Group of Management of Public Enterprises in the state, which submitted itsReport in 1978, classified SLPEs into thirteen groups.

6

Public Enterprise:Performance and EvaluationAs state above, it is, however, possible to identify, for the sake of simplicity, theSLPEs into five groups:

1. Manufacturing

2. Trading and marketing

3. Financial

4. Promotional

5. Welfare

The merits of the proposed classification are many. Firstly, it keeps the basic purposeof the setting up the SLPEs in the various states at the centre of the classificationsystem. Secondly, it presents a basis for comparing the inter-state performance of theSLPEs because of its broad based nature. Thirdly, it is very simple to understand andoperate. Finally, it takes fully into consideration, the “Public” and “enterprises”elements of the SLPEs by dividing them into appropriate categories in terms of theprecedence of one element over the other. On priority considerations one couldexpect that as we go down the classification hierarchy, the component of commercialobjectives keeps reducing while the social objectives keeps increasing.

Broadly the classification suggest that the enterprises involved in manufacture ofproducts come under manufacturing sector .The enterprises like HandloomDevelopment Corporations and Handicrafts Corporations can be brought undertrading and marketing enterprises. The enterprises like Industrial DevelopmentCorporations and State Finance Corporations can be classified as financinginstitutions whereas enterprises such as Small Scale Industries DevelopmentCorporations, Mineral Development Corporations and Fisheries DevelopmentCorporations can be classified as promotional enterprises. The welfare enterprisesare those which have as their mission the task of improving the welfare of sometargeted group of people or area. Backward Classes Corporations and ScheduledCastes Corporations come under this category.

Typology

The SLPEs, for the purpose of studying their typology, could be divided into variousforms 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 Actand Cooperative Societies Act and Joint Sector Companies. The company form oforganisation 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 theCompanies Act. Approximately, 15 per cent of the enterprises are statutorycorporations and the rest cooperatives and other societies. The departmentalenterprises 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. Thestatutory corporations and boards constituted 10 per cent of the total number ofSLPEs. The departmental enterprises were reduced to 3 per cent of the total numberof SLPEs. This shows that the State Governments, in principle recognised the needfor greater autonomy to the SLPEs. The elimination of the departmental enterprisesin Orissa and Bihar illustrates this case.

The tendency to register the SLPEs under the cooperative societies act is gainingmomentum in the agriculture related industries and welfare sector. The reason is nottoo far to seek. The SLPEs under this category besides discharging an economicactivity, have to enlist the people’s cooperation in fulfilling their objectives.

The sectorial pattern of the State Level Public Enterprises in India reveals that theseenterprises are engaged in variety of activities ranging from industrial developmentand financial promotion, trading and marketing, contract and construction services,

7


Performance

consumer goods, engineering goods, development of backward regions and weakersections of the society to agro-industries, minerals and metals, development of smallindustries, and tourism. As on March 31,1986 the top five sectors in terms of numberof the SLPEs, barring the other enterprises, were agro-based industries, engineeringindustry, trading and marketing, industrial development and financial promotion andconsumer goods. These categories of enterprises had a lion’s share in the investmentof all the SLPEs in the country and represented nearly sixty per cent of the totalinvestment in the SLPEs.

Coverage and features of SLPEs

There are some important features of the SLPEs in the country with a little or nodifference between one state and the other as considered below:

i) Novelty of State in Business: Public utilities in the field of electricity and roadtransport are the first state enterprises in almost all the states. State governmentshave entered into business more or less for the first time in a number of newfields, e.g., ceramic, alcohol manufacturing, handicraft and life insurance. Otherexamples are the manufacture of sugar, chemicals, fertilizers and minerals. Thus,all these are activities which are new to the state government and to theiradministration.

ii) Size of the Enterprises: State Electricity Boards and State Road TransportCorporations are large in terms of their area of operation, investment and numberof people involved. There are also few major SLPEs which are comparativelylittle smaller than Electricity Boards and Road Transport Corporations in size,investment etc. belonging to other areas of operation like coal, minerals, cementetc.

iii) Period of Establishment: A large number of SLPEs have been established overa short period. This, combined with the novelty of the enterprises, the nature andextent of problems of organisation and management of SLPEs have attracted theattention of the state government and legislatures during the last one and halfdecades. Barring public utilities and a few other major enterprises (for historicalreasons), most of them were established during the sixties. In the seventies theywere multiplied. Perhaps, this is also a special feature of PEs organised by theCentral Government.

iv) Interface with the Government: Because of closer relationship with the stateadministration the SLPEs and their management’s are bound to be influenced bythe Government in ways different from the rest of industrial and commercialactivities of the country. They are influenced directly by the policy of the stategovernment and sometimes also by the policy of the central government. Besidesthe formal Industrial Policy, legislature enactment’s and the Resolutions of thegovernment of India the state government influences directly the operationalpolicy of these enterprises in such matters as appointments, pricing, location,expansion, distribution and helping certain sections of the society. Thus, inimplementing the government policy certain social and political implications areinvolved.

v) Financing Pattern of Enterprises: SLPEs get finances including workingcapital not only from the state government but also from different sources in theequity capital as given below:

i) they have finances of central government and state government in a fewenterprises;

ii) they have finances from public with majority state government capital;

iii) they have state government investment and other PE’s investment; and

iv) there are few SLPEs where there is more than one state’s investmentinvolved. Loan capital is also obtained by these enterprises from stategovernment public and various other institutions.

8

Public Enterprise:Performance and Evaluationvi) Preference for Autonomous Corporations: One of the interesting features of

SLPEs is that in quite a number of cases activities performed by GovernmentDepartments were entrusted to new autonomous corporations. This was done inorder to take advantage of the financial facilities which would not have beenotherwise available as, financial institutions do not lend to departmentalenterprises. Therefore, quite a few departmental activities were transferred toautonomous SLPEs. This is a special feature of SLPEs. Unlike the CentralGovernment enterprises, the financing of SLPEs is done to a large extent, both interms of equity and loan through institution funds.

vii) Bureaucratic Dominance: For management of their enterprises, stategovernments have to depend largely on their own civil service cadres particularlyat the middle and higher levels. The increase in the number of SLPEs, theexpansion of their activities, and paucity of managers increased this dependence.However, as there is no clear and well-defined policy for the development ofmanagerial cadres, most of the SLPEs have gone outside the Government fortechnical personnel at different levels. It may be mentioned that for the middleand lower level posts, most of the staff is recruited by the enterprisesthemselves. The top levels are manned mostly by deputationsists resulting inbureaucratic dominance. In respect of the middle and lower level personnel, mostof the SLPEs adopted the pay structures of the state Governments.

viii) Political Leverage: Appointment of ministers, MPs, MLAs / MLCs otherpolitical party leaders as chairmen or members of the Boards of theseenterprises, 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 defeatedpoliticians.

ix) Development of Backward Regions: An important features of SLPEs is thatsome of them are intended for the development of backward regions. The StateGovernment of course, is obliged to sponsor industrial enterprises with a view topromoting regional development in the underdeveloped areas possessing too littleinitiative and capital. Specifically, Industrial Development Corporations, StateFinancial Corporations, Small Scale Industries Development Corporations, RuralDevelopment Corporations and Land Development Corporations are playing animportant role in this regard.

x) Industrial and Infrastructural Development: Rapid industrialization andcreation of infrastructure all over the state is yet another major objective of theState Governments. To achieve this, State Governments have establisheddifferent corporations. Industrial Infra-structure Corporations, Housing BoardsConstruction Corporations, Electricity Boards, Transport Corporations andIrrigation Development Corporations, are intended to create the necessaryinfrastructure. State Industrial Corporations, Small Scale Industrial DevelopmentCorporations, State Financial Corporations, Khadi and Village Industries Boardsplay an important role in industrialization of state which is an important feature ofSLPEs.

xi) Utilisation of Local Resources and Distributions of Essential Commodities:An important feature of the SLPEs is that they have been created forexploitation and utilisation of the locally available resources such as minerals,water, forest wealth hides and skins, fisheries, diary etc. Some states haveconsidered that distribution of essential commodities is the state’s primeobjective. Therefore, SLPEs have been established with this purpose.

xii) Employment as an Objective: Creation of more employment opportunities byexpanding and increasing economic activities in the state is one of the majorobjectives of the Five Year Plans of the State Governments. The best strategy to

9


Performance

create more employment is through SLPEs. Therefore, a special feature isprovision of employment to various sections of the society, through variousSLPEs 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 developmentof the weaker sections of the society is one of the major policies of theGovernment. In order to achieve it, State Governments have stated a variety ofSLPEs to help backward classes, scheduled castes, scheduled tribes, women andphysically handicapped.

Many of SLPEs are small in size. The preference is for autonomous corporations.The SLPEs conform closely to Government policies. They cater to variousdevelopment requirements of the state in so many ways. It is true that they areexpanding very rapidly in terms of investment and size in all the states of the country.

11.2 GROWTH OF STATE LEVEL PUBLICENTERPRISES

Public enterprises in India function at the three levels of administration: Central, Stateand Municipal (or local bodies). Even though have an extensive survey and researchhas been conducted on the Central Public Enterprises, the enterprises pertaining tothe other two categories have not been systematically examined. The Institute ofPublic Enterprise (IPE) at the instance of the Planning Commission is engaged in thetask of developing the extensive data-base on the SLPEs.

Development through SLPEs has been adopted as a policy by the State Governmentsin the country. Though no State government officially stated the aims and objects ofthis philosophy, it can be inferred that one important object is to attract funds from thefinancial institutions and banks to enable the states to undertake activities on a longscale. Another aim is to cut the red tape associated with Government administrationand help expedite service and works. Yet another reason may be to keep the growthof these corporations on the lines of Central Enterprises.

The organisations and forms of SLPEs broadly fall under the following categories:

i) Department Enterprises, like A.P. Government Text Book Press, PunjabRoadways and Government Silk Weaving Factory in Karnataka.

ii) Government companies like the Bihar Mica Syndicate Ltd., Kerala Tourist andHandicrafts Corporation Ltd. and Haryana Dairy Development Corporation Ltd.

iii) Public Corporations and Boards like Rajasthan State Road TransportCorporation, A.P. State Financial. Corporation and Orissa State ElectricityBoard.

iv) Companies registered under Cooperative Societies Act, like Assam StateCooperative Marketing and Consumers Federation Ltd., A.P. Women’sCooperative Finance Corporation Ltd., Milk Producers Cooperative Ltd. inGujarat.

v) Joint ventures like Gujarat state Fertilizers Company Ltd. and Gujarat NarmadaValley Fertilizer Company.

A large number of enterprises have been organised in the form of GovernmentCompanies followed by statutory corporations in almost all the states: This shows theclear-cut preference for Government companies and statutory corporations fororganising SLPEs.

10

Public Enterprise:Performance and EvaluationThere has been a massive growth in the number of SLPEs. From a mere 23 in theFirst Plan period, the number of SLPEs shot up to 1993 during 1966-67. The numberof SLPEs rose to 594 by the end of the Fifth Plan period. During the Sixth Planperiod, the number of SLPEs increased to 777. During the Seventh Plan Period, thenumber of SLPEs further went up to 802. In terms of numbers there areapproximately threefold of the Central Public Enterprises. The major expansion ofCentral Public Enterprises took place during 1955-65. The growth was most markedin the SLPEs during 1970-85. The Public Enterprise system substantially expandedduring 1970-85 in Andhra Pradesh, Assam, Gujarat, Haryana, Himachal Pradesh,Kerala, Maharashtra, Orissa, Punjab, Bihar, Uttar Pradesh and Rajasthan. In manyother states, viz. Assam, Nagaland, Mizoram, Manipur, Tripura and ArunachalPradesh, the growth of SLPEs has been a more recent phenomenon. The StateGovernments have set up the SLPEs as a policy with the deliberate intention to usethem, 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 severeburden of effective management. This is visible from Table 11.1 and 11.2.

Table 11.1 : State Level Public Enterprises (1990)

Sl. State Registered Statutory TotalNo. Companies Bodies

1. Assam 25 6 31

2. Bihar 39 18 57

3. Manipur 6 - 6

4. Meghalaya 8 2 10

5. Nagaland 6 - 6

6. Orissa 45 5 50

7. Sikkim 1 - 1

8. Tripura 7 - 7

9. West Bengal 40 11 51

10. Atunachal Pradesh 3 - 3

11. Mizoram 1 - 1

12. Harayana 20 4 24

13. Himachal Pradesh 14 6 20

14. Jammu & Kahsmir 14 4 18

15. Punjab 45 11 56

16. Rajasthan 13 8 21

17. Uttar Pradesh 83 8 91

18. Chandigarh 10 1 11

19. Delhi 5 1 6

20. Andhra Pradesh 42 4 46

21. Karnataka 46 6 52

22. Kerala 71 3 74

23. Tamil Nadu 68 9 77

24. Pondicherry 3 - 3

25. Gujarat 37 11 48

26. Madhya Pradesh 29 8 37

27. Maharashtra 45 11 56

28. Goa, Daman & Diu 8 - 8

Total 733 137 870

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Performance

Table 11.2 : Number of SLPEs in 1990-91 and 2000-01

State No. of SLPEs 1990-91 2000-01

Andhra Pradesh 46 128

Assam 43 49

Bihar 47 54

Gujarat 48 45

Haryana 21 21

Himachal Pradesh 17 20

Jammu and Kashmir 14 85

Karnataka 58 111

Kerala 92 26

Madhya Pradesh 34 65

Maharashtra 54 14

Manipur 08 72

Orissa 33 53

Punjab 36 24

Rajasthan 39 59

Tamil Nadu 45 41

Uttar Pradesh 83 82

West Bengal 51 54

Others 26 N/A

Total 802 1003

So far as the sector-wise distribution of the SLPEs is concerned, the Report of theSeventh Finance Commission (1978) had made the estimates of investments of thestate governments in their enterprises separately for 3 categories, namely, financialinstitutions, promotional enterprises and others. This was also accepted by thesubsequent Finance Commissions, namely, Report of the Eighth Finance Commission(1984) and the Report of the Ninth Finance Commission (1989). The first includes theState Financial Corporations set up under the State Financial Corporation Act, 1951as well as enterprises held eligible for refinance facilities by the IndustrialDevelopment Bank of India. The promotional category includes enterprises which areengaged mainly in promoting the development and other industries of all regionsthrough providing infrastructural facilities, financial and managerial assistance,technical know-how etc. as well as through works of development for backwardareas or other weaker sections of the population. This category, therefore, includesSmall Industries Development Corporations, Industrial Development Corporations,Handicrafts and Handloom Development Corporations, etc. A statement giving thestate-wise breakup of enterprises is given in Table 11.3. It is under the 3 categoriesas mentioned above.

12

Public Enterprise:Performance and EvaluationTable 11.3 : Break–up of State Level Public Enterprises under Three Categories(other than State Electricity Board and State Road Transport Corporations)

State Financial Promotional Commercial Total

Andhra Pradesh 4 10 38 52

Arunachal Pradesh 1 1 - 2

Assam 2 7 25 34

Bihar 4 8 26 38

Goa 1 2 4 7

Gujarat 3 8 28 39

Haryana 5 10 9 24

Himachal Pradesh 1 6 8 15

Jammu and Kashmir 3 5 10 18

Karnataka 12 11 54 77

Kerala 6 12 68 86

Madhya Pradesh 5 6 22 33

Maharashtra 2 15 25 42

Manipur 2 3 3 8

Meghalaya 1 3 5 9

Mijoram 1 1 2 4

Nagaland 1 3 7 11

Orissa 3 8 65 76

Punjab 2 11 14 27

Rajasthan 4 5 26 35

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Performance

Sikkim 2 2 6 10

Tamil Nadu 4 9 40 53

Tripura 2 3 38 43

Uttar Pradesh 5 24 32 61

West Bengal 5 12 43 58

Total 78 186 563 827

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 theSLPEs Working Group, Institute of Public Enterprises, Hyderabad shown inTable 11.4. It shows that manufacturing and promotional enterprises dominate thescene followed by trading welfare and financial enterprises. This indicates theemphasis the various state governments have placed on the entrepreneurial andpromotional role of Public Enterprises. Kerala, West Bengal, Karnataka, Bihar,Assam, U.P., Gujarat, Tamil Nadu and Punjab had a maximum concentration of theSLPEs in the manufacturing group. Andhra Pradesh, Maharashtra, Manipur, Orissaand 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 15 07 02 17 05 46

Assam 19 02 02 14 06 43

Bihar 20 06 04 14 03 47

Goa 04 - - 03 01 08

Gujarat 17 06 04 16 05 48

Haryana 07 01 02 08 03 21

Himachal Pradesh 04 03 01 09 - 17

Jammu and Kashmir 05 03 02 04 - 14

Karnataka 23 12 02 16 05 58

Kerala 53 08 03 17 11 92

14

Public Enterprise:Performance and EvaluationMadhya Pradesh 13 06 04 10 01 34

Maharashtra 12 05 03 23 11 54

Manipur 03 01 01 02 01 08

Mijoram - - 01 - - 01

Orissa 10 06 03 13 01 33

Punjab 15 03 03 13 02 36

Rajasthan 14 03 02 18 02 39

Tamil Nadu 18 03 04 15 05 45

Tripura - 02 02 14 - 18

Uttar Pradesh 34 07 04 18 20 83

West Bengal 25 07 02 16 - 51

Meghalaya 03 02 01 02 - 09

Total 317 94 53 254 82 802

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 thenumber of State Level Public Enterprises in India. Thus, it goes without saying thatthe SLPEs occupy a place of importance in the public enterprise in the country. Theyhave become a vital instrument of public policy in spurring the overall economicdevelopment in all the states of the Indian Union. As a result, there has been aspectacular growth in the investment in the State Level Public Enterprises since thefifties.

According to the ministry of Disinvestment, estimated total investment in State LevelPublic Enterprises was of the order of Rs 1,62,063 crores as on 31st March 2000. Sixstates, viz., Gujarat, Maharashtra, Karnataka, Uttar Pradesh, West Bengal andPunjab 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 toRs 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 No. of SLPEs Estimated TotalInvestment

15


Performance

1. Andhra Pradesh 128 48,794

2. Assam 42 3,732

3. Bihar 54 8,169

4. Delhi 15 10,964

5. Gujarat 50 25,758

6. Haryana 45 443

7. Himachal Pradesh 21 4,731

8. Jammu and Kashmir 20 1,948

9. Karnataka 85 27,813

10. Kerala 111 16,429

11. Madhya Pradesh 26 7,923

12. Maharashtra 66 20,855

13. Manipur 14 81

14. Orissa 72 7,297

15. Punjab 53 13,384

16. Rajasthan 28 11,576

17. Tamil Nadu 59 6,192

18. Uttar Pradesh 41 17,773

19. West Bengal 82 18,183

Total 1,012 2,52,045

Source: Ministry of Disinvestment, 2003

The number of public sector undertakings run by the states has grown rapidly overthe years. They vary widely in regard to size, activity and financial performance. Theinvestments in SLPEs have been growing at a rate above 20 per cent during the pastdecade. The share capital investment of states in as many as 827 undertakings (otherthan State Electricity Boards and State Road Transport Corporations) is estimated atRs. 5,164 crores at the end of 1988-89. During a period of twelve years the numberof SLPEs has increased from 437 in 1976-77 to 716 in 1982-83 and finally to 837 in1988-89, recording a growth of 66 per cent. The investment in these enterprises hasgrown at a higher rate and the paid up capital alone has gone up from Rs. 605 croresto Rs. 5,164 crores. The major states which have recorded a sudden massive growthin investments are Bihar (Rs. 203 crores), Assam (Rs. 60.51 crores), Gujarat(Rs. 209.25 crores), Kerala (Rs. 287 crores), Maharashtra (Rs. 386 crores), UttarPradesh (Rs. 1,790 crores) and West Bengal (Rs. 182 crores). The data on theSLPEs also indicate that majority of the SLPEs are involved in the manufacturing ofindustrial and agricultural products. As such many of them compete with the privatesector companies in areas such as electronics, chemicals. Fertilizers, electrical andmechanical equipments and agricultural products.

The institute of Public Enterprise (IPE), at the instance of the Planning commission, isengaged in the task of developing an extensive database on the SLPEs. As on March31, 1986 the database includes information of the various aspects of functioning of636 SLPEs in 24 states of the country.

The investment in enterprises other than the State Electricity Boards and the StateRoad Transport corporations as on March 31, 1977 was on the order of Rs. 2,860crores. The total investment rose to Rs. 10,000 crores as on March 31, 1986 while

16

Public Enterprise:Performance and Evaluationinclusive of the State Electricity Boards and the State Road Transport Corporations,the investment stood at Rs. 25,000 crores as on March 31, 1986. This shows that theinvestment in SLPEs other than electricity boards and road transport corporations hadincreased at an average growth rate of 39 per cent per annum during 1977-86. Theaverage rate of growth of investment in the SLPEs inclusive of these two categoriesof enterprises was 20 per cent per annum, while the average rate of growth ofinvestment for the central public enterprises during the this period was 30 per centper annum. This is shown in Table 11.6.

Table 11.6 : Investment of State Governments in State Public Enterprises(Rs. in crores)

1976-77 1980-81 1982-83 1988-89

State No. Share No. Share No. Share No. ShareCapital Capital Capital

Capital

Andhra Pradesh 28 54 41 174 42 195.4 52 313.9

Assam 24 21 25 26 25 29.2 34 60.5

Bihar 24 18 35 62 39 76.9 38 203.0

Gujarat 19 15 36 49 37 54.8 39 209.2

Haryana 13 16 16 26 20 19.2 24 77.0

Himachal Pradesh 8 6 13 26 14 30.2 15 57.7

Jammu and Kashmir 10 22 14 39 14 42.7 18 66.1

Karnataka 29 57 45 180 46 2113 77 259.4

Madhya Pradesh 12 13 25 30 29 39.3 33 318.0

Maharashtra 27 66 44 127 45 139.2 42 386.0

Manipur 2 2 6 4 6 4.6 8 5.8

Maghalaya 5 7 8 12 8 12.9 9 24.7

Kerala 51 44 71 149 71 171.5 86 286.9

Nagaland 3 6 6 5 6 5.4 11 21.3

Orissa 19 38 41 75 45 87.6 76 249.9

Punjab 22 31 41 48 45 3.2 27 178.4

Rajasthan 15 16 12 31 13 39.4 35 124.9

Sikkim 3 - - - 1 0.6 10 7.9

Tamil Nadu 35 40 62 154 68 225.0 53 292.3

Tripura 4 2 6 6 7 6.2 8 16.3

Uttar Pradesh 50 85 82 209 83 271.6 61 1790.1

West Bengal 29 37 35 72 41 71.7 58 182.2

Mizoram - - 1 - 1 0.5 4 2.3

Arunachal Pradesh - - 2 1 3 1.2 2 7.0

Goa 5 1 7 3 8 8.0 7 22.8

Total 437 674 716 837

Source: Report of the Finance Commission

Electricity Boards and the State Road Transport Corporations, the investment stoodat Rs. 25,000 crores as on March 31, 1986. This shows that the investment in SLPEs

17


Performance

other than electricity boards and roads transport corporations had increased at anaverage growth rate of 39 per cent per annum during 1977-86. The average rate ofgrowth of investment in the SLPEs inclusive of two categories was 20 per cent perannum, while the average rate of growth of investment for the central publicenterprises during this period was 30 per cent per annum.

The investment in SLPEs almost doubled over the six period under reference asshown in Table 11.7. The growth in investment was more pronounced during 1982-83, 1984-85 and 1986-87. This might have had a linkage with the expendituredimensions of the planning process in India which encourages higher expenditureimmediately after the opening years of the plan and during its terminal year. In termsof sectors, the manufacturing, trading and service and financial enterprises took thelead. The promotional and welfare enterprises have lagged behind. Table shows thesector-wise investment in the SLPEs during 1981-82 to 1986-87. It is evident thatinvestment has more than doubled in SLPEs over a span of six years. The years1984-85 being the terminal years of the Sixth Plan, was the watershed in the growthof investment.

Table 11.7 : Investment in SLPEs in Different Sectors

Sector 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

Manufacturing 1924.50 2431.38 3004.63 3620.00 4222.83 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 barringthe other enterprises were agro based industries, engineering industries, trading andmarketing, industrial development and financial promotion and consumer goods.These categories of enterprises had a lion’s 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 theSLPEs. The states in which the investment has grown about three-fold and moreduring 1987-86 include Uttar Pradesh, Orissa, Bihar, Andhra Pradesh, HimachalPradesh, Nagaland, Goa, Manipur, Tripura, Meghalaya, Pondicherry, MadhyaPradesh, Tamil Nadu and West Bengal. The states in which investment has increasedalmost two-fold and more are Punjab, Rajasthan, Mizoram, Jammu & Kashmir,Assam and Gujarat. There has not been an appreciable growth of investment inSLPEs in Haryana, Maharashtra and Kerala.

Besides direct investment by the government there has also been a huge increase inimplied subsidy to State Level Public Enterprises.

18

Public Enterprise:Performance and EvaluationImplied subsidy denotes excess of subsidy enjoyed by the PSUs out of governmentinvestment either directly or indirectly. This constitutes cash losses, fiscal benefits anda notional 15% return on the investment made by the state government in the form ofequity, 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 constitutesimplied subsidy. Thus, presence of implied subsidy means a burden on the Stateexchequer. Table 11.8 gives a detailed view implied subsidies to SLPEs.

Table 11.8 : Implied subsidies to SLPEs(Rs. in crore)

State Implied Financial/Year Implied FinancialSubsidy Subsidy Year

Bihar 99.00 (1985/6) 318.00 (1994/5)

Karnataka 175.36 (1985/6) 1339.00 (1997/8)

Kerala 100.00 (1985/6) 498.00 (1996/7)

Madhya Pradesh 165.89 (1985/6) 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 adrastic drain on state resources. The Governments have been forced to put in moremoney into running these enterprises. In six States alone, the budgetary outgo hasbeen to the tune of Rs. 1961 crore in the year 2000-01. This amount can well bespent to health and education, which will to a long way in improving the lot of thegeneral public. Table 11.9 illustrates how State resources are going into unproductiveends.

Table 11.9 : Budgetary Outgo, Grants/Subsidies, Guarantees, Waiver ofDues and Conversion of Loans into Equity

(Amount Rs. in crore)

State 1998-99 1999-2000 2000-01

Assam 155 92 117

Haryana 694 848 1206

Karnataka 1341 1717 3974

Kerala 371 269 211

Orissa 336 279 98

19


Performance

West Bengal 1797 1447 2355

Total 4694 4652 7961

Source: Ministry of disinvestment, 2000

20

Public Enterprise:Performance and Evaluation11.4 FINANCIAL PERFORMANCE OF SLPEs

In the States, nearly Rs. 75,000 crore has been invested in statutory corporations andnearly 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 thisinvestment, the rate of return generated by the State level public enterprises is nearlyzero. 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 theiraccounts. Whatever accounts are available show that the rates of return of most ofthe 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 oncapital invested in State Electricity Boards (SEBs) that account for the bulk of theStates’ investments in PSEs has been persistently negative. Far from yielding the 3per 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 in1998-99, revealing a steady deterioration over the nineties. State road transportundertakings (SRTUs), the other major enterprise of the States, also has been a dragon their budgets. During 1997-98, the losses of all the SRTUs taken together werereported to be Rs. 1,282 crore, reflecting organisational inefficiencies on the hand andthe uncompensated burden of social obligations on the other. While there has beensome improvement in their physical performance of late, the loss per bus per day hasincreased from Rs. 425 in 1997-98 to Rs. 565 in 1998-99. In several States theSRTUs are in extremely bad shape, with the bulk of their fleet of buses off the roadand employees going without pay for years.

About 11,00 autonomous SLPEs in 28 states and 7 union territories, are poorlymanaged and most of them are making losses. The electricity boards and roadtransport corporations dominate the State Level PEs both in terms of investmentmade and number of employees. There are very few, if any, large or mediumindustrial enterprises in the states. SLPEs are mostly developmental and promotionaland a few are financial and welfare.

The table 11.10 shows a sample of 747 enterprises, with an investment of Rs 1,18,548crore (equity Rs. 33,293 crore plus long term loan Rs. 85,255 crore). Stategovernments prefer loan to equity to finance their enterprises as dividend earned onequity by the state government is after tax which goes to the central exchequer. Thefigures 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 ofenterprises not finalising their accounts within the time limit. The fact is that someenterprises never took off or became defunct after some years. Delays in finalisationof the accounts so common for SLPEs come in the way of assessing their financialhealth. The range of delay in Orissa is from 1-37 years, followed by Punjab (4-25years) and Bihar (1-22 Years). 305 SLPEs, out of 747 in 12 states, had anaccumulated loss of Rs. 7,534 crore, which is 2-76 times of their paid-up capital ofRs. 2,732 crore.

In 2002-2003, the net accumulated loss of SLPEs of 18 states amounted to Rs 43,498crores. There were approximated 491 loss making SLPEs and 204 non-workingSLPEs out of a total of nearly 1000 SPLES.

21


Performance

Table 11.10 : Financial Data of SLPEs (2002-2003)

Net Accumulated No. of No. of State Loss Loss-making Non-working

(Rs. Crores) SLPEs SLPEs

Andhra Pradesh 2919 62 09

Assam 2885 36 10

Bihar 5060 12 28

Gujarat 6774 24 10

Haryana 384 10 04

Himachal Pradesh 605 13 02

Jammu & Kashmir 587 16 01

Karnatka 1888 30 07

Kerala 3510 52 13

Madhya Pradesh 600 08 15

Maharashtra 1775 44 18

Manipur N/A 10 N/A

Orissa 2372 22 24

Punjab 1435 25 28

Rajasthan 315 11 08

Tamil Nadu N/A 33 N/A

Uttar Pradesh 5327 21 19

West Bengal 7062 62 08

Source: Ministry of Disinvestment, 2003

Most State level public enterprises are running at a loss. Therefore, they are unableto pay any dividends. State Electricity Boards and State Road Transport Undertakingare 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 ofinputs like coal; and

• Technical inefficiencies resulting in high cost of generation, and sometimescamouflaged 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. Suchunbundling is possible with or without privatisation and States may select a suitableoption depending on their circumstances. However, the determination of propertariffs reflecting costs and keeping subsidisation and cross-subsidisation implicit in thetariff structure should be rationalised and kept at minimum levels. State level tariffcommissions need to look at the issue of revision of electricity tariff structurekeeping in perspective the interests of different categories of consumers, changes incost structure, the functional implications for the SEBs, as also for the Stategovernments.

22

Public Enterprise:Performance and EvaluationState Transport Undertakings (STUs) are also running in losses in many States. Poorproductivity combined with subsidised tariffs, concessions, and higher share of lowprofit routes keep the STUs in the red. Key elements of reforms in this sector aretariff revisions in line with input costs, elimination of concessions, suitable mix ofprofitable 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 soldoff. Closure, disinvestment of equity, merger of SLPEs operating in the sameproducts and services where horizontal/vertical integration may lead to economiesand externalities, and voluntary retirement schemes may help reduce the fiscalburden. Table 11.11 : summarises disinvestment transactions till February 2002..

Table 11.11 : Disinvestment Transactions Completed Upto February 2002

Year No. of Companies Target Receipt for Actual Receiptsin which Equity Sold the Year (Rs. crore) (Rs. crore)

1991-92 47 2,500 3,038

1992-93 35 2,500 1,913

1993-94 - 3,500 Nil

1994-95 13 4,000 4,843

1995-96 5 7,000 362

1996-97 1 5,000 380

1997-98 1 4,800 902

1998-99 5 5,000 5,371

1999-00 2 10,000 1,829

2000-01 4 10,000 1,870.53

2001-02 10 12,000 5,632

Source: Ministry of Dininvestment, 2002

11.5 PERFORMANCE OF STATE ELECTRICITYBOARDS

Power industry in India is in the concurrent list. The responsibility lies both with thecentral and state government. The supply of electricity commenced in the India in the1880s with the commissioning of a small 130 KW hydroelectric plant at Darjeeling. Athermal 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 ofthe ventures were due to the initiatives of the private players. However, theenactment of electricity supply Act (1948) changed the scenario. This resulted in theestablishment of the state Electricity Boards (SEBs). SEBs took over the operatingprivate players and enlarged the customer base and made the electricity available tothe 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 theelectrical equipment business such as leasing out its generating stations, conductinginvestigations and granting loans to licensees. An SEB enjoys all the powers of alicensee under the Indian Electricity Act of 1910.

23


Performance

Until 1991, only central generating companies were responsible for supplying powerto the grid without power of distribution. The major players are NTPC, NHPC &NPCIL. Since 1991, now independent power producers (IPPs) also fall under thiscategory. Besides SEBs & central generating companies, the power industry alsoincludes the licensees. The licensees are private players licensed by the governmentto generate and supply power within an area e.g. Total Electric Company (TEC),Bombay Suburban Electric Supply Limited (BSES), Gujarat Industrial PowerCorporation Ltd. (GIPCL) and Central electricity Supply Corporation (CESCO). Thestate government has the authority to grant licenses for 30 years, renewable for afurther 20 years after the expiry of the renewal or license.

Performance of SEBs in generating capacity has been quite reasonable. The installedgenerating capacity was about 10,000 Mw in 1951 and it increased to more than75000 MW in 1995. However the cumulative average growth rate has declined from12.7% in the 1960s to 7.3% in the 90s SEBs are present in all the three segments ofpower industry – generation, transmission and distribution. But the financialperformance of SEBs has deteriorated due to several factors.

••••• Gap between tariff and lost: The average unit cost of supply of utilities hasbeen progressively increasing over the years. During the last one decade theincrease in the unit cost supply has been steep and reached the level of 327 paiseper unit in 2000-01 (ER) as compared to 108.6 paise/KWh in 1990-91. Theincrease in the total cost of supply could be attributed mainly to the increase inthe cost of fuel, establishment & Administration cost, interest payment liabilityand the cost of power purchase. Though the average tariff has increasedsubstantially during the past few years, the increase has not been commensuratewith the increase in the cost of supply. As a result, the gap between the cost ofsupply and average tariff has been widening over the years. This gap hasincreased from a level of 50 paise in 1996-97 to about 110 paise in 2001-02. Thelevel of recovery, therefore, has declined from 77% in 1996-97 to 69% in 2001-02. Though the number of consumers and the quantum of sales have increased inthis period, the number of consumer has been mainly in the domestic andagriculture sectors, who are getting power supplies at subsidized rates. Thiscould be one of the reasons for the widening gap between average cost of supplyand average tariff.

••••• Commercial losses: The commercial loss of a SEB is the gap between thetotal revenue receivables and total expenditure in a given year. The commerciallosses (without subsidy) of the SEBs increased from Rs 4560 crore in 1992-93 toRs 25259 crore in 2000-01.

••••• Subsidy: Gross subsidy on energy sales has been increasing over the yearsbecause of the policy of some of the states to provide electricity at subsidisedrates 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 aneffort to recover the losses due to the subsidised power supply to domestic andagriculture consumers by way of cross-subsidisation mainly to the industrial andcommercial consumers.

••••• Rate of Return: The return on assets employed by SEBs has been turning moreand 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 isbeing financed through interest bearing loans. Very few SEBs could convince thegovernment to convert the loans into equity. As a result of the lop–sided capitalstructure, the interest burden is increasing over the years. This has an adverseaffect on the finances of SEBs.

24

Public Enterprise:Performance and Evaluation••••• Plant Load Factor: The average PLF at present is around 63 %. The same for

the SEBs is 58 % whereas for the private sector it is 73 %. The cost of energyfrom the IPP power stations corresponds to a PLF of 68.5 % and above. Suchhigh PLF is not possible in Indian context due to the changing pattern of demandin Faber of peaking requirements. This leads to the inflated cost of power. ThusSEBs have to pay such high cost of power.

••••• Investment: In order to reduce the T×D losses and increase the generatingcapacity, there is need for investment. Neither the Central nor the StateGovernments have such money for investing in the power sector.

••••• Net Internal Resources: It refers to the surplus left with the SEBs aftermeeting the revenue expenditure and loan repayment obligations. It includesdepreciation etc. as the SEBs function on commercial lines, the IR would havebeen positive. However, IR have been negative in all the years except in1995-96.

The unsatisfactory and deteriorating financial health of SEBs has acted as aconstraint not only for adding new capacity, improving the transmission anddistribution system, carrying out renovation and modernisation programs, but also forcarrying out much needed reforms in the electricity utilities.

Presently, restructuring and regulatory reforms are contemplated with a view to bringabout reforms in the SEBs through establishment of State Electricity RegulatoryCommissions. The establishment of Regulatory Commissions, as provided by the Actpassed by the parliament, would lead to rationalisation of tariff and also provide fortransparency in provision of subsidies, wherever required. The State Government canexercise the option of providing subsidies, over and around those recommended bythe Regulatory Commissions, on condition that the State Governments Compensatethe SEBs by providing adequate budgetary support. When tariffs are rationalised andbudgetary support is provided, SEBs are expected to improve their financial position.

Reform of the Power Sector would be greatly aided by the establishment ofindependent regulatory agencies responsible for setting tariffs and regulation powerpurchase agreements. Accordingly, the Government of India has enacted ElectricityRegulatory Commission Act, 1998 for setting up of independent regulatory bodies viz.The Central Electricity Regulatory Commission (CERC) and the State ElectricityRegulatory Commissions (SERCs) at the Central level and State level respectively.These regulatory bodies would primarily look into all aspects of tariff fixation andmatters incidental thereto.

Reform State Path Orissa Haryana UP AP Karnataka Raj Delhi

Date of Instituting April March Sept. Oct. June June MarchReform Act 1996 1998 1998 1998 1999 2000 2001

Regulatory Commission Yes Yes Yes Yes Yes Yes YesEstablished

Utility Unbundled Yes Yes Yes Yes Yes Yes In theProcess Stage process

stage

Separate Distribution Yes Yes No Yes No Yes In theCompanies Established process

stage

Distribution Privatised Yes No No No No No Noprocess

25


Performance

stage

The reform in power sector in Orissa is of particular interest to the rest of thecountry for the following reasons:

• It is the first State to start the reforms in the power sector.

• It has used the full package of reforms – from Unbundling, Corporatisation andPrivatisation.

• 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 growthdue to specialisation, sourcing of material on a wider scale, the use of just-in-timestrategies, increase and dispersal of retail and wholesale activities etc. prices oftransport service have also been falling as a result of increased productivity due tocompetition among suppliers of transport services as well as pressure from users.The transport system in India has not been able to keep pace with thesedevelopments and considerable effort is required to correct the shortcomings.

An efficient transport system is a prerequisite for sustained economic development. Itis not only the key infrastructure input for the growth process but also plays asignificant role in promoting national integration, which is particularly important in alarge country like India. In a liberalised set-up, an efficient transport networkbecomes all the more important in order to increase productivity and enhancing thecompetitive efficiency of the economy in the world market. The transport system alsoplays an important role of promoting the development of the backward regions andintegrating them with the mainstream economy by opening them to trade andinvestment.

India’s transport system comprises a number of distinct modes and services. Theseinclude railways, roads, road transport, ports, inland water transport, coastal shipping,airports and airlines. The sector has expanded manifold in the first fifty years ofplanned development, both in terms of spread and capacity. Along with the increasein quantity, there have been several developments of qualitative nature, such asemergence of a multi-modal system in the form of container transport, markedreduction in the arrears of obsolete assets, improvement in the self-financing capacityof the sector and the establishment of new centres of excellence for manpowerdevelopment. Impressive as this progress is, the country’s transport system is farfrom adequate both in terms of spread and capacity and suffers from a large numberof deficiencies and bottlenecks. The quality and productivity of the transport networkand resources also needs improvement.

It emphasised the need for improving the capacity and quality of the transportationsystem through technological upgradation and removing distortions in the intermodalmax by evolving a rational tariff and investment policy. It also laid stress onimprovement of the self-financing capacity of this sector and on the need for ensuringan improved transport system to provide speedy, efficient, safe and economicalcarriage of goods and people. While the achievement of objectives and targets set forsome subsectors, particularly roads and ports, have been encouraging, the progress inthe case of others has not been as good. This is particularly true of railways whereshortfalls in achievement of physical and financial targets as well as policy objectivesare anticipated.

While capacity shortages on both the main road and rail links continue to be a seriousconstraint to overall growth, even the existing infrastructure is inefficiently utilised.

26

Public Enterprise:Performance and EvaluationThis is because over the years, a large number of distortions have appeared in thetransport sector because of a deliberate policy or lack of it. Another reason for thisstate of affairs is inadequate maintenance of the existing assets. The condition ispervasive across various modes of transport. The productivity of freight trains isconstrained by the condition of tracks and rolling stock. Though the Indian roadnetwork appears and only 20 per cent of paved roads are estimated to be in goodcondition. The average productivity of a truck is 200 Km a day against a potential of350-400 Km that could be possible through reduction of road congestion. Although,various productivity indices in the ports sector have been looking up includingreduction in the waiting period for the ships, increase in the turn time etc., there is stillscope for further improvement. The delay in the installation of modern instrumentlanding or traffic control facilities have constrained the capacity of our majorinternational airports while inadequate draft in our waterways limit the use of inlandwater transport.

Some of the demand for transportation is due to administrative policies that are oftenat variance with the pattern of demand that would emanate from the marketeconomy. Presently coal and POL together constitute around 55 per cent of total railtraffic. The movement of coal by railways is mainly for power generation. This is theresult of the insistence by State Electricity Boards on locating power plants within thegeographical boundaries of the State regardless of the distance from the source offuel supply. The problem was redressed to some extent by the creation of theNational Thermal Power Corporation. It may diminish further with the onset ofreforms in the energy sector, the emergence of strong grid to transfer power fromone location to another, development of mechanism that will permit the trading ofpower across State boundaries etc. As a result, in the near future, there may bechange in the pattern of setting up of power plants. This would create an opportunityfor 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 majorimplications for the environment. With rapid economic growth, increase in populationand increasing integration of the economy, the demand for transport services is risingat a fast pace. This is, however, leading to the use of scarce land and contributing tothe atmospheric pollution in a big way. Sound pollution, road congestion, etc., areother environmental hazards due to transport. Water transport, in addition, leads topollution of sea and coastal waters and also endangers marine life. While steps arenecessary to minimise the environmental impact of transport infrastructure andservices 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 environmentalclearance before they are taken up. In large cities like Delhi, initiatives have beentaken to enforce Bharat Stage II norms for vehicular emission. Stricter normsconforming to Euro III-IV are also under consideration. However, what is required isa nation-wide policy on the use of clean fuel and phasing out of old vehicles. There isalso need to improve the quality and efficiency of the public transport system in orderto reduce dependence on private vehicles. In the larger national interest, it is alsoimportant that rail transport, which is a cleaner and more fuel-efficient system vis-à-vis road transport is accorded higher priority.

Safety of operation is an area of concern in all modes of transport. Though theaccident 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 requireimmediate attention increased to over 70. The Indian economy is going throughstructural changes. The share of value added by the primary sector is constantlydeclining while the share of non-primary sector has been increasing.

27


Performance

The demand for transport is influenced by these structural changes. For example, adecline in the share of agriculture and increase, the share of manufacturing may leadto an increase in demand for transport. Shower growth in population, however, mayreduce demand for transport, which may partly be offset by the fact that the share ofmobile population (ages 15-60) is likely to increase. Taking all factors into account, itis expected that traffic elasticity with respect to GDP will continue to decline in linewith the past trends but will still be around 1. This growth in transport demand has tobe met by expanding domestic supply as transport infrastructure is non-tradable.Investment in transport must, therefore, reflect the need to make up for existingcapacity shortages and also to allow for growth in demand.

Budgetary resources for the transport sector are likely to be limited, especially whenfiscal prudence is the overriding consideration. However, within the budgetaryconstraints, transport infrastructure development needs to be treated as a high priorityarea for continued resource requirement and would greatly exceed the capacity ofthe budget to meet the costs of maintenance and expansion. Internal generation ofresources through rational pricing and user charges is, therefore, essential for thesuccessful development of transport infrastructure. Increasing participation of theprivate sector would also be necessary to augment the resource base and increasecompetitive 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 domesticproduct (GDP).

• Ensuring transport growth in a manner that all regions of the country participatein the process of economic development and is paid special attention tointegrating remote regions such as the North-East into the economic mainstream.

• Capacity augmentation, quality and productivity improvements throughtechnology up-gradation and modernisation.

• Emphasis on higher maintenance standards so as to reduce need for frequentreconstruction of capacity.

• Higher generation of internal resources and increased private sector participationin providing transport services.

• Increase in overall economic efficiency by bringing in competition into theprovision and maintenance of transport infrastructure and services whereverpossible.

• Higher emphasis on safety, energy efficiency, environmental conservation andsocial impact.

• Developing an optimal inter-modal mix, where each mode operates efficientlyand according to its comparative advantage and complement services providedby other modes of transport.

11.7 PERFORMANCE EVALUATION OF THE POSTALSYSTEM

India has one of the most extensive networks of postal service in the world. A basicprofile of the postal sector of India is given below:

• The Indian postal system is the largest in the world, with the number of postoffices/outlets numbering 1,54,919 as on 31 March 2001. The permanent postoffices, called Departmental Offices, number 26,037.

• Of these, 1,28,882 (83 per cent) are in the rural areas and are called Extra

28


Departmental Branch Offices (EDBOs).

• The total manpower under the Department of Posts is about 6,00,000 almostequally divided between permanent employees (who number 2,94,301) andextra-departmental employees (numbering 3,09,649).

• The total revenue expenditure of the Department in 2001-02 was Rs. 5,210.83crore, with a revenue deficit of Rs. 1,458.37 crore.

• The plan outlay constitutes a very small fraction of the total expenditure and wasRs. 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 noexternally-aided projects.

• The total expenditure as percentage of receipts for the Department of Posts was160 per cent in India as compared to 101 per cent in the United Kingdom, 102per cent in the United States, 99 per cent in Brazil and 138 per cent in Sri Lankain 1998.

• Except courier services, postal operations are still a State monopoly.

The Indian postal system currently provides 38 services which can be broadly dividedinto 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 anopen ended subsidy and forms part of the general budget. The deficit has shot upalmost 16 times. This has serious implications for resource availability for other needysectors like infrastructure and social development. The trends of postal deficit areshown in Table 11.12.

Table 11.12 : Trend of Postal Deficit (Rs. in Crore)

Year Deficit

1992-1993 91.81

1997-1998 993.43

1998-1999 1590.97

1999-2000 1740.53

2000-2001 1576.35

2001-2002 1458.37

Source: Tenth Fine Year Plan

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

29


Performance

(UPSO) may be justified, the pricing of non- UPSO services need to be fixed oncommercial principles. The projections are shown in Table 11.13.

Table 11.13 : Subsidy on Services Rendered Through the Postal Network

(Projections – 2002-03)

Service Subsidy Traffic Total deficitper unit (Rs.) (in million) (Rs. in crore)

Post Card 6.70 193.30 129.59

Printed Post Cards 1.73 93.49 16.16

Letter Cards 4.79 329.48 157.66

Registration 18.93 196.08 371.28

Money Order 29.61 106.73 316.05

Reg. Newspaper (Single) 8.54 73.09 62.44

Reg. Newspaper (Bundle) 14.39 18.06 26.00

Printed Books 10.44 25.90 27.03

Parcel 3.37 64.29 21.65

Others N.A. 1996.13 185.27

Total N.A. 3,096.55 1,313.13

Source: Department of Posts

The postal department should endeavour to achieve self sufficiency andconsolidation. Various steps necessary in this sector are mentioned below:

• There does not seem to be any justification for subsidizing services likeregistration, newspapers, postal orders, money orders etc. Only Insurance, SpeedPost and Foreign Mail are yielding a surplus. This policy of blanket subsidy needsto 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 Fiveyear Plan has recommended inclusion of postcard, inland letter, and moneyorders upto a certain limit to be under UPSO. Price of other services should bedetermined on commercial basis.

• Under the Indian Postal Act, 1898, the central Government fixes the tariffs forvarious postal articles and these are approved by the Parliament. Due to variousreasons, tariffs have not been revised at reasonable intervals. Revision of postaltariffs has not been keeping pace with the increase in operational costs. Thepresent 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 meetthe requirements of changed circumstances. It needs to be replaced with aforward – looking legislation to take care of new developments.

• The present scheme of opening rural post offices (EDBOs) has a large elementof in–built subsidy of 67 per cent in normal areas and 85 per cent in hilly andtribal areas. This is not sustainable in the long run. Two feasible options that mustbe explored are converting extra department employees into franchisees of thedepartment for providing postal services in rural areas and reactivating thescheme of licensed postal agents.

• To take advantage of the emerging scenario of convergence, post offices need tobe developed as multi product and multi–service delivery centres in whichdelivery of postal services would only be part of the job. The Government is nowmoving towards consolidation and integration of the steps taken in the part forcomputerization and modernization of the postal system in harnessing the

30


emerging technologies to improve the services offered through the network.About 2 crore postal transactions are done through the network. About 2 crorepostal transactions are done through computers every month. A VSAT networkfor prompt transmission of money orders with 150 micro earth stations capableof linking about 5000 post offices has been established.

• So far 192 mail offices have been modernized. The field formations are alsorestructuring the delivery arrangements in the post offices keeping in view therequirements of customers in specially new colonies in urban areas. To meet thechallenger of changing market demand, a member of new services have beenintroduced, such as speed post, business post, express parcel post, media post,greeting post, data post, passport services and satellite post. In order to bridgethe digital divide, “e-Post”, for delivering e-mail at the doorstep of the citizens, isrunning 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 postoffices.

• Generation of substantial additional revenue through non–tariff methods likecommercial exploitation of land and introduction of IT based financial servicesare the two other important components of the strategy for making theGovernment run postal services self–financing.

• Except courier services, the postal services are still a state monopoly. To ensureefficiency and improved quality of service, it may be desirable to open upselected postal services to private entrepreneurs. This will ensure flow ofrequired funds into the sector, bring in new technology and also enable thedepartment to pay greater attention to its main activity i.e. carrying of mail.

• To ensure competition and a level playing field, the establishment of anindependent regulatory authority may be considered.

11.8 PERFORMANCE OF PORTS

There are 12 major ports and 184 minor / intermediate ports along the 5560 kmcoastline of India. The major ports are Kolkata / Haldia, Mumbai, Jawaharlal NehruPort 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 handleabout 15 per cent of the country’s port traffic of the country, with the minor / stateports handling the remaining 25 per cent.

Ports are a key component of infrastructure. Recent policy initiatives have ushered innew institutional arrangements and have yielded results in terms of measurableoutcomes such as the delay at ports. However performance lags internationalstandards. 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 years-with growth rates of over 10 per cent per annum over the last three years (2002-2003).

• There has been an improvement at major ports in the principal indicators of portefficiency (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 thatthere are institutional innovations at better performing ports, such as JNPT,

31


Performance

which could be adopted in other ports.

The major initiatives taken for improvement in performance of ports can besummarised as follows:

• Corporatisation of Major Ports: The functioning of major ports under various porttrusts is operationally inflexible, and they are unable to respond quickly tochanging market situation due to delays inherent in the decision making process.Steps are thus being taken by the Government towards corporatisation of majorports.

• Private sector participation: The areas identified for private participation in portsare: Leasing out assets of ports; construction and operation of containerterminals, 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 newtechnology, introduce better managerial practices, expedite implementation ofschemes, foster strategic alliances with minor ports and enhance confidence ofprivate sector in funding of ports.

• Tariff policy: Currently, the tariff stricture is determined by the cost-plusapproach, which is not an appropriate pricing mechanism for cargo services.While fixing tariff, the improvement in productivity and efficiency needs to betaken into account. It needs to be ensured that the users do not pay for theinefficiencies of the ports.

• Development of Hinterland / port connectivity: the lack of proper connectivitywith hinterland has hampered the development of ports. Hence, the developmentof other modes of transport-railways, highways, inland, water transport and evenpipelines is essential.

11.9 PERFORMANCE EVALUATION OF RAILWAYS

Railways is a massive organization in India that carries more than 10 millionPassengers and a million tones of freight each day. There are about 14,000 odd trainsincluding about 8500 passenger carrying trains.

For the past few years however, the Indian Railways have not performed well. Thetopmost problem has been to find funds for even essential investments. The causes ofthis 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. Butlarge part of the resources has been thinly spread across several hundreds of workslike including a huge shelf of new line and gauge conversion projects with littleprospect 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 notesthat the Railways is on the verge of a financial crisis, and suggest fundamental

32

Public Enterprise:Performance and Evaluationchanges in order to farce the emerging competitive pressures. The group considersthat the Railways has to make a deliberate choice it can opt for the strategic HighGrowth scenario that has the Potential to double the rate of growth, and emerge as astrong, modern system, or allow this fine institution to wither. The causes ofperformance of Railways can be evaluated as follows:

• Investment in the transport sector, including the Railways, was a priority in theinitial phase of India’s planned development. In the first three, five year plansRailways received adequate budgetary resources for their strengthening andmodernization and facilitate industrial and economic development. But thereafter,a decline of budgetary support started and became a major cause of the situationto day. A plan outlay for Railways is shown in Table 11.14.

Table 11.14 : Plan Outlay for Railways

Plan Railways Railways outlay as % (Rs. in crores) of Total Plan Outlay

Up to 4th 3200 10.3

5th 1523 5.3

6th 6555 6

7th 16549 7.6

8th 27202 6.3

9th 45413 5.3

Source: Status paper on Indian Railways: 2002

• In terms of revenue performance, the Railways enjoyed fairly satisfactory resultsduring the first three plan periods. But in the twenty years that followed, itdefaulted several times on payment of dividend to general revenues and resortedto loans from general revenues for the Development found (used for financing anremunerative but essential works, passenger amenities and staff welfare.

• During the seventh plan period (1985-90), there was a fairly balanced increase oftariffs of both passenger and freight traffic. The year 1989-90 was significant forthe raised level of freight tariff. It was however, the starting point of a relentlesstrend of freight increases over almost a decade.

• Diversion to roads-the high freight charges led to a steady loss of traffic to theroads, aggravating the trend that had set in after the deregulation of trucking inthe 1980s.

• Delays and losses in transit added further to the loss of revenues and downturnof financial performance.

• Returns from the growing levels of passenger traffic, accounting for nearly 60per cent of the transport output, were wholly inadequate to meet its costs, mainlybecause of a continuous policy of tariff restraint.

• The year 1997-98 marks a precarious phase for Railway finances with theimplementation of pay commission recommendations, which put up staff costs bya third. Freight traffic also dropped by 29 million tones below target. Table 11.15shows the financial status of the Railways.

Table 11.15 : Trend of Railway Finances

% 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

Staff costs 100 135 156 162 176 185

Traffic receipts 100 118 122 135 143 155

Ratio of (1) & (2) 41.7 47.8 53.3 50.0 51.2 49.8

Railway Fund Balances 3370 3564 1253 149 359 994

Plan expenditure 100 99 107 10.9 113 131

1


PerformanceUNIT 12 SICKNESS AND PUBLIC

ENTERPRISES AND TURN-AROUND STRATEGIES

Objectives


• Develop the concept of sickness;

• Know about the magnitude of sickness prevalent in India;

• Understand the remedial measures that prevent sickness.

Structure

12.1 Concept of Sickness

12.2 Growth and Magnitude of Sickness

12.3 Causes of Sickness

12.4 Remedial Measures and Prevention of Sickness

12.5 Summary



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) it was registered for at least seven years;

ii) it incurred cash losses for the current and the preceding year;

iii) its net worth was eroded.

Initially only private companies were covered under this Act. But in 1991, publicsector companies were also brought under the purview of the Act.

The act was amended in 1994 and the criterion of cash losses for two successiveyears was eliminated. Firms only need to be registered for five years. A sickindustrial unit redefined means a company registered for not less than five years andwhich has defaulted in payment on due dates of debts (including interest due) to anycreditor for atleast four quarters, continuous or not, in a block of two consecutivefinancial years. It also requires the Board of Directors of any company to informBIFR, if at the end of any financial year erosion of 50 per cent or more of its peaknet worth has resulted during the immediately preceding four years.

Basically sickness refers to continued sub-normal standards of performance erodingcapital or denying return to the investors. The two questions which need to beaddressed are; what is ‘continued’ and what is ‘normal standard’. One option is todefine normalcy by an established benchmark. No universally applicable benchmarksare easily accessible or could be fruitfully applied to Indian conditions which werecharacterised for a long time by a regulated, protected, constrained framework. Onecould maintain that sub-normal performance, leads to a loss-making state, but onedoes not necessarily follow from the other. Moreover, loss generation does notcapture sub-standard performance, in a specific area. Loss-making state of anenterprise is a cumulative result of several functions.

2

Public Enterprise:Performance and Evaluation12.2 GROWTH AND MAGNITUDE OF SICKNESS

Industrial sickness has grown in magnitude over the years. A large number ofindustrial 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 March2001, 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 Large and medium Small Total

1980 1401 23,149 24,550

1990 2269 2,18,828 2,21,097

1998 2476 2,21,536 2,24,012

1999 2792 3,06,221 3,09,013

2000 3164 3,04,235 3,07,399

2001 3317 2,49,630 2,52,947

Outstanding Bank Credit (Rs. in crore)

1980 1,502 306 1,809

1990 6,926 2,427 9,353

1998 11,825 3,857 15,682

1999 15,150 4,313 19,463

2000 19,047 4,608 23,656

2001 21,270 4,506 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 tolarge and medium enterprises;

• the outstanding bank credit of large and medium enterprises is higher than smallunits;

• 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 ofsmall sector sick units are non-viable. The extent of industrial sickness varies bysectors and across regions. In the category of large and medium sick units, textile andengineering industries accounted for about 27 per cent total credit outstanding (1998).Among the states, Maharashtra and West Bengal accounted for about 27.2 per centof the total credit outstanding and 26.2 per cent of the number of total units in thecategory of large and medium sick units. To a large extent, this regional concentrationof sickness corresponds with the historical pattern of industrialisation of India, also,these regions are characterised by the presence of industries in textiles, engineeringgoods and jute which happened to be the sectors afflicted with industrial sickness,especially in the category of large and medium sick industrial units.

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Performance12.3 CAUSES OF SICKNESS

The analysis of causes of sickness is very broad. The factors could be as varied asthe problems of industrial management. The causes of sickness faced by publicenterprises 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 tobe done is the action which again appears to be too obvious. But the fact is that thecauses of sickness can be of very different kind. The discussion below will helpunderstand some basic causes of sickness.

In the classification of causes of sickness into exogenous and endogenous factors thedifferent 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 structurewithout 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, sicknessmay be classified into five distinct types. The broad types of sickness based ondifferent causes are:

••••• Genetic sickness

••••• Structural sickness

••••• Operational sickness

••••• Policy-linked sickness

••••• Exogenous sickness.

4

Public Enterprise:Performance and EvaluationTable 12.2 shows the different types of sickness, when they occur (time frame) andtheir causes.

Table 12.2 : Types of Sickness and Their Causes

Type Time Frame Basic Causes

Genetic Historical Varied-technological, economic or managementrelated

Structural Launch or Later Decisions on locations, technology, product etc.

Operational Any time Management failure, lack of leadership,emergence of competition

Policy-linked Any time Conditions imposed by policy decisions

Exogenous Any time, Industry location specific, policy specific.Unpredictable

Some enterprises are genetically sick. Among the public enterprises, there is a largenumber of cases of historic or genetic sickness. Several enterprises were taken overas sick from the private sector to prevent unemployment. Some corporates, outsidethe public sector are sick structurally. They represent some basic and seriousdeficiency in their conceptual visualisation. The structural sickness could be due to anuneconomic location, obsolete or inappropriate technology, over-capitalisation, faultyproduct mix or uneconomic size. Some enterprises become sick after some change ina basic parameter of operation. While it is true that every enterprise has to facechange and manage change, some management’s respond to change feebly.Operational sickness could also occur because of management failures without theoccurrence of any change. It could be a case of management fatigue or lack ofleadership. Policy-linked sickness and sickness owing to exposure to change is fairlycommon. Exogenous sickness occurs due to any of the factors affecting the unit fromoutside.

12.4 REMEDIAL MEASURES AND PREVENTION OFSICKNESS

Consequences of Industrial Sickness: India is a developing country with surplus oflabour. Industrial sickness, therefore, has many adverse impacts on the laboureconomy of our country. India has a limited opportunity for its surplus labour. Closureof sick units adds to the woes of unemployment. Since large units employ largenumber of labour, closure of such units, leads to unsatisfaction and unrest among thelabour class. This may lead to strikes and increase trade unionism. An industrial unitoften has close linkages with other related units. Therefore closure of an unit effectsthe linked units also. This adverse effect may take large proportions and can damagethe economy of a country. Sickness is not healthy for the industrial environment of acountry. Closure of units discourages other entrepreneurs to set up industrial units. Italso 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 wereutilised in setting up that unit. Since resources are scarce, this is a very harmfulconsequence of sickness. The loss caused to banks and financial institutions due toclosure of sick units is quite obvious. The various consequences of sickness can nowbe summarised as follows:

• increase in unemployment;

• unhealthy industrial environment;

5


Performance

• 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 theearly 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 notadequate to cover the fixed costs and variable cost;

• shortage of funds to meet short term obligations like salary to labour, purchase ofraw materials, interest on loans, payment of tax etc.;

• decrease in net profit;

• unhealthy financial ratio; like debtequity ratio and ratio of current assets tocurrent liability less than 1:1 (1977) by adding section 72A. This section allowsfor 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 actuallypaid for 5 years;

Concessions by Banks and Financial Institutions: Various concessions wereannounced 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 ofsick unit to suggest corrective measure with regard to rehabilitation;

• setting of regional monitoring cells by RBI for better coordination between thebanks, state government financial institutions;

• establishment of IRCI – Industrial Reconstruction Corporation of India withfunctions like – providing financial assistance, managerial and technicalassistance, 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 hasvarious power to tackle industrial sickness. The Board has the authority to enquireand determine the sickness of a company. It can give time to a sick company to makeits 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 ahealthy unit. BIFR can also direct banks and financial institutions to-not-to extend anyfinancial assistance for a period of ten years if the Board finds that the sickness isdue to a person or partner of a company.

Goswami Committee on Industrial Sickness and Restructuring: The committeesubmitted its Report in 1993 with the following main elements;

• It recommended a change in the definition of sickness to – default of 180 days ormore on repayment to term lending institution and irregularities in cash credits orworking capital for 180 days or more.

• To avoid delays in the BIFR process, the committee recommended that BIFRshould use the winding up provision more frequently not only to expedite the saleof economically unviable firms.

• Financial institution could increase monitoring so that they could take corrective

6


measures, at the time of flow.

• take over of the management of a sick undertaking with the clear understandingthat 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

4. Remedial Measures: Public sector has long been considered a social obligationof the government. Thus the sickness of this sector was regarded as a socialproblem of our country. Cosequently various measures were taken by thegovernment, banks and financial institutions to ruin sick enterprises. The varioussteps are discussed below.

Government Policy: The government made a policy statement on industrial sickness(1978) and laid down guidelines for various measures to deal with this policy andthese measures are as follows:

• arrangements for monitoring and detecting industrial sickness early;

• administrative ministries in the government were given responsibility tocoordinate action for revival and rehabilitation;

• setting up of five fast- track winding up tribunals and fine recovery tribunals atMumbai, Chennai, Kolkata, Delhi and Bangalore;

• giving choice of “voluntary reference” to BIFR instead of mandatory referenceso 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 aNational Company Law tribunal will be set up. The role of this Tribunal will be toserve as a liquidator rather than a rehabilitator.

Turnaround Strategies: Sick enterprises demand changes in their treatment andapproach, revival and other strategies for sick enterprises range from simplemanagement intervention like a change in leadership to complete restructuring, finalclosure or management transfer in case of public sector, the turnaround strategieswhich aim at course – correction are of the following types. Often more than onestrategy is required to be used depending on the situation. Strategies of managementinterventions are:

• 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)

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Performance

• 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 publicsector environment were overlooked in the past. Moreover they are always missingfrom sick enterprise. What was considered more important was growth in investmentnot real growth in output and value addition. Management initiatives were ratherdiscouraged. Complacency and adherence to predetermined procedures wasfollowed. Managers of today cannot ignore the “best practices” listed below thoughsome of these are not directly measurable. These practices have to be followed andoperationalised in an effective manner.

• Goal sharing

• Quality upgradation (in product or service)

• Worker satisfaction

• Decision-making quality

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• Productivity enhancement

• 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 nothave to bother much about competitive advantage because of the protectedenvironment in the past. The creation and maintenance of competitive advantagedemands focussed strategies. Each product and each market has its own competitiveadvantage which has to be explored and operationalised. The task before the publicsector 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. Unitsmust have a financially viable debt – equity ratio. Most PEs in trouble want toconvert their government loan capital to equity to avoid interest cost. However, this isnot a healthy sign. There should be a mechanism by which restructuring of capital istaken up judiciously.

Merger or joint venture option has been approved by the government in the past. Thestrategy is to revive these companies so that they would be able to support, but wouldbe able to sustain on a long-term basis. Some public enterprises have made largeeffort in developing plans of revival. But many of them remained unimplemented dueto lack of confidence lack of new approach and lack of authority. Such cases needthe help of an external agency. This out – sourcing must be designed effectively witha time bound approach, quick evaluation and decision. One of the major causes ofsickness is the over staffing in public enterprises. The strategy adopted to turnaroundform this ailment is the adoption of VRS packages with high compensation. Publicsector enterprises will not be able to survive besides their best effort and initiatives ofgovernment. They require a state of robust health with an optimal resource mix ofcapital, manpower, management, marketing and technology. A correct combination ofthese 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 in1998-99 to a profitable enterprise in 2002-03. The plant which took over 21 yearsto be commissioned since it was first conceived in 1971, faced many challengesfrom the world go. The slowdown in 1998 only made things worse. But a collec-tive 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 companytone up its bottom-line and top-line.

• Electronics Corporation of India is another turnaround story. Though it scored

9


Performance

several first by developing various complex products without any externaltechnological help, it suffered the crisis of a slowdown due to globalisation andeconomic liberalisation. Apart from the stress of competition which led to thecompany posting its first loss in six years in competition which led to the com-pany posting its first loss in six years in 1997-98, the problem was accentuatedwhen ECIL. Was named by the us Department of commerce for export embar-goes 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 employeemotivation financial discipline, performance monitoring mechanism, business develop-ment through bidding and forging partnership even with competitors and improvingtechnical base through relationship with universities, BARC and DRDO has paid richdividends. The turnover of the company jumped four times since 1998-99 to touchRs.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.

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12.5 SUMMARY

The Sick Industrial Companies Act (SICA) were enacted in 1985 for identification ofsick units. A sick unit has been defined as a unit registered for not less than five yearsand which has defaulted in payment on due dates of debts to any creditor for at leastfour quarters, continuous or not, in a block of two consecutive financial years. Causesof sickness can be grouped for simplicity as— exogenous and endogenous factors.Exogenous factors may be the irregular availability of inputs, changes in demand ofproduct, less supply of raw materials etc. Similarly endogenous factors areunbalanced capital structure, increasing operational cost, lack of new technology andno improvement in quality of product. The main cause of sickness helps to identifyfour types of sickness genetic, structural, operational, policy linked and exogenous.Major consequences of industrial sickness are setback to employment, fear ofindustrial unrest, wastage of resources, adverse impact on related units, adverseeffect on investors and entrepreneurs losses to banks and financial institutions etc.

Various remedial measures have been taken by the government in the form of policyformulation and concessions. Banks and financial institutions have also givenassistance in revival and reconstruction of sick units. Setting up of IRCI and BIFRare the steps in this direction. Some turnaround strategies for survival of sick publicenterprises are management intervention, corporate restructuring joint venture

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Public Enterprise:Performance and Evaluationoptions, VRS package and developing competitive advantage. Sick unit survival liesin an optimal use of capital, manpower, management, marketing and technology.


1. Define sickness. What are the reasons for the changing concept of sickness

2. Industrial sickness is threat to a developing labor surplus economy. Justify.

3. Discuss the main turnaround strategies followed for revival and reconstruction ofsick enterprises.

4. Do you agree that sickness can be prevented? What are the preventive steps?

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 ofIndustrial Sickness.

1


PerformanceUNIT 13 DIMENSIONS AND METHODS OF

EVALUATING ENTERPRISEPERFORMANCE

Objectives


• Learn about objectives of performance evaluation;

• Know the various models of performance evaluation.

Structure

13.1 Performance Evaluation of PSEs – Factors and Agencies

13.2 Objectives of Performance Evaluation in PSEs

13.3 Criteria for Evaluation of Public Sector

13.4 Availability of Data on Performance Evaluation of PSEs

13.5 Country Models for Performance Evaluation of PSEs

13.6 Summary



13.1 PERFORMANCE EVALUATION OF PSEs –FACTORS AND AGENCIES

There is a need for proper performance evaluation system for public enterprises asthey continue to play a dominant role in most developing countries. There has been anongoing debate over the management of public enterprises – their rationale, growth,successes and failures and their relevance in the socio-economic philosophy of acountry. Performance evaluation should be intended for further improving theperformance of these enterprises, and evolving a proper system of performanceevaluation. Various performance evaluation systems argued whether the objectives ofpublic enterprises should be financial or social. However, public enterprises will haveto satisfy both these objectives. Several attempts evolving models for performanceevaluation include the breakeven approach, total performance approach, constrainedoutput model, total factor productivity approach, omega – sigma, optima approaches.But none of these approaches is easy to implement and hence their utility remainsminimal. These practices and concepts are not entirely satisfactory in that theproblem of social profitability and its quantification, and its being included inperformance evaluation exercise is still unsolved. Though some make a mentionabout negotiating these social costs and social benefits with the government, thesuccess of such an exercise depends upon the negotiating skills and the bargainingpower 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 areenumerated below

1. Environmental Factors

••••• Governmental interference for location, size, technology, appointment ofchief executive, functioning of Board of Directors, pricing etc.;

2


••••• Lack of political and administrative will;

••••• 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 forimprovement.

••••• 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 similarorganisation, 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 andinternal agencies, Different agencies have different objectives.

The evaluating agencies and their main objectives are listed as below:

Agencies Objectives

a) External Agencies

1. Parliament National, political and socio-economic

2. Minister Short term optimisation of political goals

3. Administrative Ministry To provide assistance in fulfilling ministriesobjectives, to provide assistance in fulfillingbudgetary objectives, to perform the controlfunction

4. User Ministries To achieve favourable trade-offs

5. Finance Ministry To ensure compliance with national budget

6. Planning Ministry Ensure fulfillment of the plan objectives

b) Internal Agencies

Governing Board Specified corporate objectives

Unit Specified unit objectives

Public Enterprise

Manage – Micro Level objectives the above listing shows that it is very complex toattempt a single model or approach that satisfies all objectives and agencies.Performance evaluation at the level of parliament requires broad judgement of issueslike investment, returns, import substitution, employment creation, regionaldevelopment etc. In contrast, performance evaluation at the enterprise level requiresidentification of units’ objectives and the extent of achievement, identification of areasfor further improvement, identification of control inputs and so on. Thus it becomesnecessary to develop alternative approaches to performance evaluation.

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Performance13.2 OBJECTIVES OF PERFORMANCE

EVALUATION IN PUBLIC ENTERPRISES

The evaluation of public sector enterprises have to be related to a complex set ofobjectives. There are more dimensions to the problem of performance evaluation inpublic enterprises than in private enterprises. The principal objective of a privatesector enterprise is maximisation of profit. In case of public enterprises, theobjectives are multiple and cover different aspects of its operations like earning ofsurpluses, equitable distribution of its products and services, etc. The major objective,whether immediate or ultimate, in case of a private enterprise is profit. Otherobjectives like location, choice of technology, composition of workforce, capacityutilisation becomes secondary until it adds to the ultimate goal of profit maximisation.

Public enterprises are controlled by the parliament through its associated agencieslike the Committee on Public undertakings, Audit Board, the concerned department ofthe Administrative Ministry along with the Finance Ministry and the Bureau of PublicEnterprises, Board of Directors of the respective individual enterprises. Variousconflicting interests arise between them and the enterprise which is under diversecontrolling units is pushed to a stage in which the enterprise cannot show goodperformance. Often, these conflicting interests lead to decisions which are notintended to better the performance of enterprise as a whole but satisfy one controlunit or the other. However, many of these decisions are crucial in affect veryimportant strategic and operational areas. They have a long-term impact on theperformance of the enterprises. Examples are decisions affecting location, capacity,technology, pricing, appointment of chief’s etc.

It has not been possible for the Government to come out with a list of specificeconomic and non-economic objectives for public enterprises. There are as manyobjectives as there are people who are concerned with public enterprises.

Commercial and non-commercial objectives – Different public enterprises givedifferent emphasis on their social obligations while earning a reasonable rate ofreturn. For example, reduction in cost in certain fields may come in conflict withsome of the non commercial objectives – a reduction caused by retrenchment orquality reduction. It may not be in the national interest if a drug manufacturer goes infor profit maximisation. In reality, however commercial and non-commercialobjectives are complementary to each other, and not conflicting and confronting.Commercial success should enable a public enterprise to fulfil its non-commercialobligations in a better way. Similarly, non-commercial objectives should pave the wayfor further success in commercial terms. The real success of a public enterprise liesin balancing these two different objectives.

Long-term and short-term objectives-objectives of an individual enterprise level needalso be classified as long-term and short-term. It is necessary because some publicenterprises may have to plan for commercial losses in the short-term in preference tothe fulfillment of social obligations. An organisation like ONGC operates in a highrisk environment in that it may or may not succeed in identifying oil reservesimmediately on a short term basis, but it will have to invest heavily on thisidentification process on a continuous basis.

Objectives at each Individual Enterprise Level – Instead of looking at the objectivesof Public Enterprises in general, objectives of specific groups of enterprises may beconsidered for evaluation purpose. There are public enterprises that develop orpromote industrial growth (Development Corporations), Public enterprises that

4

Public Enterprise:Performance and Evaluationprovide basic materials like steel, coal, chemicals etc; to other industrial units (BasicIndustries); 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 TradingCorporations are examples. Defining objectives of each of these groups of publicenterprises 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 meaningfulperformance evaluation of a public enterprise.

The Comptroller and Auditor General of India in his Review of Accounts published inthe annual reports of most central government companies, provides the followingfinancial ratios for a 3-year period. But the absence of analysis based on them makesit 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 consumptionrequirements.

13.3 CRITERIA FOR EVALUATION OF PUBLICSECTOR

The general criteria used for evaluation of performance of the public sectorenterprises can be listed as

••••• Return on investment

••••• Total contribution to the state Treasury (Interest + Divided + Taxes + Savings inForeign 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.

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Performance13.4 AVAILABILITY OF DATA ON PERFORMANCE

EVALUATION OF PSEs

Availability of data on actual performance on all the performance criteria is veryimportant in carrying out a meaningful evaluation. The Public Enterprises surveypresented to the parliament annually by the Department of Public Enterprises gives anumber of financial ratios for all central public enterprises. These ratios provide ameasurement of efficiency.

••••• The first ratio “percentage of sales to capital employed” shows the overallproductivity or effectiveness of the resources available to the firm. The limitationof the ratio is that it only indicates the turnover.

••••• The second ratio “PBDIT to capital employed” indicates the beneficialness of thecapital employed. The PBDIT figure is before deprecation, interest and otherappropriations, all of which would vary from firm to firm, it is argued that it is abetter indicator of comparative efficiency as compared to net profit.

••••• The third ratio, the “percentage of cost of sales to sales” indicates the profit orloss per hundred rupee of the sales effected. Cost of sales includes all expenseson or production including depreciation, interest charges, write off of deferredrevenue expenditure and plus and minus depletion / accretion to the stock.

13.5 COUNTRY MODELS FOR PERFORMANCEEVALUATION OF PUBLIC ENTERPRISES

There are various models in practice in different countries for the performanceevaluation of public sector enterprises.

United Kingdom – In UK, financial discipline in case of public sector was broughtabout by various measures, the prominent among these being the while papers of1961, 1967 and 1978. Since then performance is sought to be evaluated by the extentto which public enterprises are operating within the set external financial limits andachieve the required rate of return.

France – the “contract system” is followed in France for the performance evaluationof public sector enterprises. The system is meant to increase both the autonomy andaccountability of an enterprise. The contract is between enterprise and governmentLand covers a period of three to five years. Performance is evaluated against theagreed targets under these contracts.

Argentina – The Argentina model looks at performance of public enterprises at threelevels namely X

2, X

1 and X

0, denoting macro, sectoral and enterprise levels.

Morocco – Performance evaluation of public sector enterprises in Morocco is alsodone at three levels – the government, the enterprise and the citizen levels.

USSR – The soviet system uses two ratios for evaluating the enterprise’sperformance. They are the ratio of general profit to the average value of assets andthe ratio of accounting profit to the average value of assets. The purpose of suchevaluation is to see that these enterprises do not become a burden on the exchequerand become self-sufficient.

India – Performance of public enterprises is looked in by several agencies like theparliament, the Bureau of Public Enterprises, the administrative ministries, the AuditBoard, the Reserve Bank of India, the Planning Commission.

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Public Enterprise:Performance and Evaluation13.6 SUMMARY

Performance evaluation of public sector enterprises is necessary for theirimprovement growth and accountability. There are various models developed fromtime to time for the performance evaluation of PSEs but none of them are easy toimplement and hence their use is very little. Various factors that have to be taken intoaccount while attempting an evaluation like – environmental factors, operationalfactors, etc. The evaluation of public sector enterprises are related to a complex setof objectives. On the other hand the private sector has the ultimate motive of profitmaximisation. Therefore, alternative evaluation models are required for thesecomplex set of objectives. The objectives of PSEs vary from financial and social tolong term and short term. However, the evaluation at each individual level appears tobe more relevant because of their specific objectives. The other two importantaspects for performance evaluation of PSEs are – criteria for evaluation andavailability of data for the purpose of evaluation. Various countries have differentmodels for performance evaluation of public sector. In India, the evaluation is done byseveral 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 performanceevaluation of public sector enterprises. Describe their objectives.

2. Do you think that performance evaluation is easy for private enterprises thanpublic enterprises.

3. What are the various objectives that affect the performance evaluation of publicsector enterprises.

4. Discuss the various criteria for evaluation of public sector evaluation.

5. Give examples of any four countries and their system of performance evaluationof public sector enterprises.

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Performance13.8 REFERENCES AND FURTHER READINGS

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.

1

Project ManagementUNIT 14 BOARD OF DIRECTORS :

CONSTITUTION AND FUNCTIONING

Objectives

The objectives of this unit are to:

• Understand the organizational structure of public enterprises andits significance in management of PEs;

• Describe the types and composition of the Governing Boards of PEs andtheir functions;

• Describe the composition of the Public Enterprise Selection Board andits role in management of PEs.

Structure

14.1 Introduction.

14.2 Organisational Structure of PSEs

14.3 Composition of the Board

14.4 Public Enterprises Selection Board

14.5 Summary



14.1 INTRODUCTION

Historically, Public Sector in India has played a unique role in the fortunes of thecountry. At the time of independence, it was realized that political freedom withouteconomic self-reliance would be detrimental to the country’s sovereignty andintegrity. Hence, public sector came to be charged with objectives which wereprimarily economic but contained a heavy dose of social and political ingredients.For instance, building of infrastructure for economic development was an economicobjective which also had social connotations, creation of employment could be said tobe a social objective and prevention/reduction of private economic power could bebest described as socio-political objective. Hence, public sector had a multiplicity ofobjectives 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 avery onerous task. Hence, the organizational structure of the public enterprises had tobe designed in a suitable manner, which could enable the public enterprise to performunder the overall guidance and patronage of the government, while at the same timebe autonomous enough to carry out activities which would ensure that the economicgoals set for it could be achieved successfully.

As time went on, public sector enterprises increased in number and took on more andmore responsibilities. Sick private industries were also taken over by Government andconverted into public sector enterprises, obviously to safeguard employment. Thisincreased the role of the public sector from managing infrastructure industries which

2

Organisation andManagement

had virtual monopoly to managing industries which were sick and in the competitivefields. Hence, the organizational structures for public sector enterprises underwentchanges with changes in portfolios.

Since 1991, when the liberalization movement started in India, areas reserved for thepublic sector have come down drastically. Prior to July 1991, 17 industries werereserved for the public sector. After July 1991, this list had been pruned to merely8 and from December 2002, only three industries are reserved for the public sector.Hence, this measure has consequently opened up erstwhile reserved areas forcompetition and caused challenges to the public sector competence/performance.After 1991, disinvestment of government equity in selected public sector enterpriseshas also brought in a certain amount of fiscal discipline in these enterprises. Listing instock markets has also brought about changes in the way the public sectormanagements think. From the year 2000, offloading of major portion of equity toprivate entrepreneurs has brought in a totally new dimension to public sectormanagement. All these changes have been reflected in the organization structure ofthese enterprises and their ability to face competition.

Experience of industrially developed countries has shown that performance of anorganization, whether in the public sector or private sector, has largely dependend onthe leadership of the chief executive officer and he, in turn, cannot be successfulunless he is backed by a very professional and competent board of directors. Sincepublic enterprises have to deal with delicate questions of policy which affect thestability , self-reliance and integrity of the country, their boards of directors play avery crucial role. Unless the governing board has several members who are not onlycompetent but also wise, the organization is bound to suffer. The effectiveness of themanagement board of directors is crucial not only to the success of the public sectorenterprise but also to the future of the country.

Effectiveness of the management boards depend not only on the competence of themembers but also on the extent of trust reposed in them by the owner of theenterprise, viz. the government. This is ensured by adequate delegation anddecentralization of authority and non-interference in the day to day affairs of thecompany by government. There should be clear enunciation of the level of authoritythat the board would have along with accountability for their performance.Frequently, Government has been seen to interfere in petty matters such as postingsand transfers of staff of the enterprise, grant of licences/sanctioning of tenders etc.Government nominees on the boards of public sector enterprises attend meetingswithout adequate brief and frequently stall decisions in the board or get the mattersreferred to government for decision. Many public enterprises have suffered sincetimely 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 thetop management organ responsible for implementing the objectives of an enterprise.The Board is required to formulate policies for running the enterprise with a view inachieving the given objectives. The Board is responsible for all decisions of policy andadministration. The functions of the Board include appointment of the ChiefExecutive and the principal officers, the drawing up of programmes, plan fordevelopment and reorganization, policies regarding finance and expenditure, pricefixation, staff matters such as incentives, allocation of funds and management ofreserves, adoption of new methodologies to improve production, processing ormarketing, training, education, etc, research and development.

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Project Management14.3 COMPOSITION OF THE BOARD

The management of administration of public enterprises has been entrusted togoverning boards, which enjoy wider responsibilities than the boards of private sectorenterprises. For instance, they are entrusted with responsibilities towards consumers,employees, Government, Parliament and the Nation. These boards are expected toformulate policies for running the enterprise and to work towards the achievementsof objectives that have been laid down by various statutes from time to time. Theboards also ensure that the policies of concerned public enterprise conform to theoverall government approach and policies in various matters. Hence, the success orfailure of an enterprise depends upon the proper and careful composition of theBoard. Shri A.D. Gorwala has rightly observed that “whatever the form, withoutsuitable men at the highest level of management-the governing board or board ofdirectors the likelihood of success is very little…….Negatively, the compositionshould not be such as to obscure the essential condition of autonomy. It should notgive rise to overlapping of responsibility or lead to introduction of control andinterference by the back door. Positively, the composition of the Board should be suchas to subserve only one purpose, that is, good and efficient direction in the publicinterest.” Mr. Herbert Morrison had also rightly observed that the Board should becomposed of the best brain that we can secure” and for this “we must insist upon allthe 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 publicenterprises. In addition, certain non-officials drawn from different walks of life arealso given representation on the management boards as they bring in vast experienceof business, accounting and management. The Estimates Committee has criticized thepractice of appointing civil servants as official members, since “the agenda is runthrough each officer giving his department’s point of view and then hurrying back tothe post of duty.” This bureaucratic approach to the organizational and functionalproblems defeats the very purpose of constituting a company. The EstimatesCommittee, therefore, recommended that “keeping in view the tasks to be performedand the requirements thereof, members of the Board of Directors might be drawnfrom a wide sphere than that at present and more technical experts, experienced menfrom 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 sameindustry in private sector is appointed.” Mr. Khera, who had a long experience in civilas well as industrial administration, has, however, been in favour of the appointmentof official directors on the boards of public enterprises. According to him “theappointment of officials on the board of directors tends to secure for Governmentcompanies the same control and community of interest which private companiesattain through the appointment of members of the family on their boards ofmanagement.” The presence of official directors on the board provides the vital linkbetween the Government, which is responsible for the overall performance of theenterprise, and the management, which is responsible for running the enterprise anddealing with its day-to-day administration. This arrangement also ensures coordinationbetween the Government and the enterprise. This link can be used as a two waycommunication channel in explaining the policies of the Government to the Board andconveying to Government the problems of the Board and its requirements. Manysuch official members also facilitate horizontal coordination between several suchenterprises by virtue of their being a member on these enterprises. Prof. Robson isnot particularly enthused with members of the board being drawn from variousinterest groups. He observes “A director who thinks that he is on the Board torepresent a particular interest is bound to consider that he is an advocate of thatinterest and this cannot but affect adversely the harmonious functioning of theBoard.”

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Qualification of Board Members

It would be desirable that board members possess certain qualifications either interms of industrial experience or in terms of professional experience. Thequalification provisions should be clearly mentioned in the Statute or Act under whichthe enterprise has been established. In the absence of clear-cut qualificationprovisions, there is a possibility of Government misusing their power to appoint theirfavourites on the board.

The Indian Companies Act, 1956, does not prescribe any statutory qualification for adirector except that he should hold the prescribed number of shares. The Directors ofGovernment companies, however, are exempted from this shareholding qualificationalso.

In the case of statutory form of enterprises, in some cases, qualification provision hasbeen mentioned. In Damodar Valley Corporation, the Act provides that a membermust have; (1) highest integrity and incorruptability; (2) high intelligence; (3) clearconcept of economic development of India on modern scientific lines and (4) fairlywide experience of men and affairs. Similarly, in the State Electricity Board, there isexpress provision in the Electricity Supply Act 1948, that (a) one shall be a personwith experience of commercial matters and administration; (b) one shall be anelectrical engineer with wide experience; and (c) one shall have experience ofaccounting and financial matters in public utility undertakings preferably anelectricity undertaking.

The sitting members of state legislatures and parliament are barred from beingappointed members of the Board. This disqualification continues for one year evenafter 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 willdepend on the size of the industry or enterprise and on other factors. Care should betaken to ensure that the Board is neither too small to be dominated by a singleindividual nor too large so that its members feel that they don’t count. “A Boardshould not have so many directors as to make free discussion impossible nor so fewthat the necessary breadth of viewpoint is not obtainable.” (Conference BoardReports—“The 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 beingthe chairman. The Krishna Menon Committee also favoured a small Board consistingof 5 to 9 members depending upon the size and nature of the enterprise. A largeboard makes it possible for Government to appoint vested interests. The IndianRailways is the largest enterprise in India. If it can do with 6 board members, otherenterprises 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 ofresponsibility which may make for quick disposal of business and harmonious workingof 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 aStatutory Corporation or of a Government Company.

Statutory Corporation: Statutory Corporation are established under special actsenacted by Parliament or State Legislatures. Members of these boards have fixedtenure which is clearly mentioned in the Act.

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Project ManagementFor 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 Vice-Chairman hold office for a period “not exceeding years” (Section 20(1) of the StateBank of India Act). In the IFCI Act an elected Director holds office for a term of 4years [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 directorsexcept 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 ofthe Indian Companies Act 1956, there is a provision that all the part-time directors areappointed for a period of at least 3 years, 1/3rd of whom would retire every year byrotation.

Experience has shown that unless the tenure of members are for sufficiently longperiod, members are not in a position to take concrete decisions. The tenure of theappointment of full-time chairman and functional director should normally be for aminimum period of years, whereas the tenure of a non-official member should be forat 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 publicenterprises in India have policy boards, which however, include the full-timeManaging Director/Chairman-cum-Managing Director of the public enterprises.

Functional Boards are composed entirely of full-time members incharge ofparticular branches of the work in the enterprises such as production, finance,personnel, marketing and such other allied functional activities. Members are chosenon 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 havingspecific responsibility of some of the subjects. After a detailed study of variouspublic enterprises, the Estimates Committee in its 52nd Report stated that “On balanceof advantages, the Committee is inclined to view that it would be better to have aMixed Board consisting of some full-time and some part-time Directors :

The Administrative Reforms Commission (ARC) have suggested that “in the case ofsmaller public enterprises there is perhaps an advantage in having a policy makingboard………………except for the very small enterprise, a few functional directorsmust be included in every board. The ARC favoured policy board for smallerenterprises and functional boards for large enterprises. Public enterprises in India, byand large have policy making types of boards.

Chairman of the Board:

The management/governing boards of companies/corporations are headed by aChairman. 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 suchcases, there should be full-time managing director who would be taking all the fullresponsibilities for the Organisation.

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Structure of Board of Directors of PSEs

The Department of Public Enterprises (DPE) formulates policy guidelines on theBoard structure of public enterprises and advise on the shape and size of organizationstructure of PSEs. Public Enterprises in India are categorized in four Schedules,namely ‘A’,‘B’,‘C’and ‘D’ based on various quantitative and qualitative criteria. Thecriteria for categorization of PSEs have been reviewed and revised guidelines havebeen issued on the subject in October 2000. The present criteria include quantitativefactors like investment, capital employed, net sales, profit before tax, number ofemployees, number of units, value added per employee and qualitative factor likenational importance, complexities of problems, level of technology, prospects forexpansion and diversification of activities and competition from other sectors, etc. Inaddition, a criterion relating to the strategic importance of the corporation is alsotaken into account. The pay scales of Chief Executives and full time functionalDirectors in PSEs are determined as per the schedule of the concerned enterprise.As on 31.3.2002, there were 51 Schedule’A’,88 Schedule’B’, 63 Schedule’C’ and 10Schedule’D’ enterprises. The details of the Board level posts (whole time) are givenin Table 14.1:

Table 14.1 : Details of Board Level Posts

Schedule Chief Executive Whole time Director

31.3.2001 31.3.2002 31.3.2001 31.3.2002

Schedule A 46 51 - -

Schedule B 89 88 175 179

Schedule C 67 63 194 206

Schedule D 11 10 61 67

Total 213 212 430 452

Proposals received from the administrative Ministries/Departments for categorizationof PSEs, upgradation of the Schedules of PSEs and creation of the new posts at theBoard levels are examined in DPE in consultation with PESB. During 2001-02, DPEexamined 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, 6PSEs categorized in the appropriate schedule and 9 PSEs were upgraded to the nexthigher schedule. In addition, CMDs of two PSEs were granted higher schedule onpersonal basis and two posts of functional Directors were revived.

Professionalisation of Boards

In pursuance of the public sector policy being followed since 1991 several measureshave been taken by the Department of Public Enterprises to professionalise theBoards of public enterprises. The guidelines issued in 1992 provide that outsideprofessionals should be inducted on the board of PSEs in the form of part-timenon-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 ofGovernment Directors on the Boards should be not more than one-sixth of the actualstrength of the Board subject to a maximum of two. Apart from this there should besome functional Directors on each Board whose number could be upto 50% of theactual strength of the Board, in case of listed PSEs headed by executives Chairmanthe number of non-official Directors (independent Directors) should be at least half ofthe strength of the Board.

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Project ManagementAppointments of part-time non-official Directors on the Boards of PSEs are made bythe administrative Ministries/Departments from the panel prepared in consultationwith the Department of Public Enterprises. During 2001-02 various proposals forappointment of non-official Directors are considered and 40 names wererecommended to various Ministries’ Departments for obtaining approval of ACC. Inso far as Navratna/Miniratna PSEs are concerned the panel of non-official Directorsare 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, theBoard of these companies should be professionalized by including a minimum of4 non-official directors in the case of Navaratnas and 3 non-official Directors in thecase of Miniratnas before the Boards exercise the enhanced powers.

14.4 PUBLIC ENTERPRISES SELECTION BOARD

Background

The Public Enterprises Selection Board (P.E.S.B) is a high powered body constitutedby Government of India Resolution dated 3.3.1987 which was subsequently amendedfrom time-to-time, the latest being on 19.4.2000. It functions under the administrativecontrol 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 policyfor the Central Public Sector Enterprises and, in particular, to advise Government onappointments 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 ofChairman, Managing Director or Chairman-cum-Managing Director (Level-I),and Functional Director (Level-II) in PSEs as well as in posts at any other levelas may be specified by the Government;

ii) To advise the Government on matters relating to appointments, confirmation orextension of tenure and termination of services of the personnel of the abovementioned levels;

iii) To advise the Government on the desired structure at the Board level, and, forsenior management personnel, for each PSE or group of PSEs;

iv) To advise the Government on a suitable performance appraisal system for boththe PSEs and the managerial personnel in such enterprises;

v) To build a data bank containing data relating to the performance of PSEs and itsofficers;

vi) To advise the Government on formulation and enforcement of a code of conductand ethics for managerial personnel in PSEs;

vii) To advise the Government on evolving suitable training and developmentprograms 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. TheChairperson and Members shall be persons who have had a long and distinguishedcareer 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 PrivateSector or Joint Sector Enterprise.

b) A distinguished person with experience in selection of Top Managementpersonnel.

c) A distinguished serving or former Civil servant with experience in managementof 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 fromthe date on which he assumes charge or until he attains the age of 65 yearswhichever is earlier. He shall be eligible for consideration of reappointment for asecond 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 theAppointments Committee of the Cabinet (ACC).

ii) The pay of the Chairperson and the Members shall be the same and equal to thatof Secretary to Government of India in the revised pay scale.

iii) Dearness Allowance and other relief on account of increase in the cost of livingshall also be admissible at the rates determined from time to time by theGovernment.

iv) The other conditions of service including allowances and benefits shall be asdetermined 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 SearchCommittee to look out for and identify suitable persons who can be appointed toLevel-I and Level-II posts in PSEs.

The policy of Government is to appoint through a fair and objective selectionprocedure outstanding professional managers to Level-I and Level-II posts and postsat 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 professionalmanagers within the public sector. Hence unless markedly better candidates areavailable from outside, internal candidates, employed in the PSE, will be preferred forappointment 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 areaof business or in other areas. Mobility of managerial personnel among PSEs withinthe same sector or group, failing which mobility within the public sector as a wholewill be encouraged, subject to certain limitations. However, in special cases,recruitment may be made from the organised services under the CentralGovernment. Such cases would be where, because of special circumstances, it isnecessary to place a member of an organised service in a PSE or where, because ofthe nature of the enterprise or its poor health, it would be difficult to attract goodprofessional managers on a tenure basis.

Under special circumstances, the appointment to a particular post or posts in a PSEmay be made other than through P.E.S.B with the prior and specific approval of theACC. 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 casemay be, that shall make the selection for that particular post or posts, as well as theselection procedure to be followed for filling the particular post or posts.

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Project ManagementFor 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 theCabinet Secretary, could take a decision at any stage in the process of recruitment tothe post of Chairman, Managing Director or Chairman-cum-Managing Director ofthe 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 Personneland Training, has in recent times taken several initiatives to improve its systems andprocedures 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 inNavratna, Miniratna and subsequently other PSUs so as to bring about uniformityin evaluation of eligible Board level appointees and making the appraisal formatmore relevant and performance oriented.

ii) Initiation of the selection process one year in advance of the date of vacancyinstead of six months as earlier in order to facilitate early selection and timelyappointments to Board level posts.

iii) Steps to establish the competencies required for different Board level positionsand to evolve systems and procedures to make selections based on “CompetencyModels”. Against this background, the P.E.S.B has, in consultation with BharatPetroleum Corp. Ltd. involved M/s Hay Group an internationally well-knownconsultancy organisation which has done pioneering work in “CompetencyMapping” initiated an exercise to evolve appropriate “Competency Models” forIndian Central PSUs through a participatory process.

iv) As a part of the process of ‘demystifying’ the selection process, the P.E.S.B hasafter a consultative process initiated a series of “Workshops” under the aegis ofthe SCOPE and the International Management Institute for the benefit of seniorPSU executives. The first two such Workshops have already been held in Delhiand Mumbai.

v) Based on the ideas that emerged at an inter-active session with the CEOs ofNavratna PSUs and the International Management Institute and the StandingConference of Public Enterprises, the P.E.S.B is considering how best to improvethe existing mechanism of one-stage interview for making selections to Boardlevel positions.

Selection Procedure and Guidelines

P.E.S.B keeps a close watch on the vacancies, that are likely to arise and initiatesrecruitment 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 theconcerned Administrative Ministry/Department with the request to update thecompany profile and the job description within a specified time frame of 10 to 15days. In case, the Ministries/Department do not respond within the stipulated timeframe, the job description of the post is circulated suo moto as per the usualprocedure.

A period of 30 days is normally given to receive the nominations after circulation ofthe vacancy. Incase of advertised posts, the applications should be received within21 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 allconcerned 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 postand eligibility criteria, and a shortlist of persons to be called for interview is finalizedwith the approval of the Board.

Scheduling of interview dates is done in consultation with the Secretary ofthe Administrative Ministry/Department concerned who is also invited to assist theBoard in the selection process. Participation by the Administrative Ministry/Department in the selection meetings shall be at the level of Additional Secretary andabove. In the case of selection to Schedule ‘A’ posts, Secretaries of theadministrative ministries concerned invariably assist the Board. In the case ofselection of Functional Directors, the concerned regularly appointed Chief Executivesof the enterprises are always asked to assist the Board. Further, in the case ofsubsidiaries, 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, arealso generally associated with the selection for full-time Board-level posts in P.S.Eswhere they have been appointed as part-time Chairman.

In the case of Tehri Hydro Development Corporation and Nathpa Jhakri PowerCorporation, which are joint ventures with the State Governments, the ChiefSecretaries of Uttar Pradesh and Himachal Pradesh respectively are also invited toassist the Board on the advice of Ministry of Power as and when selections in thesetwo enterprises are made. Similar procedure will be followed in case of another jointventure namely Mumbai Railway Vikas Sadan (MRVC) where the Chief Secretaryof Maharashtra is invited.

An extensive and updated data bank is maintained by P.E.S.B on the particulars ofthe officers working in the various PSEs who may fall within the zone ofconsideration for various posts.

After the first round of Selection Interview, in case, P.E.S.B desires to see somemore candidates before finalizing its recommendation, the post is advertised.

In case, no suitable candidate is found and the Administrative Ministry so desires, thequestion of granting exemption from the rule of immediate absorption may beconsidered by the Board.

Officers from Organized Services will be considered only on “immediate absorptionbasis”, unless the posts have been exempted specifically from the rule of immediateabsorption with the approval of the Competent Authority.

P.E.S.B, while sending its recommendations to the Administrative Ministry, endorsesa copy to the Central Vigilance Commission (CVC) so as to enable them to initiateadvance action for giving vigilance clearance.

Time frames are laid down by the Government, from time to time, within which theconcerned authorities are expected to process the recommendations of the P.E.S.Bfor obtaining order of the competent authority.

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Project ManagementEligibility Criteria for Short-listing Candidates

Following eligibility criteria with regard to pay scales and age of the candidates havebeen 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 scalesof 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 centralgovernment DA formula for a minimum period of two years. In the case of internalcandidate, the qualifying service in the above grade is one year. GovernmentOfficers of the rank of Additional Secretary to the Government of India, holdingposts in the equivalent scale of pay with adequate experience in the relevant field willbe eligible for consideration.

In the case of Defence Service officers, Lt. General in Army and equivalent in otherservices 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 pay-scales of Rs.7,250-8,250 (pre 1.1.1992 scale) (Rs. 9,500-400-11,500 (post 1.1.1992scale)/ 20,500-26,500 (post 1.1.1997 scale) and above with IDA or equivalent postswith Central government DA formula for a minimum period of two years. In the caseof 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 holdingposts in the equivalent scale of pay with adequate experience in the relevant field willbe eligible for consideration. In the case of Defence officers, Major General in Armyand 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-scalesof 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 CentralGovernment DA formula for a minimum period of two years. In the case of internalcandidates, the qualifying service in the above grade is one year. GovernmentOfficers in the scale of Director to the Govt. of India or holding posts in theequivalent scale of pay with adequate experience in the relevant field will be eligiblefor consideration. In the case of Defence officers, Brigadier in the Army andequivalent 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 scalesof 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 CentralGovernment DA formula for a minimum period of two years. In the case of internalcandidates, the qualifying service in the above grade will be one year. Governmentofficers in the scale of Deputy Secretary to the Govt. of India or holding posts in theequivalent scale of pay with adequate experience in the relevant field will be eligiblefor consideration. In the case of Defence officers, Colonel in Army and equivalentin other services are eligible.

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Age Criteria

Preferable around 40 years for schedules ‘C’ and ‘D’ posts and preferable around45 years for schedules ‘A’ and ‘B’ posts. In any case, the candidates not to be above58 years of age on the date of vacancy, except in cases where the age ofsuperannuation has been rolled back to 58 years. In such cases, the upper age limitwill 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 isnot considered for any other organisation for a period of six months or till a decisionon 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 otherenterprises 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 Board-level post. Exception is being made only in the case of internal candidates who couldbe considered for higher posts in their own organizations even if they have notcompleted two years in their present posts.

Criteria for Candidates from Open Market

With regard to candidates from the open market, their suitability is assessedessentially with reference to their qualification, expertise, background and experienceand their conformity to the job specifications, as also their performance andpersonality traits as revealed at the time of interview. P.E.S.B also takes into accounttheir level and positions in their own organizations as also the standing of theorganization.

Notes:

1) Break-up of the 210 PSUs (out of 242 PSUs) already categorized in theappropriate 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 ofthe first year of their term and extension/non-extension after the expiry of theirapproved term are processed in the P.E.S.B on the basis of documents receivedfrom the administrative Ministry/Department concerned. P.E.S.B has alsoprescribed Check-list of documents to be sent to the concerned AdministrativeMinistry/Department as under:

Check List : For Confirmation Cases:

Special Performance Report (S.P.R) in the prescribed format duly signed by thecompetent authority. In the case on Functional Directors, the S.P.R should either becounter-signed by the Secretary of the Administrative Ministry concerned or a clearconfirmation 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 theDPE’s guidelines dated 25.4.85 have been followed while recording the ACRs.

13

Project ManagementCheck List: For Extension/Non-Extension of tenure cases:

The performance appraisal report in the prescribed format B, C and D, along withupdated bio-data of the Board-level incumbents. In the column relating toperformance of the enterprise since the date of appointment of the incumbent, thelatest figures upto the last five years should be indicated.

The special performance report (SPR) duly signed by the competent authority . In thecase of functional directors, the SPR should either be counter-signed by theSecretary of the Administrative Ministry concerned or a clear confirmation to thateffect should be given in the covering note.

The ACRs for the last five years including the latest one should be forwardedincluding the certificate as prescribed by the P.E.S.B.

All Administrative Ministries/Departments to ensure that the proposals regarding theConfirmation or Extension/Non-extension of tenure of Board-level incumbents isforwarded 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 allrespects, 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 asthe 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 theBoards. If we talk about a public enterprise, the Board has more responsibilitytowards the community at large. In this unit we have discussed different aspectsrelated to Boards. This includes types of Boards, size of Boards, tenure of Boardmembers, their respective functions etc. This unit gives a brief description about theBoards 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 ofpublic enterprises?

3. Describe, in brief, the functions of Public Enterprises Selection Board?

4. What is Government’s Policy regarding recruitment to various level posts inpublic enterprises?

14

Organisation andManagement 14.7 REFERENCES AND FURTHER READINGS

Sahai, Baldeo. (1989). Public Sector in India – Historical Perspective in SCOPE:Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai andBaldeo Sahai.

Laha, Chandra, Prakash. (1989). Public Sector: The Socio – Economic andPolitical 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 andBaldeo 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 andredesign of management and control systems – Renaissance Publishing House.

Chopra, R.N.: Public Sector in India (Performance, Profitability and IndustrialRelations), Intellectual Publishing House.

Mathur, B.P., (1993): Public Enterprise Management, Macmillan India Ltd.

15

Project ManagementUNIT 15 PERSONNEL MANAGEMENT

ISSUES IN PUBLIC ENTERPRISES

Objectives

The objectives of this unit are to :

• Describe the role of the Department of Public Enterprises in the Management ofPublic Enterprises;

• Explain Personnel Management Issues such as Recruitment, Wage Policy,Bilateral Agreements, Collective Bargaining, and Productivity-related aspects.

Structure

15.1 Introduction

15.2 Department of Public Enterprises:Role in Management of Public Enterprises

15.3 Wage Policy

15.4 Voluntary Retirement Scheme (VRS)

15.5 Collective Bargaining

15.6 Summary


15.8 Reference and Further Reading

15.1 INTRODUCTION

Personnel Management issues in Public Enterprises are handled by various agenciesdepending on their importance. For instance, recruitment to higher appointments inPSEs 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 withpromotions and confirmations up to certain higher levels of appointees. Lower levelappointments/promotions are usually done at the CEO level with the aid of selectioncommittees consisting of officials of the Board.

15.2 DEPARTMENT OF PUBLIC ENTERPRISESROLE IN MANAGEMENT OF PUBLICENTERPRISES

In their 52nd Report, the Estimates Committee of 3rd Lok Sabha stressed the need forsetting up a centralized coordinating unit which could also make continuous appraisalof the performance of public enterprises. This led to the setting up of the Bureau ofPublic Enterprises (BPE) in 1965. BPE was later constituted as an independentadministrative unit within the Ministry of Finance, Department of Expenditure in1969. As a result of the reorganization of the Ministries/Departments of the CentralGovernment in September, 1985 BPE was made part of Ministry of Industry. InMay, 1990, BPE was conferred the status of a full-fledged Department and is nowknown as the Department of Public Enterprises (DPE) in the Ministry of HeavyIndustries and Public Enterprises.

The Department of Public Enterprises acts as a nodal agency for all central PSEsand assists in policy formulation pertaining to the role of PSEs in the economy as also

1

Project ManagementUNIT 15 PERSONNEL MANAGEMENT

ISSUES IN PUBLIC ENTERPRISES

Objectives

The objectives of this unit are to :

• Describe the role of the Department of Public Enterprises in the Management ofPublic Enterprises;

• Explain Personnel Management Issues such as Recruitment, Wage Policy,Bilateral Agreements, Collective Bargaining, and Productivity-related aspects.

Structure

15.1 Introduction

15.2 Department of Public Enterprises:Role in Management of Public Enterprises

15.3 Wage Policy

15.4 Voluntary Retirement Scheme (VRS)

15.5 Collective Bargaining

15.6 Summary


15.8 Reference and Further Reading

15.1 INTRODUCTION

Personnel Management issues in Public Enterprises are handled by various agenciesdepending on their importance. For instance, recruitment to higher appointments inPSEs 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 withpromotions and confirmations up to certain higher levels of appointees. Lower levelappointments/promotions are usually done at the CEO level with the aid of selectioncommittees consisting of officials of the Board.

15.2 DEPARTMENT OF PUBLIC ENTERPRISESROLE IN MANAGEMENT OF PUBLICENTERPRISES

In their 52nd Report, the Estimates Committee of 3rd Lok Sabha stressed the need forsetting up a centralized coordinating unit which could also make continuous appraisalof the performance of public enterprises. This led to the setting up of the Bureau ofPublic Enterprises (BPE) in 1965. BPE was later constituted as an independentadministrative unit within the Ministry of Finance, Department of Expenditure in1969. As a result of the reorganization of the Ministries/Departments of the CentralGovernment in September, 1985 BPE was made part of Ministry of Industry. InMay, 1990, BPE was conferred the status of a full-fledged Department and is nowknown as the Department of Public Enterprises (DPE) in the Ministry of HeavyIndustries and Public Enterprises.

The Department of Public Enterprises acts as a nodal agency for all central PSEsand assists in policy formulation pertaining to the role of PSEs in the economy as also

2


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 alsoprovides an interface between the administrative Ministries and the PSEs. Infulfilling its role, it associates itself with other Ministries and organizations as alsopremier management institutes in the country.

Role and Tasks

The important role and tasks of the Department of Public Enterprises are listedbelow:

i) General policy relating to public sector.

ii) Matters relating to issue of Presidential Directives and guidelines to PublicSector Enterprises.

iii) Formulation of Policy guidelines pertaining to Public Sector Enterprises inareas like performance improvement and evaluation, financial management,personnel management, board structures, wage settlement, training, industrialrelations, vigilance, performance appraisal etc.

iv) Matters relating to reservation of posts in the Public Sector Enterprises forcertain classes of citizens.

v) All matters relating to Memorandum of Understanding between the PublicSector Enterprises and the administrative Ministries/Departments.

vi) Matters relating to delegation of powers to Board of Directors.

vii) To undertake in-depth studies in respect of significant areas of functioning ofCentral PSEs.

viii) Matters relating to International Centre for Promotion of Enterprises (ICPE).

ix) Matters relating to Standing Conference of Public Enterprises (SCOPE).

x) To monitor and evaluate the performance of PSEs and to act as a repository ofdata and to bring out an annual survey for the Parliament.

xi) Settlement of disputes among Public Sector Enterprises and between PublicSector Enterprises and government departments except disputes relating to taxmatters.

xii) Advice on establishing new Centrally sponsored enterprises including theircapital and organizational structure and memorandum and articles ofassociation.

xiii) All policy matters relating to composition of Board of Directors of PSEs,categorization of top posts, scheduling of PSEs and notification of revised payscales and DA admissible thereon at periodical intervals.

xiv) Notify revised scale of pay for Board level executives and the DA admissiblethereon at periodical intervals.

xv) Co-ordination of training programmes for managerial personnel in PublicSector Enterprise.

xvi) Policy relating to deputation of Government officers to Public SectorEnterprises.

xvii) Provide information to Committees appointed by the Government to examineany aspect relating to Public Sector Enterprises.

xviii) Monitoring of performance of Sick Public Sector Enterprises and preparingnote for PMO and Cabinet Secretariat authorizing latest developmentregarding Public Sector Enterprises referred to BIFR.

xix) Examination of proposals on restructuring, joint ventures, issue of fresh capitaletc. of PSEs received from Ministries/Departments.

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Project Managementxx) Matters relating to counseling, retraining and redeployment of rationalizedemployees of CPSEs.

xxi) Annual review of the performance of CPSEs and bringing out PublicEnterprises Survey.

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 withan overall sanctioned strength of 121 personnel.

This Department has five Divisions, viz. the Financial Policy Division, theManagement Policy Division, the MOU Division, the Administration andCo-ordination Division and the Permanent Machinery of Arbitration. Financial PolicyDivision 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 ofpolicy relating to wage settlements of unionized employees/pay revision of non-unionized supervisors and executives holding posts below the Board level as well asthe Board level. The Department provides clarifications and render advice to theadministrative Ministries/Departments and the PSEs in matters relating to the wagepolicy and revision in the scales of pay of the executives.

Government have given complete freedom to the management of PSEs to negotiaterevisions of the scales for the unionized staff within certain stipulated conditions. The6th Round of Wage Negotiation was to be entered between managements and theworkers unions which was to come to effect from 1.1.1997. The Government orderswere 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 onpersonnel matters, Board structure, categorization of PSEs, vigilance andperformance appraisal. It deals with professionalisation of Board of Directors andselection of non-official Directors on the Board of PSUs.

Department of Public Enterprises advises the administrative Ministries on thecomposition of the Board of Director of PSEs. The public enterprises are divided infour Schedules, namely ‘A’,‘B’,‘C’,‘D’ based on criteria such as investment, capitalemployed, turnover, profit, number of employees etc.The pay scales of theincumbents of the posts of Chief Executives and fulltime functional directors in thePSEs are determined as per the schedule of the enterprise concerned. As on31.3.2002, there were 51 Schedule ‘A’,88 Schedule ‘B’,63 Schedule‘C’ and 10Schedule ‘D’ Enterprises.

Creation of Posts/Appointments

Categorization, upgradation and creation of new posts at Board level as alsoappointment of part-time non-official directors on the Board of PSEs are done by theadministrative Ministries/Departments in consultation with DPE. During the year2001-02, DPE examined 72 proposals relating to categorization, upgradation, grant ofhigher scales of pay on personal basis, creation of new posts and appointment of non-official part-time Directors. As a result 6 companies were categorized in theappropriate schedules (1 Schedule ‘A’3 Schedule ‘B’ and 2 Schedule ‘C’), 6 posts ofChief Executives and 18 posts of functional Directors created and personnelupgradation granted to Chief Executives of 2 PSEs. Further, 9PSEs were upgraded tothe next higher schedule. Names of 40 persons have been recommended for

4


appointment as non-official part time Directors on the Boards of various PSEs. Asregards Navratna and Miniratna PSEs, non-official Directors are selected by theSearch Committee. The Search Committee held five meetings during 2001-02 andmade selections for 20 Navratna/Miniratna PSEs.

Vigilance

Department of Public Enterprises also deals with vigilance management in PublicSector Undertaking by issuing necessary guidelines, as a part of an on going exerciseof strengthening vigilance machinery in public sector to tackle corruption and makefunctioning of investigation and vigilance agencies more independent, effective andcredible. A model vigilance set up for PSEs has been drawn up and circulated for theguidelines of the public enterprises.

Guidelines

The DPE also undertakes periodical review of guidelines issued by erstwhile Bureauof Public Enterprises/Department of Public Enterprises to the public sectorenterprises from time to time. A compilation of 196 BPE/DPE guidelines retainedafter a review by Vittal Committee has been issued in a booklet form titled“Guidelines for administrative Ministries/Departments and Public Sector EnterprisesVolume-I”. The guidelines issued subsequently were compiled and issued asVolume-II of this publication in September, 2000. A Committee has been set up toreview 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 negotiaterevision of pay scales within certain stipulated conditions for the unionized staff. The6th round of Wage Negotiation was to be entered between management and theworkers union which was to effect from 1.1.97. Government orders were issued on14.1.99 and 26.7.2000 to this effect.

The Public Sector Enterprises are having two groups of employees. One group ofemployees are following the Central DA pattern (CDA) pay scales while the othergroup of employees are following IDA pattern of pay scales.

For the CDA pattern pay employees, their pay scales are governed by therecommendations of the Central Pay Commission and Government decision thereonas in the case of the Government employees. The benefits allowed to Governmentemployees 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 thePSEs should be on IDA pattern related scales of pay. Instructions had been issued bythe DPE in July,1981 and July,1984 to all the administrative Ministries that as andwhen a new PSE is created or established, IDA pattern and related scales of payshould be adopted ab-initio. There are 250 PSEs (excluding Banks, InsuranceCompanies and Financial Institutions) under the administrative control of the CentralGovernment. They employ nearly 18 lakhs workers, clerical staff and executives. Outof this, 97% of the workers and executives are on IDA pattern and related scales ofpay. 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 tofollow-CDA pattern, attempts have been made to rationalize their scale of pay andallowances on IDA pattern and guidelines to this effect were issued in 1990.

5

Project ManagementCDA Pattern in 69 PSEs

CDA pattern pay scales are applicable to clerical staff, unionized cadres andexecutives of the 69 PSEs who were on the rolls of these companies as on 1.1.1986and 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 inpursuance of the Supreme Court directions dated 12.3.1986 which submitted itsReport to the Government on 24.11.1988. Its recommendations have beenimplemented in these PSEs. In pursuance of the Hon’ble Supreme Court directiondated 3.5.1990 read with the subsequent direction dated 28.8.1991, IDA pattern andrelated 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 theunionized staff within certain stipulated conditions have been allowed by theGovernment. The latest wage negotiation was to be entered between managementsand the workers’ union which was to come to effect from 1.1.1997. The Governmentorders were issued on 14.1.1999 and 26.7.2000 to this effect. Some PSEs havealready implemented the negotiated wage settlement, while some are in the processof doing so. There are now two groups of employees in public enterprises. The firstgroup of employees are following the Central DA pattern (CDA) pay scales whilethe second group of employees are following IDA pattern of pay scales. For theemployees following CDA pattern pay, their pay scales are governed by therecommendations of the Central Pay Commission and Government decisions thereonfor the Government employees. The benefits allowed to Government employees arealso 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 often years based on the recommendations of Justice Mohan Committee as per OMdated 25.6.99. In regard to the unionized employees covered by the IDA pattern payscales in the Central Public Enterprises, the Government has decided to allow themthe option to opt for either:

i) A ten year periodicity of pay revision with 100% neutralization of DA as set outin the guidelines issued on 14.1.99.

ii) A five year periodicity on the basis of graded neutralization as existed previouslyi.e. from 1.1.1992 to 31.12.1996.

As per the recommendations of High Power Pay Committee, the CDA patternfollowing employees of the Central Public Sector Enterprises would get pay revisiononly as and when similar changes are effected for the Central Governmentemployees.

15.4 VOLUNTARY RETIREMENT SCHEME (VRS)

In the present market scenario, in view of the ongoing restructuring in the industriesincluding Central PSUs, several measures for reforms and restructuring of PSEshave been taken up by Government. Right sizing of manpower in the CPSUs is oneof the measures adopted. Restructuring of manpower may lead to redundancy. It is inthis context, it has been the constant endeavour of the Government to safeguard theinterest of the employees involved in Central PSUs.

In the process, the Voluntary Retirement Scheme, Which was initially announced inOctober, 1988 for the first time was further liberalized and a comprehensive package

6


was notified vide DPE’s O.M. dated 5th May, 2000 so as to cater to the need of theCPSUs to meet their objectives and also to protect the interest of the workersaffected due to various modes of restructuring.

Considering the difficulties faced by the enterprises where the wage revisioneffective from 1st January, 1992 or 1997, as the case may be, could not be effectedthereby leading to hardships of the employees involved in these enterprises, theVoluntary Retirement Scheme was further modified by issuance of subsequentnotification of 6th November, 2001, which inter-alia provides for 100% additionalcompensation for employees where the wage revision of 1997 could not be effectedand similarly 50% additional compensation for employees where the wage revision of1997 could not be made effective. These increases in VR compensation are to becomputed based on the existing pay of the employees.

The liberalizations in the compensation package would help the sick and loss makingenterprises 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 employeesreleased 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 workforcein order to remain competitive may frame their own schemes of VRS and make itattractive enough for employees to opt for it. They may offer as compensation upto60 days salary or every completed year of service. However, such compensation willnot 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 animproved VRS scheme based on Gujarat model. Under this model an employee willreceive compensation as:

i) 35 days salary for each completed year of service; and

ii) 25 days per year of service for the balance of service until superannuationsubject to some conditions.

The other option available to the employees is known as Voluntary SeparationScheme (VSS) already approved by the Government in respect of units under theDepartment 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 andowners/managers in the industrial sector. This is an important instrument in the handsof both labour and management to avert needless stoppage of work fulfilling oflegitimate aspirations of labour and expectations of managers.

Origin of Collective Bargaining

Sidney James Webb and his wife Beatrice, eminent English economists andsociologists, are credited with first coining the term ‘collective bargaining’ as anantonym to the term ‘individual bargaining’, the phrase they found in use first in theirbook on the cooperative movement in the course of their extensive researches theycarried out into the history of British Labour Unionism (Sidney and Beatrice Webb(1920). Industrial Democracy, London: Longman, Green and Co).

7

Project ManagementHistory of Collective Bargaining

i) U.S.A.: Studies into the past history of labour movements in some of theindustrialized countries of the West, particularly the U.S.A. and U.K. revealthat collective bargaining came into vogue with the growth and development oftrade unions in those countries. Early labour movement in the U.S.A. and otherindustrialized countries encountered difficulties in formation and developmentof trade unions, owing to the reluctance of employers to recognize theexistence of such unions. The American Revolution gave impetus to theformation of trade unions and the earliest case of “collective bargaining” datesback to the 1790s. However, collective bargaining came to get legal recognitiononly with the passing of the National Industrial Recovery Act 1933, whichguaranteed to labour, the right to bargain through representatives of itschoosing. This right was reiterated by the National Labour Relations Act , alsoknown as the Wagner Act, in 1935. These Government Laws encouragedcollective bargaining. The Wagner Act was later amended by the LabourManagement Relations Act, popularly known as the Taft Hartley Act, 1947.This Act considerably strengthened the collective bargaining in the country.

ii) The U.K.: In the U.K., by the end of the nineteenth century, collectivebargaining had become an established practice but it was confined only tocertain specified kinds of employment. Trade unions continuously struggled forrecognition and extended their power and social influence with the result thathealthy relations developed between employers and workers’ organizations ona voluntary basis. Since 1870s, collective bargaining came to be recognized bythe Government as the normal practice of settling wages and workingconditions between employers and workers’ organizations in Britain. TheBritish Government has accepted and applied the principles of collectivebargaining in the matter of wages, salaries and service conditions etc. in publicemployment also.

iii) India: The importance of harmonious relations between the employers andemployees was realized as early as Vedic times and the practice of collectivebargaining existed in some form or the other since ancient times in India.During the British rule, industrial relations followed the ‘Laissez Faire’ policyand no encouragement was given to formation of labour unions. Till the middleof the eighteenth century, there was not much of industrial activity in thecountry. It was only between 1850-1860 that industrial development started inIndia with the establishment of some Jute and Cotton Mills and railway lineswere laid through the country. The earliest instance of collective bargainingwas that of a textile mill in Ahmedabad. Industrial disputes, mainly in the textileindustry, came to be settled through mutual negotiations and voluntaryarbitration. This paved the way for collective bargaining. With the attainmentof Independence, the Government of India enacted the Industrial Disputes Actof 1947, which encouraged the orderly development of trade unions. Thishelped in the development of collective bargaining in the country.

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 anda group of work people to reach agreement on working conditions. If negotiations arebetween an employer and a group of his own work people, the dependence of thework people on the employer for their jobs weakens their bargaining powers, andtherefore collective bargaining is more usually understood to be negotiations betweenone or more trade unions and an employer or a group of Associations or employers.

8


Trade Unions organization gives the work people greater strength to providing meansfor the expert presentation of demands by skilled officials not dependent on theemployers for their jobs. Further, a union has funds and means of obtaininginformation outside any one undertaking and can secure for the work people at anyone firm the support of their followers in other firms.” The Encyclopedia Americana(The Encyclopedia Americana, Vol.1, p. 502-1) defines collective bargaining asfollows: “Industrial history shows that collective bargaining is the method by whichthe progress is made in industrial relations. Collective bargaining is a procedure basedupon the principle that those concerned with decisions should have a voice in theirmaking.”

Some Characteristic Features

1) Group Action: As the term collective bargaining itself signifies, essentially is agroup action instead of an unilateral or individual action. It has achieved adistinctive position in an industrial society where capital and labour haveorganized themselves into groups with the objective of fighting their disputes andsettling them with a firm belief and relying on the principle that union is strength.

2) Flexibility, Fluidity and Mobility: Flexible attitude of both the managementand union is an essential pre-requisite for the success of collective bargaining. Inthe 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 maymove from position to position as they try to stress their case.

3) Bilateral Process: Collective Bargaining involves two parties for arriving atcommonly agreed solutions

4) Continuous Process: Collective Bargaining is a continuing relationshipbetween management and the union of which the signed agreement is only thebeginning. It establishes sound employer-employee relationship.

Objectives

The main objectives of collective bargaining are fostering of amity, cooperation andgoodwill between employers and employees and achievement of harmonious relationsbetween them. Other objectives include ensuring that no party tries to outwit theother but rather to negotiate agreements which will be in the mutual interests of theemployers and employees.

Extent and Scope

Collective Bargaining in India has made little progress due to multiplicity of unionswith different political affiliations and existence of inter union rivalry. Managementsfeel hesitant to negotiate and enter into agreement with a particular union, since thereis always the risk that the agreement may not be complied with by members notbelonging to that union, and hence are not party to that agreement. Sometimes, theattitude of some managements towards non-recognition of the unions and their lackof bargaining spirit has also contributed to poor progress in collective bargaining.

Another reason for the poor progress of Collective Bargaining in India is Governmentintervention. The Government has, no doubt, encouraged collective bargaining buthas added provisions relating to adjudication and compulsory arbitration in casenegotiations fail. Government’s standing orders stand in the wake of items subject tobargain, though these orders only prescribed the minimum and they can be exceededby 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,

9

Project Managementgenerally agreements in case of other industrial undertakings are concludedundertaking wise. Collective Bargaining agreements may vary depending uponwhether it is regarding as a single unit or a single company or it covers all workersof a certain type in a particular area or workers in an industry through out thecountry.

Collective Bargaining is applied to finding solutions not merely pertaining to wages,hours of employment, allowances, bonus, security of service other terms andconditions of employment but this has also been applied to other working conditionssuch as seniority, promotions, transfers, lay-offs, vacations and handling orgrievances. However, collective bargaining cannot find solutions for all the issuesrelated to labour market and work process, and other economic and socialproblems connected with best it provides a procedure which helps issues andproblems 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 ofan issue or issues may abruptly choose to close the negotiations. This is calleddead-lock of negotiations.

Activity

Specify the role of the Department of Public Enterprises in the Management ofPublic Enterprises? Do you think it is too much or too little ? If so, why ?

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15.6 SUMMARY

Department of Public Enterprise plays an important role in the management ofpublic enterprise. Here, we have discussed the role of DPE in manaing PE keepingin mind the organisational structure and various policies related to the managementof PEs.

Moving further, different personnel management issues like wage policy, VRS,collective bargaining have been discussed to give a fair view regarding theimportance of personnel management in Public Enterprises.


1. What is the Government’s Policy regarding wage revision in publicenterprises?

2. Trace the origin of Collective Bargaining in industry and its relevanceto Indian conditions.

15.8 REFERENCE AND FURTHER READING

Aggarwala, Dharam Vir. (1982) : Industrial Relations and CollectiveBargaining – Deep and Deep Publications.

10

Organisation andManagement UNIT 16 PROJECT MANAGEMENT

Objectives


• Know the concept of project management;

• Understand the project planning concept;

• Understand the implementation and the evaluation aspect of projectmanagement.

Structure

16.1 Introduction

16.2 Project Management : Concept

16.3 Project Identification

16.4 Project Planning

16.5 Techniques of Project Management

16.6 Project Implementation

16.7 Project Evaluation

16.8 Summary



16.1 INTRODUCTION

Post 1990s saw a great change in the economy of the nation. To improve the socio-economic conditions in the country, large amounts of money in different projects havebeen invested. Usually the projects are designed in such a manner so as to earnadequate returns for the future development. But in most of the cases it is seen thatprojects take longer time than estimated, and returns are less than expected. Thismay be due may be due to inadequate planning. Therefore, it becomes necessary tohave scientific and systematic management in project planning, development andimplementation (Gopala Krishnan et al, 1996)

Project Management plays an important role and only in the past few years it hasemerged as a separate discipline. In this highly competitive world, the need tounderstand the concept has been growing considerably. When we talk about publicenterprise, this issue becomes more important because when PEs come up with anynew 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 projectfails, the money of the public is lost. Therefore, it becomes all the more necessary tounderstand 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 nationalhighways across the country. Looking at its dimensions, the project has beencompleted to large extent in a short span of time. This shows that the project hassucceeded. Now the question arises, why do some projects succeed and the others

1

Project ManagementUNIT 16 PROJECT MANAGEMENT

Objectives


• Know the concept of project management;

• Understand the project planning concept;

• Understand the implementation and the evaluation aspect of projectmanagement.

Structure

16.1 Introduction

16.2 Project Management : Concept

16.3 Project Identification

16.4 Project Planning

16.5 Techniques of Project Management

16.6 Project Implementation

16.7 Project Evaluation

16.8 Summary



16.1 INTRODUCTION

Post 1990s saw a great change in the economy of the nation. To improve the socio-economic conditions in the country, large amounts of money in different projects havebeen invested. Usually the projects are designed in such a manner so as to earnadequate returns for the future development. But in most of the cases it is seen thatprojects take longer time than estimated, and returns are less than expected. Thismay be due may be due to inadequate planning. Therefore, it becomes necessary tohave scientific and systematic management in project planning, development andimplementation (Gopala Krishnan et al, 1996)

Project Management plays an important role and only in the past few years it hasemerged as a separate discipline. In this highly competitive world, the need tounderstand the concept has been growing considerably. When we talk about publicenterprise, this issue becomes more important because when PEs come up with anynew 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 projectfails, the money of the public is lost. Therefore, it becomes all the more necessary tounderstand 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 nationalhighways across the country. Looking at its dimensions, the project has beencompleted to large extent in a short span of time. This shows that the project hassucceeded. Now the question arises, why do some projects succeed and the others

2

Organisation andManagementfail ? The answer is simple. The projects which succeed are well managed and theone 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 taskinvolving research whereas ‘Management’ means people who control a business.According to the Dictionary of Management, it is an investment project carried outaccording to a plan in order to achieve a definite objective within a certain time andwhich will cease when the objective is achieved (Goel, 1987). There are manysuch definitions regarding project management. On combining the two wordsviz 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 acapital 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 willeither 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 ofthe services provided by the library, the librarian wants to finds out what the users thinkof them. A user survey seems appropriate. The objective of this project is to fund outwhat users of the library think of the services it provides. The benefits expected are aranking of importance of the different services to the users which will provide the basisof any changes. The timescale will depend on the deadline for the review and the costswill 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 theproject. The above stated characteristics are the common characteristics to all kindsof projects.

3

Project ManagementStages of Project Managements

Each project has some distinct stages. As we move further, we will discuss thesestages. One thing is important to note here is that the importance of these stages varyfrom 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 onthe nature of the project:

• National level

• Sectoral level

• Project (individual) level

Practically, all the three levels are connected to each other and any discrepancy inany of the three levels will affect the other two levels.

In the subsequent sections we are going to discuss different stages of ProjectManagement in brief.

16.3 PROJECT IDENTIFICATION

For a new project, identification of the project is the very first stage. This is the mostcrucial step as it forms the basis for further stages. This stage is concerned withcollecting, compiling and analysing the economic data, eventually locating possibleinvesting opportunities. The project idea should especially indicate the objectives,benefits, time span and the cost required for the completion of the project. Thiswould 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

4

Organisation andManagementwhich a decision is to be made. Here, comes the selection process i.e., choosing thebest project profile. A project which will give maximum profits at minimum costs isconsidered to be the best choice. The following are the criteria for selecting aparticular project.

• Investment size

• Location

• Technology

• Equipment

• Marketing

Now the question arises that why is it important to identify a project ? The followingcan 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 thisstage 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. Tocritically appraise a project, it is essential to have a plan. Planning of a project is acyclic 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 afeasible plan of action. Project formulation involves a series of steps to be taken toconvert an idea into a feasible plan of action. Project planning is a process whichinvolves 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 throughwhich planning can change from an institutional base to an institutional and rationalbase.” (Goel, 1987).

Five stages are involved in Project Formulation. These stages are in:

• Project identification

5

Project Management• Technical analysis

• Economic analysis

• Financial analysis

• Project appraisal

We will not go into details of these stages rather more further to know theadvantages 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. Thereforeplanning should be such that the objectives of the project are achieved at minimumcost.

16.5 TECHNIQUES OF PROJECT MANAGEMENT

Any project, irrespective of its nature follows a definite path of planning, schedulingand controlling. Network techniques is one aspect, which helps the management inperforming these functions effectively and efficiently. We are going to discuss thefollowing 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 itsside plotting tasks into a timescale showing start and finish dates. These charts werehence named Gantt Charts. The chart depicts the work to be done alongwith theinterrelationship between the phases of the work. Variations of Gantt Charts likecommitment schedules, analysis bar chart ABC, modified Gant Charts, project

6

Organisation andManagementprogress charts etc. are still used in many of the projects

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 accumulatingbacklong 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 todraw and maintain it. Gantt Charts are particularly useful for simple projects. Formore sophisticated projects we use some more sophisticated techniques like CPMand PERT.

Programme Evaluation and Review Technique (PERT)

PERT was introduced on the polaris weapon system in 1958 by a special projectoffice of the US Navy with the aid of a US consulting firm. Since then, the use ofPERT has spread to defence forces in all countries and to large industrial projects aswell. In India, large PEs like NTPC, EIL, BHEL, FCI, IOC, ONGC etc. have usedPERT successfully for new projects, diversification, replacement and formaintenance.

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 isclearly displayed. PERT charts are very useful for complex projects.

Figure 16.1 : PERT Chart for Project X

1

3

4

5

2

6

7

Project Management

Critical Path Method (CPM)

CPM is a mathematically ordered system of planning and scheduling for projectmanagement, which makes possible a balanced, optimum time cost schedule andassures timeliness and minimum use of resources (Goel, 1987). It is also known asCPA or Critical Path Analysis. It was devised by Du Pont and Remington Rand in1950s to improve project scheduling techniques. Similar to PERT, this is also basedon the network principle. As in PERT, in CMP also the events are shown by circlesand 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 alsodetermines 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 projectbe it, people, staff, equipment, overhead expenses etc. This is the most technical ofall 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 henceforth, a project also has certain amount of risks involved with it. Risk analysis is onesuch method which helps in analyzing the problems which may be associated with aproject. Risk associated with a project of any public enterprise may be associatedwith 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. Asample of Risk Checklist is shown in Table 16.1.

8


Table 16.1: Risk Checklist

Low Risk Scale High Risk WeightTotal

1 2 3 4 3 4 5 6

Full-time experienced 1 Inexperienced or part-time 5 5project manger project manager

Project team is experienced 2 Team is inexperienced and 3 6and has appropriate skills lack the appropriate skills

Staff are dedicated to the 3 Staff have other duties 4 12project

Installation of a system which 1 Installation of a new 3 3has been used elsewhere system

Business will not be 4 Significant impact on 5 20affected business operations

Little or no modification 2 Extensive modification or 3 6or development work development neededundertaken

Little constraint on 4 Mandatory completion 4 16completion date date

Suppliers are well-established 2 Supplier are new or 2 4and experienced one-man businesses

Few users 4 Many users 4 16

No dependence on other 3 Heavy dependence on 5 15projects outside manager’s other projects outsidecontrol manager’s control

Well-developed set of 1 Few or no standards 3 3standards and procedures and procedures in usein use

Delegation of authority 1 Delegation of authority 3 3is clear is not clear

Total 28 44

Low risk if score less than 2 × weight = 88

High risk if score is greater than 3 × weight = 132

Project is therefore medium risk = 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 ofsuccess of the project. Therefore, risk analysis helps in establishing the priorities forthe project.

It is essential to note that delay in any of the activities on the critical path will delay

9

Project Managementthe whole project as the project management environment is a dynamic process, itundergoes continuous changes.

16.6 PROJECT IMPLEMENTATION

It is easy to plan but quite difficult to implement the plan. If the plan is implementedefficiently, the project is said to be successful. A successful project requires athorough control mechanism. Control is the process of monitoring, evaluating andcomparing planned results.

The Primary purpose of control is not to determine what has happened but rather topredict what may happen in future if the present conditions continue. This facilitatesthe manager to effectively manage the project in compliance with the plan andimplement it effectively.

Monitoring

The Control technique like GANTT Charts, PERT, CPM etc. help in monitoring theproject. The important thing in monitoring is how to do it. The following three areasneed 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 notand what can be the ways to bring it on schedule.

Quality: This area shows that whether the results of each stage match the successfactors or not .

CONTROL SYSTEM

(1)Establishing

Standards

(4) (2)Taking Corrective CONTROL SYSTEM Observing

Action 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 costsare under control or not and will the project achieve its objective within the budgetor not.

All the changes or modifications to be made should be done at the proper moment in

10

Organisation andManagementturn guaranteeing the correct implementation procedure.

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. Projectevaluation is done to bring all over improvements. It is basically assessing theperformance with that of the objectives set in the beginning. According to RussellD. Archibald, following can be the objectives of project evaluation:

• To provide visibility of the interrelationship between different areas of theentire project.

• To identify problems before they occur

• To identify opportunities

There are also certain prerequisites for achieving the objectives. These can be statedas 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. Thefollowing flow-chart show different types of evaluation

Types of Evaluation

In terms ofProject Effects on Objectives/Goals

the recepients of a project

Early Evaluation Immediate Objective(Formative)

On-Going Evaluation Intermediate Objective(Interim)

Ultimate Objective

Normally, the evaluation takes place at end of the implementation stage of anyactivity.

Many methodologies over the years have been evolved and adopted by differentprofessionals to evaluate the project. Here we are going to see some of them butwould not indulge into the details:

1) First hard information

11

Project Management2) Formal/informal periodic reports

3) Graphic presentations

4) Standing evaluation review committee

5) Project profiles

6) Control centre

The effective and efficient performance of any project depends on its cyclic processstarting from planning, implementation, monitoring and control, to evaluation.

Activity

List any five infrastructural projects in the public enterprises.

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16. 8 SUMMARY

Public enterprises and as a matter of fact private enterprise do have number ofprojects coming and going. Some are completed successfully and some areabandoned in the middle. Each and every project has a beginning and the end,whether they are completed successfully or not. Project management is one suchfield where only starting a project is not the major concern. This requires properplanning, implementation and evaluation.


1. What is project management ?

2. Differentiate between PERT and CPM.

3. Give an example of a project in each of the following sectors specially takinginto account the public enterprises.

— Manufacturing

— Banking

— Marketing

12



Maclacher, Liz (1996). Making Project Management Work for YouLibrary Association Publishing, London.

Cleland, I. David, (1994) Project Management : Strategic Design andImplementation 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 ProjectManagement, Macmillan India Ltd., Delhi

Kharbanda, O.P. & Stallworthy, E.A. (1986). Successful Project with a Moral forManagement, University Press, Cambridge.

1

Project ManagementUNIT 17 MANAGEMENT OF FINANCE,

MARKETING AND PRODUCTION,ISSUES

Objectives

After going through this unit, you should be able to:

• 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 Introduction

17.2 Finance Objective

17.3 Scope of Finance Function

17.4 Relevance of Marketing to Public Enterprises

17.5 Marketing Concepts in Public Enterprises

17.6 Production System

17.7 Production Management in Public Enterprises

17.8 Summary



17.1 INTRODUCTION

Public enterprises (PEs) in India face a host of financial problems. The ultimatefinancial results of these enterprises have been substantially affected by theirinefficient financial management. India, being a developing country, continues tostrive to achieve planned economic growth through generation of additional income invarious sectors of economy such as agriculture, industry, mining, internal and externaltrade. What is aimed at is not only economic growth but also social change in aplanned manner.

In the process, the country has been constantly facing the problem of limitedresources, and adopt the concept of public enterprise as an instrument for betterusage of these limited resources for the benefit of the society at large. Under suchcircumstances, marketing as an activity, which involves (1) attraction of sufficientresources, (2) conversion of these resources into products, services and ideas, (3)distribution of these outputs to various consuming public, is inevitable to publicenterprises.

PEs in India are of two kinds: (a) central public enterprises (CPEs) under the directcontrol of central government, and (b) state level public enterprises (SLPEs) initiatedby the respective state governments for implementing their aims and polices. WhileCPEs by and large are in manufacturing activity such as machine tools, heavyelectrical etc. majority of the SLPEs are engaged in promotional, developmental orservice activities.

2

Organisation andManagementMarketing utilises and blends a set of tools called the marketing mix — productiondesign pricing, communication and distribution. Too often many equate marketingwith only one of its tools such as advertising. But marketing is oriented towardsproducing result and this requires a broad conception of all the factors influencingbuying behaviour.

Production is a key performance area in any industrial undertaking. The success ofan enterprise largely depends upon the efficiency of its production system.Production is a dynamic process. A minor portion of value addition in any economiceffort is contributed by the production activity. Production or productive endeavorsand achievement of organisational goals are closely linked in all enterprises – whetherpublic owned or private owned. Unfortunately, however, the significance ofproduction is frequently misconstrued. Although it could be viewed as a simple input-output system, it may involve high levels of complexity. Production management goesbeyond the issues of physical feasibility. It involves an active interface with all thefunctional areas. Besides engineering and technology, subjects such as economicsand industrial psychology also play an important role in creation and operation ofproduction system.

In this unit, an attempt has been made to portray the concepts of financialmanagement, marketing management and production management in publicenterprises.

17.2 FINANCE OBJECTIVE

Finance objective constitutes the core of overall business objectives. There is a viewthat PEs need not have any finance objective as they are expected to generate profitssince all their losses could be made good by the State. The practice reveals thatwhereas these enterprises have chosen to explicitly indicate the sub-financialobjective, they are faced with the dilemma of evolving full-fledged financialobjectives. Some PEs point out stepping up the rate of internal resource generationas their finance objective. The declaration of dividends on equity investment hasbeen assumed as finance objective by many PEs. A sizeable chunk of PEs believethat control, cost reduction, financing of working capital and expansion, raisingresources for funding new technology and arranging ways and means to financediversification constitute the finance objective. In order to point out the financeobjective in real sense of the term, we need to dissect the term “PE”. As is obviousthis term comprises two words viz. ‘public’ and ‘enterprise’. By being ‘public’, theseenterprises lend themselves to the ownership and control of the Government andmanagement by it. The ‘enterprise’ dimension makes it obligatory on them toproduce goods and render services at a price which should result into profits to berecorded in the profit and loss account and balance sheet. This makes it clear that aPE has both the ‘public’ and ‘enterprise’ dimensions. The ‘enterprise’ dimension ispreceded by the ‘public’ dimension which suggests that a PE cannot think in terms ofprofits alone. However, they cannot overlook the profit earning in view of thepresence of the enterprise element. In other words, a trade-off would have to beachieved by giving due credit to the nature and activities of the enterprises. PEshaving a larger public dimension would lay less stress on profitability whereas thosedominated by the enterprise dimensions would make efforts to maximize theirprofitability.

3

Project ManagementOrganisation for Financial Management

A study of the organisation for finance should reveal the status and importance offinance function in an enterprise and its role in the changing dynamics of the businessentity. The organisation for finance is shaped among other things, by the structure ofan enterprise. If it has a simple structure in terms of products and location, theorganisation would be functional. The organisation for finance would be complex, onthe other hand, in the case of multi-product, multi-unit and multi-locationalundertakings. In the initial years when public sector units were just coming up wehad cases of finance function being looked after by executives functioning at themiddle or junior levels in the organisation. The finance departments werecharacteristically inadequately staffed. The background of the finance personnel wasconsidered to be an immaterial factor. The training and education of the financepersonnel were foreign to the minds of the top managements in PEs. Though financewas a staff function the variegated expertise was missing and the line relationshipswithin the finance department dominated the staff requirements. Over the years, theorganisation for finance has been undergoing a shift from pure functional andcentralised type to decentralised and divisionalised type organisation.

17.3 SCOPE OF FINANCE FUNCTION

The width and depth of finance function in PEs challenges anybody’s imagination.Most of the decisions in business enterprises have indirect or direct bearing onfinance. PEs are no exception to this generalisation.

The finance function is saddled with the following responsibilities in PEs:

i) Determining the financial resources required to meet the company’s operatingprogramme.

ii) Forecasting how much of the requirements would be met by internal generationof funds by the company and how much would have to be obtained from outsidethe firm.

iii) Developing the best plans to obtain the external funds needed.

iv) Establishing and maintaining system of financial control governing the allocationand use of funds.

v) Formulating programmes to provide most effective profit-volume costrelationship.

vi) Analysing the financial results of all operations, reporting the facts to topmanagement and making recommendations concerning future operations.

vii) Carrying out special studies with a view to reduce cost, improve efficiency andprofitability.

viii) Carrying out feasibility studies and preparing project reports.

In regard to capital expenditure relating to new projects of expansions, feasibilitiesand detailed project report are to be prepared by the Management and these shouldbe examined by the Finance Department to ensure that:

a) The capital expenditure prepared would be in furtherance of the objectivesfor 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.

4

Organisation andManagementix) Budgeting: The Finance Department is the principal coordinating office for:

a) preparation of long-term operating budget covering a period of 10 yearsindicating the likely profit/loss during the period:

b) preparation of long-term capital expenditure budget covering a period ofabout 10 years and advise the management in regard to the timing of theincurrence of capital expenditure;

c) reporting on capital expenditure budget in regard to the expenditure that isexpected to be incurred during the year;

d) preparation of the annual operating budget;

e) preparing the budget returns that flow out of the comprehensive budgetarysystem in operation;

f) analysing variations between budget figures and the expenditure incurred andcomment on the causes that have led to such variation to facilitate themanagement to control expenditure by application of the principal ofexception.

g) preparation of Cash Flow Statement indicating the inflow and outflow ofcash during the period;

h) assessment of the total working capital requirements for the fiscal year andadvise the management regarding the sources of financing and the workingcapital requirements;

i) assisting all the matter relating to purchase of requirements, raw materials,and laying down suitable procedures for purchase to ensure that adequatecontrol is exercised over such purchases and that there are no uneconomicpurchases;

j) advising chief executive on the pricing policies to be followed in theorganisation – in regard to selling prices of products, inter-departmentalissues, charging of material to jobs, etc.

x) advise the management on all service matters having financial implications suchas scale of pay, dearness allowances, bonus, gratuity etc.

xi) organising an effective internal audit department and process the reportssubmitted by the internal auditor and placing the same before the Board throughthe chief executive.

xii) ensuring that the annual accounts are prepared in time according to provisionsof law on all matters relating to the statutory audit and the audit by theComptroller and Auditor General.

xiii) acting as custodian of the cash of the company, and in discharging the duty, theDepartment has to ensure that adequate financial control is exercised over theallocation and use of funds in accordance with the approved programme andbudgets 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 withreference to cost reduction, economies in administration and other overheadexpenditure and such other areas which have bearing on profitability of thecompany.

xiv) furnishing the management prospective costs of the products to enable themanagement to determine the optimum product etc.

5

Project Managementxv) 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

d) Capital expenditure incurred during the quarter compared with sanctionedamount, 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 withvariations, if any with standards established.

i) Any other report prescribed by the undertaking relating to financial andcost matters.

Investment Management

Investment proposals for the establishments of new units and for the expansion ofexisting units emanate either from the Ministries and the Departments of theGovernment or from the enterprises proposing expansion and growth. The broadnature of investment is determined by the priorities indicated in the national plan. TheGovernment exercises a measure of control on the size and pattern of investment inPEs by reserving to itself the power to approve capital outlays exceeding certainfinancial limits. It also exercises control over such investments through scrutiny andapproval of the annual capital budgets of the concerned enterprises. Past three yearshave shown as increasing trend in the outgo from the union Budget to PSUs. Theoutgo for the year 2002-03 Rs.135559.72 crore and was more as compared to2001-02.

Working Capital Management

The management of working capital in these enterprises poses problems both therespect of individual components of current assets and the volume and maturity ofcurrent liabilities. These enterprises do not have a well-defined policy in regard to theworking capital management.

The working capital requirements of the PEs are generally met through cash creditsand 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 centas compared to be previous year but when compared to 2000-01 it had increased by7.68 per cent.

6


Table 17.1 : Guarantees Given by Central Government(Rupees in crore)

Guaranteed Amount Guarantees Amount Guaranteed During Outstanding As on

March 31, 2003

2000-01 2001-02 2002-03

1. Cash Credit from 1580.65 1747.80 2032.10 1426.13State Bank of India(SBI) and otherNationalised Banks.

2. Loans from other 8442.75 8677.07 12552.84 16310.36sources

3. Letter of Credit Open 2297.35 1326.73 481.36 553.48by SBI in respect ofimports

4. Payment obligations 2041.11 6563.27 397.84 704.72under agreements withforeign consultants orcontractors

Total 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. TheGovernment as the owner of PEs has contributed a major share in the investments onthese enterprises. As per the audit reviewed accounts of 276 PSUs, the equityinvestment of the Government of India and loans given to them amounted toRs.1,03,388,.56 crore and Rs.72,478,.50 crore respective. The details are given inTable 17.2

Table 17.2 : Investment in Central Government Companies and Corporations

(Rupees in crore)

Source As on March 31, 2003 As on March 31, 2002

Equity Loans Total Equity Loans Total

Central Government 103388.56 72478.50 175867.06 97533.55 76596.44 174129.99

Central Government 13141.45 11246.42 24387.87 11529.45 11737.94 23267.39companies/corporations

State Governments/ State 2624.48 6667.08 9291.56 2411.75 5154.14 7565.89Governments companies/corporations

Financial Institutions/ 3687.67 158292.65 161980.32 2831.27 132774.95 135606.22others

Total 122842.16 248684.65 371526.81 114306.02 2226263.47 340569.49

Percentage of Central 84.16 29.14 47.34 85.33 33.85 51.13Government Investment

Source: http:/www.cagindia.org (2004)

7

Project ManagementPEs have evolved over the years systems and procedures to manage the investmentsin inventories, sundry debtors, loans and advances, and cash and short termsecurities. Similarly, current liabilities as a component of sources of funds havestarted 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 workingcapital (excluding funds obtained to finance working capital requirements of the FoodCorporation of India) constitutes about three months turnover. Some of thecontributory factors to the exceed build-up of working capital include its slowtransmutation, unfavourable credit management, absence of motivation to reduceinvestment in different components of working capital and lack of awarenessconcerning 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 mixsuggested by the Government of India in 1961. Such a mix has been vehementlyopposed by PE Managers. The committee on Public Undertakings and theadministrative Reforms Commission lent their support to the contention of managers.Those who support the Government policy argue that differentiating between equityand loans is immaterial in the case of PEs as both the dividend and interest are atransfer entry. This argument does not stand ground when PEs approach the capitaland financial markets for raising bonds and public deposits. Moreover, this argumentis based against the basic principle of financial motivation to optimize the capitalstructure. The dependence of PEs on the Government financing is almost total. Inthe face of challenges place before PEs, it is only a matter of time that they would berequired 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 toSection 619 of the Companies Act, 1956, a Government company should makeavailable 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 alwaysheld the view that PEs should strengthen their internal audit. However, the progressin this regard has been inadequate. Among other things, the absence of internal auditmanuals, inadequate staffing and lack of expertise have hampered the quality ofinternal audit in PEs. The internal audit team comprises of experts mostly fromaccounting and finance area. This activity should be carried out by an inter-disciplinary team of economists, engineers, management experts and finance andaccounting personnel. In large enterprises internal audit often does notcommensurate with their size. The Steel authority of India Ltd., Maruti Udyog Ltd.,Indian Rare Earths Ltd., State Trading Corporation, Heavy Engineering Corporationand the Indian Tourism Corporation could be cited as cases in point.

17.4 RELEVANCE OF MARKETINGTO PUBLIC ENTERPRISES

In the early stages of planned economic development, PEs, by way of engaging themin such activities which are of strategic importance, where the gestation periods arelonger coupled with heavy investment, were used as instruments of economicdevelopment. Of late, however, one may find that PEs are also engaged in activitieswhere heavy competition exists. There has been a gradual shift from investment inthe manufacture of capital goods to the manufacture of consumer goods which are

8

Organisation andManagementnormally in a competitive environment. At present one would find that competitionnot 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 monopolysituation, 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 thatover a period of time., PEs may have to shift from sheltered phase to self propellingphase through an intermediary phase called supportive phase. The sheltered phase ischaracterised by greater dependence on government for its performance, thesupportive phase is characterised by the fact that the enterprise strives to survive onits own, whereas the self-propelling phase is characterised by total independence ofthe enterprise by developing within itself competitive capabilities for its own survivaland growth and also contributing to the Nation’s productivity by way of generatingsurpluses. At the juncture of transformation from sheltered to supportive phase,marketing becomes more relevant since at this stage enterprises become moreconscious of cost effectiveness and efficient functioning of the organsiation in moreand more competitive environment.

Marketing plays a dynamic role in stimulating output and consumption, the essential ofeconomic development. On the one hand, it creates and activates new demand byimproving and transforming product or processes and generating new customers andneeds. On the other hand, it also guides enterprises to new production opportunitiesand encourages innovation and improvement in response to demand and prices. It isthe most important multiplier of economic development. In the marketingmanagement of PEs, conceiving right deserves priority attention. One has to viewthe problem not as a series of specialised activities and related to product mix, but asa continuous thought process, moulding of the present situation with the desired formsof the future. A fair match between the capital and output would deliver the goods tothe public at large, even at the desired time and at affordable prices. Sucharrangement would pave avenues for profit generation and welfare channelisation.In the context of the above analysis, let us now study various aspects of marketing asapplicable to PEs.

17.5 MARKETING CONCEPTS IN PUBLICENTERPRISES

Public enterprises are complex organisations. They have many facets – they can beseen as economic entities, administrative systems or political configurations operatinga wide range of business settings. They are exposed to turbulent environments bothinternally and externally and therefore, present challenging tasks. The experience inthe functioning of PEs has adequately demonstrated that the social purpose cannot beadequately achieved unless the functioning of the organsiation as an enterprise issuccessful and generates adequate returns on the investment. In order to cope withthe ever-changing techno-economic environment PEs have to rely on the marketingconcept. The process of marketing is mainly concerned with the exploration, analysisof consumer wants and meeting them. The marketing concept refers tot the basicphilosophy of marketing. In order to be a successful enterprise, a PEs marketingphilosophy must emphasie (1) customer needs and desires, (2) goal achievement,(3) societal requirements, and (4) a systems approach,. Essentially, the marketingphilosophy revolves round the ‘customer’ and ‘customer satisfaction’. The philosophy

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Project Managementunderscores that an enterprise’s policies should stem from the customer’s needs. Inunderstanding and implementing the ‘Marketing concept’, it is not simply enough thatit has got the top management support and approval, but the concept should becommunicated to every nook and corner of a PE. The entire PE must be viewed asa customer creating and customer satisfying organisation.

Business Definition

On most of the occasions, it is rather difficult to define an enterprise’s business inprecise terms. While doing so, many enterprises tend to become myopic and placeheavy emphasis on the products and markets they presently serve. In the ever-changing world of technology and consumer needs, the myopic view would make theenterprise outdated and obsolete. In order to exploit the opportunities that futurewould 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 ofthe business and redefine on the basis of strengths gathered over time. This visionwould 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, getsestablished and continues to produce merely on the basis of servicing socialcommitments. Each and every PE has to have its clear target group distinguishedfrom the mass market which is likely to be most heterogeneous in character. It isimportant to see that a marketing strategy focuses on some target customers, with aview to develop a more satisfying and profitable marketing mix – one that will givethe 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, tradeand utility undertakings. All these contribute a lot to the production factor. PeterDrucker opines that ‘Marketing might by itself goes far towards changing the entireeconomic tone by the existing system without any change in the methods ofproduction, distribution of population or income’. The PEs have full support ofgovernment and therefore these enterprises have good scope to modify their policydecision in order that the product line has a correlation with customer orientation.

The infrastructural industries such as machine manufacturing industries face all sortsof difficulties, specially while excelling the global competition. The industriallyadvanced countries of the world have been successful in initiating qualitativetransformation, specifically through technological sophistication and therefore, theirproducts are not only superior in quality but also affordable to the industrial users orprospects.

In the utility undertakings, we find communication, transportation, electric and waterservices. For example in the case of rail transportation the product-mix decision withregard to quality of locomotives, quality of coaches and wagons need specialtreatment.

In the services sector, we find services like banking, insurance, consultancy, tourismetc. These services one way or the other directly related to the social welfare. Inthe banking sector, for example, the product-mix decisions with regard to expansionof credit facilities, simplification of loan-granting processes and repayment modesneed special attention.

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Organisation andManagementPlace-mix (Distribution Channel): PEs are engaged in providing variety of goodsand services to different customers and the type of channel varies across the type ofPEs.

The PEs marketing consumer on durables such as bread and bulbs need to have anintensive channel network, which means that all the points of purchase have to beadequately stocked with the products. Since a number of alternative brands areavailable to the consumer, there is a problem of consumer shifting his/her loyalty incase of non-availability of the particular brand.

In the case of PEs marketing consumer durables such as automobiles, refrigeratorsetc., there is a need for having selective distribution system. The products may bemarketed through the showrooms set-up by PEs themselves or they may distributethrough a dealer network. While adopting dealer network some aspects such as(1) differential advantage of proximity of customers, (2) strategic deployment ofstores in terms of market coverage, area potential, competition, and (3) efficiency inhandling customers etc, are required to be considered for success in distribution. Forthe 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 anagent in between the PE and the buyer.

In India, the economic activities are centralised in and around the metropolitan citiesand so majority of the wholesale trade is found in these major cities. Eighty per centof our population live in the rural areas, PEs are required to take lead and establisheretail 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, multipurposedistribution centres, as adopted by Indian Oil Corporation, may be followed. IndianOil Corporation not only sell petroleum products at the petrol pumps, but also cater tothe farm requirement by making available items like fertilizers, pesticides, qualityseeds etc. Besides this, the PEs are required to make available, other essentialcommodities like steel, cement etc., with a scientific transport and storage system inthe rural areas.

Price-mix: The most paradoxical aspect is the pricing management in PEs. Themounting social costs have been affecting the pricing decisions of PEs resulting fromwhich one finds problems like cost-price-squeeze, decelerating rate of productivityand profitability, growing cases of sickness etc.

Hansan says, “The price policies pursued by PEs need to be directed by thegovernment towards the fulfillment of certain primary economic aims viz.,(a) maximum utilization of the existing stock of capital, (b) accumulation of theproject rate, (c) the stimulation of certain types of consumptions at the expense ofothers, and the provision of the strongest possible incentives to efficiency”. In thecontext 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 amacro motivation, both conceptually and operationally. The propriety of a given pricein the public sector is evaluated in terms of its inter-enterprise and inter-industryimplications, such that it turns out to be good or efficient from an overall point ofview. And the power to give effect to an appropriate pricing structure is derivedfrom 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 tostimulate sales by all the three sources of communication viz., personalcommunication, impersonal communication and persuasive communication. The

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Project Managementpersonal communication is personal selling, the impersonal communication isadvertising and the persuasive communication is the promotional measures whichinduce the prospects. For improving turnover, PEs need to make suitable efforts forthe designing of the promotion-mix. The personal selling or advertising has beensuccessfully utilized by some of the leading PEs such as Hindustan Machine Tools(particularly the watch division), National Textile Corporation (NTC), seems to lackits share in PEs. In a competitive economy, the PEs, like private enterprises, havealso 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 toexpand their business without offering any incentives to the prospects or the actualusers, however they do such with the ultimate aim of projecting their image.

Market Segmentation

Market segmentation begins with distinguished customer’s needs or interests. It isthe sub-dividing of a market into homogenous subsets of customers, where any ofthese subsets may be conceivably selected as a market target to be reached withdistinct marketing mix. A large number of variables, including geographic variableand buyer behaviour variables can be employed market segmentation.

The other variable employed in marketing strategy is the benefit segmentationvariables, in which buyers are sub-divided relation to various benefits that they areseeking from a particular product.

There are different approaches a PE might choose to play after successfulsegmentation. One alternative is to have one product and one marketing mix for allsegments referred to as ‘undifferentiated marketing’. It may also have one productwith several mixes for the relevant segments, called as ‘particularized marketing’.Concentrated marketing’ involves one or few products and one mix for opensegment. Another strategy may be to employ ‘differentiated marketing’ whichconsists of several products and several mixes aimed towards a number ofdifferentiated market segments.

Marketing Research

Marketing Research is identified as the systematic collection, analysis andinterpretation of marketing information within a specific organisation for the purposeof marketing planning, control and problem solving. Marketing research improvesthe quality of marketing decisions and the organization’s interaction with itsenvironment.

Marketing research plays an important role in PEs. As already discussed, a PE maybe defined as a government owned organisation which serves specific public intereststhrough the economic activity of production and or marketing of goods and services.In addition, PEs are differentiated from governmental units in that PE operationsinvolve the investment and use of funds on which a return is expected, which meanscommercial accounting is imposed on PEs.

In building marketing strategy, which houses strategic elements concerning marketingmix, product, price place (distribution), promotion, power and public relations PEsneed to rely on efficient marketing information system.

17.6 PRODUCTION SYSTEM

Production is a vital system of any manufacturing organisation. A system as youmight know, is a composite of equipment, skills and techniques capable of performingan operational role. The operational role entrusted to production system is to produce

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Organisation andManagementgoods of economic value which may be capital goods or consumer durables orconsumption items. Another aspect of a system is the ‘existence of two’ or morecomponents 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 aproduction systems are: (i) Production planning and control, (ii) Materialsprocurement and inventory control including warehousing and transportationmanagement, (iii) Quality, (iv) Maintenance management, (v) Energy management,(vi) Safety management and house-keeping, and (vii) Research and Development.

17.7 PRODUCTION MANAGEMENT INPUBLIC ENTERPRISES

The 67th Report of the Committee on Public Undertaking; (CPU) which was

submitted to the Fourth Lok Sabha discussed at length various production-relatedproblems of public undertakings. This report, entitled ‘Production Management inPublic Undertakings, pinpoints main problems as under utilization of capacities, lackof cost and quality consciousness and neglect of preventive maintenance. Since theresources are invested in public enterprises towards creating productive capacities, itis necessary to ensure optimum utilization of these capacities. Low capacityutilization has been a prominent feature of PEs in the country. Table 17.3 highlightsthe extent of capacity utilization in percentage in PEs.

Table 17.3 : Capacity Utilisation in Public Enterprises

Capacity utilization No. of Public Enterprisesin percentage

2000-01 2001-02 2002-03

0-50 3 4 2

50-100 20 22 19

More than 100 10 9 13

Total 33 35 34

Source: http://www.cagindia.com (2004)

How to Improve Capacity Utilization?

Capacity utilization is not merely a measure of performance, but it must be realizedthat better capacity utilization is an important way to improve overall performance ofthe PEs. The main factors affecting capacity utilization in PEs are defects incapacity planning, power constraints, infrastructural bottlenecks, raw materialshortages, marketing problems, poor maintenance and managerial shortcomings. Thegovernment and the managements of the enterprises concerned have initiated severalmeasures to improve the capacity utilization. These include modernization of plantsand upgradation of technology, change in product-mix, provision of balancing facilities,training and manpower development, export promotion, streamlining the systems andprocedures, better maintenance of machinery and equipment, use of OperationalResearch and Industrial Engineering techniques, development of ancillary units,linkages and tie-ups with suppliers and markets, increasing productivity through betterindustrial relations and incentive schemes, improvement in managerial and operational

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Project Managementefficiency and strengthening of participative mechanism at all levels. A few othermeasures towards better utilization of capacity are banning of imports whenindigenous capacity has been created, simplification of procedures for import ofessential spares, components and raw materials as also capital goods, and timelyprovision of funds including foreign exchange required for diversification ofprocedures for import of essential spares, components and raw materials as alsocapital goods, and timely provision of funds including foreign exchange required fordiversification, modernization or rehabilitation. Another measure to improve publicenterprise performance in all operational areas is ensuring continuity in topmanagement and giving them sufficient autonomy and powers. The governmentshould closely monitor and review the PE performance, but the administrativeministries should not unnecessarily interfere with the operational management of theenterprises under their control. Since the enterprises differ vastly in their nature,operations as also their situation, the government or its agencies such as Bureau ofPublic Enterprises (BPE) should provide only broad guidelines. Flexibility should beconsidered as a desirable feature and ‘entrepreneurship’ should be encouraged.System approach is useful in cost control because the control of the total cost clearlydepends upon the control of the individual components of cost. The right approach tocost reduction is through value analysis (also called value engineering). It is anorganised effort to identify unnecessary costs. The technique enables theundertaking to enhance the value or utility of its products with a little or no addition toits costs or reduce the costs without bringing down the value of the products in anymanner. Efficient and accurate system of cost accounting and cost control are thehallmark of a good management. “All PEs should make concerted efforts to bringdown the cost of production to a fair level by setting right deficiencies, if any, inorganisations and developing cost consciousness at various level of management”.Stated CPU in its 69th Report to the 4th Lok Sabha. It had also recommendedintroduction of physical norms for raw material consumption.

Role of Industrial Engineering

Industrial engineering is one of the fastest growing fields of applied knowledge whichoffers tremendous scope for application in public enterprises. It essentially aims atimproving the productive efficiency in industrial undertakings and covers quite abroad area. Work study and systems engineering are important constituents ofindustrial engineering. Management Information System (MIS) also broadly comesunder the purview of industrial engineering. Work study deals with the problems ofhow a particular job should be done (method study) and also how much time a jobshould take for completion (work measurement). Systems Engineering is the processof developing large scale and complex man-machine systems for successfulintegration of operations. MIS is both a decision-aid and a management control tooland helps in achieving better coordination among different functional areas,management levels and operating divisions. Industrial engineering can also help themanagements of public enterprises in improving the production planning andscheduling, introduction of appropriate incentive schemes, elimination of wastage andsimplification of procedures. It is essentially a fact-finding and problem solvingdiscipline and PE managements can gain immensely by making full use of this stafffunction. The CPU recommended that Industrial engineering departments in the PEsshould 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 plantmaintenance. All these call for proper systems and conscious effort by managementand workforce. Production function needs to be effectively integrated with overallframework of the organisation, its goals and objective and it should be given its dueimportance in the Public Enterprise set-up so as to achieve excellent operatingresults.

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Organisation andManagementMaterials Management

Materials constitute vital input in any production process. Materials Managementcovers are aspects of materials function including materials planning sourcing, vendorrating and vendor development, purchasing, inventory control, receipt and inspectionof raw material, components and sub-assemblies, store keeping, materials issue andaccounting, management of spares, disposal of scrap and surplus, packaging and ispatch of finished goods etc. Some critical aspects of materials function with specialreference to India PEs are as follows:

Materials Planning: It involves estimating the requirement in terms of quantitiesand timing of various materials components and stores. For efficient functioning ofmaterials department, proper coordination with production and marketing departmentsis very essential. Materials function also has a very close interface with finance andquality functions.

Purchasing: The purchasing wing of materials management department isresponsible for the efficient and economic purchases to meet the materialsrequirement of the enterprise in all its complexity. The purchasing should aim atprocuring right materials of the right quality and in right quantities at the right time, atthe right price and from the right source.

Inventory Management: It covers many aspects of materials function such asfixing higher and lowr stocking limit for each item, determining its EOQ, calculatingthe reorder levels and establishing lead times. Inventories are an indispensable partof operating cycle of all manufacturing organisations. Inventory management can bethe key to the success or failure of a manufacturing firm because excess inventoryholding leads to excessive carring cost on account of interest, storage and handlingcharges etc. Therefore, it is necessary for the PEs to maintain a certain optimumlevel of inventory. Though the optimum level of inventory varies from industry toindustry, generally it is considered that the value of inventory as a percentage ofannual consumption should not exeed 33 per cent and the value of finished goods tonet sales might be about one months sale, 8.33 per cent. At various levels (inpercentage) in some PEs.

Table 17.4 : Holding of Inventory at Various Levels (in percentage) in PEs

Ratio of inventory of Ratio of inventory of storesPercentage of Inventory Raw Materials to and spares of consumption

consumption of Raw of stores and sparesMaterials (No. of PEs) (No. of PEs)

0-33 105 22

33-50 7 17

More than 50 22 123

Source: http://www.cagindia.org (2004)

In around 115 PEs, the value of surplus, obsolete and non-moving inventory as onMarch 31, 2003 was RS.367.82 crore in 46 PEs, Rs.689.63 crore in 44 PEs andRs.1743.30 crore in 77 PEs respectively.

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Project ManagementActivity

Name one example each of infrastructural enterprises, utility undertakings andservice sectors and suggest ways of modifying their product mix.

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17.8 SUMMARY

Financial Management is an important component of the total management process inPEs. The finance objective in PEs may swing between the retention of net worth toits maximization. These enterprises however, do not lay down their financeobjectives normally. PEs discern the trend to develop suitable organisation for theirfinance function. The state of the art financial management in PEs shows that theyhave to go a long way to tone up their financial functioning. There is an immensescope to economise on the front of fixed assets and working capital. There is a needto strengthen the financial control mechanisms. The approach to financing andcapitalization need a new orientation.

Like finance, marketing is inevitable to public enterprises in India. In order toeffectively sub serve the purpose of public Enterprise, each public enterprise must beviewed as a customer creating and customer satisfying organism. In this unit variousdimensions of marketing management have been discussed.

The Government and the people of India have made huge investments in theproduction systems of the public enterprises, thus creating valuable social assets.These social assets must perform well and transform input resources into highervalues outputs more efficiently. Production function needs to be effectively integratewithin the framework of the organisaton.


1. Discuss the process by which we can set the finance objective for PEs indifferent categories.

2. Critically evaluate the working of finance function in PEs

3. 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

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Organisation andManagement17.10 REFERENCES AND FURTHER READINGS

Buffa, Elwood S. (1988), ‘Modern Production/Operations Management’, WileyEastern 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 EnterpriseManagement’ (3rd Edition), S. Chand & Company Ltd., New Delhi

Mishra, R.K., & Kar N.N., Nandagopal R. (1989). Financing of PublicEnterprises 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)

1

Implications of DisinvestmentUNIT 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.

Structure

18.1 Concept of Privatisation

18.2 Policy of Privatisation

18.3 Dimension of Privatisation

18.4 Forms of Disinvestment

18.5 Summary


18.7 References


18.1 CONCEPT OF PRIVATISATION

Privatisation appeared only in the 1980s, as a result of intensive scrutiny of therole of the state-owned enterprises (SOEs) in developed and developingcountries. Many policy makers were disenchanted with the fact that a largenumber of public enterprises were making losses. The SOE sector had absorbeda large share of governments’ budgets in the form of subsidies and capital flows.Governments ran into severe financial problems in the 1980s and experiencedinability to raise loans at home and abroad. This forced them to look at radicaloptions for turning around SOE performance. These consisted of two majorinstruments: (1) SOE reform and (2) Privatisation. These were also insisted uponas conditionalities by the International lending institutions such as the InternationalMonetary Fund and the World Bank.

The market inefficiency of the publicly-owned enterprises, the problems ofmonitoring them as well as the cost of maintaining them under public ownershiplend urgency to change their ownership to the private sector. Some otherreasons are (1) shifting development theory, (2) ideologies in the face of SOElosses, (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 raiserevenue, especially in the face of increasing public debt. Governments have alsoopted for privatisation, because of their inability to finance needed investments inSOEs. Finally, the initial reasons for state ownership have disappeared;technology and growth have introduced competition requiring entrepreneurship; thecapacity of governments to curb excesses of multinationals etc. have alsocontributed to the move towards privatisation.

Economists have generally held the view that private ownership of the means ofproduction would be better in terms of economic efficiency than public ownershipand public management. Ownership of a firm entails changes in property rightsand this, in turn, significantly affects the behaviour and performance of the firm

2

Privatisation andDisinvestment

by altering the structure of incentives for decision-makers in the firm. Thus,under private ownership, rewards could be linked to the company’s share pricevia share ownership or share option schemes and poor performance could bepenalized by threat of take-over by another firm.

Change in ownership per se can affect economic performance, all other thingsbeing equal. By reducing the number of principals to a single owner, whose over-riding objective is to maximise profits, privatisation greatly simplifies the principal-agent problem and creates potential gains. Allocative efficiency as well asinternal efficiency increases with competition. Private ownership has been foundto be most efficient - hence privatisation is most suitable - in markets whereeffective (actual or potential) competition prevails. (Refer Vickers and Yarrow,1988). Where there are massive economies of scale and scope, high entrybarriers or externalities, private ownership performs poorly. The incentive andopportunity to exploit consumers threatens allocative efficiency and the lack ofcompetitive benchmarks leads to internal inefficiency and slack. Thus,privatisation is appropriate where private ownership works best, viz. where isthere sufficient competition and suitable regulation.

Privatisation does not mean that the State has no role to play in industrialdevelopment. The State has an important role to play in creating marketconditions for proper and effective functioning of the enterprises and installing aregulatory regime which will ensure that industries function in a fair manner -and until- competition becomes effective - fostering competition to increaseefficiency and reduce cost.

Privatisation involves transfer of three kinds of rights from the State to theprivate sector: ownership rights, operating rights and development rights.Depending on the form of privatisation chosen, the private sector may acquireany one of these rights or a combination of them. Transfer of operating rightsmay or may not include a transfer of financial risk. For instance, where amanagement contract transfers operating rights to the private operator, it does notinvolve 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 termsinvolved, may relieve the State of both the operating rights and financial risk. Anoperating concession transfers both operating and development rights, andconsequently any financial or investment risk, to the private sector operator. Inbuild-own-transfer schemes, the State transfers development and operating rights(until the asset reverts to the State), including investment and financial risks, tothe private sector. Leases are sometimes also designed to transfer both operatingand development rights, resulting in enhancement of the existing assets. Build-own-operate schemes entail transfer of ownership, operating and developing rightsto the private sector. On the other hand, build-transfer schemes only give theprivate sector development rights.

Privatisation could, therefore, be defined as the transfer of ownership, operatingand/development rights from the public to the private sector; and the applicationof private sector objectives and disciplines in the operation and management ofpublic enterprises, combined in most cases with the transfer of commercial andfinancial risks to their management.

Privatisation has been known to have numerous nomenclatures. In India andPakistan, privatisation is called ‘disinvestment’; while in Sri Lanka; it has beentermed ‘peoplisation’. In the United Kingdom, this concept came to be known as‘popular capitalism’. Chile’s attempts in this direction has been labelled‘denationalisation’. Other variants are ‘prioritisation’ in Australia, ‘industrialtransition’ in Brazil, ‘economic democratisation’ in Costa Rica, ‘partners in

3

Implications of Disinvestmentdevelopment’ in Egypt, ‘dis-incorporation’ in Mexico; ‘assets sales programme’ inNew Zealand, ‘transformation’ in Thailand and ‘restructuring’ in Tunisia.Termssuch as ‘divestment’ and ‘divestiture’ are also used to describe disinvestment. Insimple terms, the term disinvestment of public sector enterprises would mean saleof 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 andwith time. While the motive in industrialised countries in the 1980s could bedescribed as ideological, that in the developing countries was linked to themacroeconomic burden of the Public Sector deficit. In the case of ex-socialistcountries, privatisation viewed as an integral element in the process of transitionfrom a centrally planned economy to a market-oriented economy. In the highlycentralised states in Eastern Europe and the former Soviet Union, where thestate sector accounted for nearly 70 percent or more of GDP, privatisation wasinstrumental in creating a market economy. In most transitional economies inAsia, 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 asmuch as they centre around the benefits to be obtained from rebalancing therelative roles of the public and private sectors in order to increase the economicefficiency and productive power of the economy. All of them have believed thatthe private sector enterprise has more vitality than the public sector and thatresources would be put to better productive use if they are transferred to theprivate sector and made subject to market incentives and discipline. In manycountries, especially countries in transition, this has meant a significant change instrategies for economic growth and development.

However, specific reasons for privatisation vary with each nation, depending onthe 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 ofseveral factors, depending on local priorities.

The following are the objectives of privatisation in countries which have so fartaken up the privatisation programme:-

a) to promote economic efficiency by fostering well-functioning markets andcompetition;

b) to redefine the role of the State in order to allow it to concentrate on theessential task of governing and to withdraw from activities which are bettersuited to private enterprise, where original objectives of a public enterpriseare fully achieved or are no longer valid due to technological advancementor to eliminate unfair competition with private enterprises;

c) to reduce the fiscal burden of loss-making public enterprises, in order to helpregain fiscal control and macroeconomic stability;

d) to reduce public debt;

e) to release limited State resources for the financing of other demands, forexample, 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 domesticfinancial development; and

h) to spread and democratise share ownership by encouraging share ownershipby individuals, making employees share-owners and by raising productivitythrough incentives for holding stock. (UNCTAD, 1995).

Promoting Economic Efficiency

Private sector ownership could increase economic efficiency by exposure ofmanagement and labour to market incentives and allow decisions on resourceallocations to be determined by private sector responses to relative price signals.In well-functioning markets, relative prices give signals regarding the relativescarcity or abundance of various resources, and about the needs of consumersand other users of products and services. This leads to efficient allocation ofscarce resources and thus serves the objective of economic efficiency.

Competition and Regulation are also necessary to achieve efficiency gains. Incase public enterprises are functioning in non-competitive markets, competition oreven threat of competition could be introduced to effect efficiency. (example:Telecommunications industry in the U.K., Malaysia and Singapore). Wherecompetition is not possible or desirable, regulation by an independent regulatoryauthority would be needed to assume the role of surrogate competition and bringabout 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 thatthe State can concentrate on its core functions, such as ensuring order andsecurity 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 forideological commitment on the role of the State, and this may not be forthcomingin many countries on account of its political ramifications.

In countries where the State continues to be sole or majority shareholder inpublic enterprises, governments enter into contract with the enterprises setting outperformance targets and allow them operational and functional autonomy.

Reduction of Fiscal Burden

In many countries, one of the important objectives of privatisation has been toreduce the financial burden of loss-making state owned enterprises in order tohelp regain fiscal control and macroeconomic stability. These financial burdenshave often been found to be responsible for monetary instability andmacroeconomic imbalances in many countries, whatever be their level ofeconomic development.

Reduction of Public Debt

Privatisation serves to reduce public debt and associated fiscal burdens of debtservice with the aid of financial resources mobilised through sales of governmentequity. Debt reduction can, by contributing to healthier public finances, allow morecapital to be made available at lower cost for private investment, thus promotingprivate sector-led growth.

Release of State Resources

By reducing the fiscal burdens of loss-making enterprises and by reducing thelevel of public debt servicing, privatisation enables the State to release the limitedresources for priority areas such as projects for reduction of poverty.

5

Implications of DisinvestmentGenerating New Investment

New investment, particularly foreign investment brings in new technology andmanagement skills, as well as new partners and their access to better andprofitable markets. This has been the main objective of privatisation in developingcountries of Asia and Africa. Privatisation frees the enterprise from budgetaryconstraints and political interference from the State, allows it to raise privatecapital and enter into alliances with strategic partners.

Mobilising Domestic Resources

Privatisation could also serve to mobilise domestic resources for development thathave hitherto been untapped. In some countries ( for example, Argentina)privatisation programmes have succeeded in bringing back domestic investmentwhich had earlier been driven abroad by factors such as macroeconomicinstability and excessive state intervention in the economy. These resources havebeen in the form of financial capital, entrepreneurial talent and other humanresources. The success achieved by the UK privatisation programme in tappingdomestic 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 byallocation of a proportion of shares to small investors and to employees andcreation of a new group of stakeholders in the well-being of the nationaleconomy. This has been the objective behind the voucher or mass privatisation intransitional economies of Europe. It is an intermediate objective which serves tofurther wider political and economic objectives in as much as it helps to mobilisedomestic resources for investment which might otherwise be held in non-productive forms. This also helps demonstrate that privatisation need notnecessarily mean providing of benefits to large foreign companies. Givingemployees a stake in the success of their enterprises can bring about changes inlabour 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 ownsan enterprise, but in the substantive sense of how far the operations of anenterprise is brought within the discipline of market forces through measures suchas liberalisation and deregulation. Privatisation encompasses a broad spectrum ofpossibilities, between denationalisation at one end and market discipline at theother. Broadly, it may consist of disinvestment and non-disinvestment options.

Non-Disinvestment Options

Non-disinvestment options could be viewed as an intermediate step towardsultimate sale of the enterprise by demonstrating the commercial viability of thepublic enterprises to be sold. They could even be important measures inthemselves and could be considered as alternatives to disinvestment. Non-disinvestment options range from corporatisation to management contracts andinvolve removal of subsidies, as well as the exposure of the public enterprise toprivate sector discipline and competition. The main types of non-disinvestmentoptions are as follows:

a) Organisational, financial and operational restructuring, together withcommercialisation and corporatisation;

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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 tooperate more efficiently and/or rendering it more attractive to potential investorsbefore divestiture takes place. Thus, the purpose of restructuring is to enhancethe value of the public enterprise. Broadly, there are three kinds of restructuring:

1) Organisational and Labour Restructuring i.e. the reorganisation of the publicenterprise into more rational or smaller units and any necessary labourshedding;

2) Financial Restructuring i.e. writing off excessive debts of the publicenterprise; and

3) Operational Restructuring: i.e. the infusion of new investment or technologyinto the public enterprise.

Organisational Restructuring usually involves splitting up the public enterpriseMonolith into smaller units or independent companies pursuing major product lines.These units or independent companies could be allowed to stay in the samefamily, in which case, the monolith converts itself into a holding company withsome reduction in centralised managerial behaviour. Some labour shedding mayresult in such restructuring. The purpose of the Organisational restructuring is toput the public enterprise on a sound financial and commercial footing, and toincrease 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. Itallows an enterprise saddled with accumulated losses to “clean up” its balancesheet. If disinvestment is contemplated, financial restructuring prior to the salecan help put a public enterprise on a sound financial footing, thus enhancing itssale value. Where debt liabilities are large, the State may have no other choicebut to absorb them (example: Argentina and Portugal).

Operational Restructuring involves new investment in order to upgrade theenterprise’s physical capacity or technology. Experience has shown that wherethe public enterprise is to be divested, operational restructuring should be left tobe undertaken by the buyer. The reason behind such a move is that thegovernment cannot second guess what the potential buyer would do and maytherefore end up doing the wrong kind of changes, leading to heavy losses.

Commercialisation

Commercialisation is the introduction of commercial principles and objectives intothe management and operations of a public enterprise. This may involve removalof subsidies, and exposure of the public enterprise to market disciplines in additionto a hard budget constraint. Commercialisation can be achieved through contractplans or performance agreements. These are negotiated agreements between thegovernment, acting as the owner of the public enterprise, and the publicenterprise itself. The contract spells out the obligations and responsibilities, suchas production goals, quality of services etc.

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Implications of DisinvestmentCorporatisation converts the public enterprise into a legally and economicallyindependent legal person with a board of directors, while government retains itsequity ownership. Corporatisation can stimulate economic efficiency, by adoptingprivate sector accounting principles, management principles based on competitionand rewards linked to performance.

Privatisation of Management

The aim of privatisation of management is to increase the efficiency of a publicenterprise through introduction of private sector disciplines and managementtechniques. Some of the methods of privatising management is to grant amanagement contract, a lease or an operating concession to a private sectoroperator. This could be an end in itself or could be used as a preparation fordisinvestment.

Management Contracts

A management contract is an agreement by which a public entity contracts witha private firm or individual for the operation of a public enterprise. Here, onlyoperating rights (not ownership rights) are transferred to the private operator. Thepublic entity continues to make financial provisions for the operating costs andinvestments. Management contracts are used especially where the governmenthopes to revitalise a loss-making public enterprise by introducing private sectormanagement methods (example: Hotels in Niger and Togo, Agro-industries inCameroon, Cote d’Ivore and Senegal, manufacturing industries in Ghana andplantations in Sri Lanka).

Leases

A lease is a contractual agreement where the owner of an asset (lessor) grantsanother party (lessee) the right to use the asset and to profit from it for anagreed period of time in return for payment of rent. Leasing can take manyforms, the main being operating leases, financial or capital leases and sale andleaseback agreements. In the operating lease, the lessor is generally required tomaintain and service the leased assets and the lessee has a right to cancel thelease before the expiry of the lease agreement. Financial or capital leases do notordinarily provide for maintenance service by the lessor; they transfer the riskand benefit of ownership and have a longer duration. Under a sale and leasebackarrangement, a firm that owns fixed assets, sells them to another party andsimultaneously executes an agreement to lease the property back from the buyerfor a given period. In this way, the seller not only receives the purchase pricebut retains the use of the assets. Leasing can bring new technical and managerialskills to the enterprise, allowing its assets to be used more efficiently. It may alsobe a feasible alternative where it is politically difficult to divest a publicenterprise. Though leasing, Government sheds the responsibility of operating theenterprises along with risks involved but retains ownership (example: Electricitysupply and water supply in Cote d’Ivore and Guinea; road transport in Niger,mining operations in Guinea, port management in Nigeria, steel mills and refineriesin Togo, manufacturing industries in Ghana, and hotels in Cote d’Ivore andNiger).

Concession

Concession involves the transfer of operating and development rights to a privateoperator by the State. The State can grant concessions directly or through thepublic enterprises. Unlike leases, the holder of a concession has responsibility forcapital expenditures and investments. Consequently, this method has beenpreferred by many governments (example: Argentina).

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Contracting Out

In contracting out, a public authority contracts a private firm to perform somespecific service in the place of a public entity or in competition with it. Thiswould involve decision of an enterprise to acquire an input from outside sourcesinstead of producing it itself (e.g. promotion of ancillary units to produce spareparts). Contracting out is a form of operating concession. It may be used whendisinvestment is not desirable or feasible for political or economic reasons.Contracting out has proved to be an important method of privatising socialservices. It has been mainly used in the USA where advantages of reduced costhave been noticed.

Joint Ventures

Joint ventures could be defined as an association of two or more natural personsor legal entities collaborating in an enterprise and sharing the risks and benefits ofthe joint venture. A joint venture agreement defines the business relationshipbetween the partners. This partnership usually involves a foreign partner whomay provide the capital and the know-how.

Joint ventures have been found to be advantageous to both the government andthe private, often foreign partner. Whereas the foreign investor gains throughaccess to local markets, government contacts, knowledge of local businessconditions and lessens the risk of expropriation though participation of the hostcountry, governments stand to gain because the public enterprise would now getaccess to the foreign partner’s international distributional networks, thusfacilitating 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 privatisationbecause the private investor often favours setting up a new venture rather thanparticipating in an established public enterprise, especially if the latter has beenunprofitable. The Jamaican government disinvested two hotels by means of jointventures involving both foreign and local partners.

Ownership

Ownership measures could consist of sale of the enterprise in full or infusion ofprivate capital through sale of government equity. The larger the private equityparticipation, 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, managementand majority shareholding.

b) Up to 100%, in which ownership and management could be transferred tothe purchaser of majority shareholding. In many cases, especially in India,disinvestment has been done up to 74% of the equity, leaving Governmentwith 26% of the equity. Such a disinvestment would leave management andcontrol with the purchaser of 74% equity but it would also enableGovernment to have a major say in matters such as liquidation of theenterprises etc. Government could also be a majority shareholder in caseother shares are widely dispensed.

Disinvestment options could be politically sensitive, often creating fears of ‘sellingthe family silver’ and of domination of foreign investors. This is especially true ofcountries where the domestic capital market is unable to absorb the public

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Implications of Disinvestmententerprises’ sales without significant depression of asset values. In suchcircumstances, there may be a feeling that the State assets have been sold toforeigners at less than their market value. Sensitivities could also arise where it isperceived that the sales have benefited certain powerful groups of entrepreneursor elite, sometimes close to the political powers. Unless disinvestment is handledcarefully, 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 tenderoffer 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 ora 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 bymaking a valuation of the enterprise, usually with the help of financialconsultants. In a tender sale, the price is fixed in response to applicationsthemselves, and a minimum tender price is stated. In doing so, other factors suchas preferential treatment, if any, to be given to small shareholders, workers,customers etc. are also taken into consideration. The advantage of the tenderoffer 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, atwhom the offer is aimed. There is a third alternative i.e. a combination of fixedprice and tender offer, for example, in British Airports Authority, part of shareswere offered at fixed price and part as tender offer, with minimum tender priceequal to fixed price. The disadvantage in both fixed price flotation and tenderoffer is that the company needs established commercial track record prior tosale. Therefore, flotations involve long-term preparation, and privatisation, in suchcases, 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 overcomelabour unions’ objections to privatisation. In the former, a combination of labourand management gains a controlling interest in the firm being privatised, often bymeans of leveraging. In the latter, a financing technique permits employees of afirm to acquire ownership of all or part of the firm’s stock without personalinvestment on their part. The stock may be a new issue or a transfer of existingassets, such as would take place in privatisation. An ESOP fund is created byborrowing from banks, and the fund is used to acquire the company’s 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), theplan’s trustees allocate to each employee his share of the total. ESOPs have, upto now, been a peculiarly an American initiative.

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Management/employee buy-out has the advantages of causing minimum disruptionto 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 bemet;

3) the company must have a solid asset base to secure borrowing in the capitalmarket.

Management buy-out is best suitable in the case of small privatisations. Someexamples of such buy-outs are:

1) sale of Vickers shipbuilding and Engineering Limited, a subsidiary of BritishShipbuilders, to management and employees, and

2) privatisation of National Bus company subsidiaries and the National FreightCorporation.

Placing

In a private placement, the company or a controlling stake is sold to a limitednumber of investors (generally institutional investors or joint venture partners). Ina private or direct placement, the State negotiates the terms of the placementdirectly with the investor. Private placement has lower flotation costs and greaterspeed. This is an useful option in which the timing of the sale is an importantobjective. A part of a company could be placed with institutions (i.e. sold toclients of sponsoring bank), to satisfy short-term fund raising requirements, withthe possibility of a public issue at a later date. It is an appropriate method ofdisinvestment when enterprises are not large enough to warrant a public shareoffering or when the public enterprises are in poor financial situation and couldbe turned around only by means of the transfer to the private sector investorswho have the experience and know-how. The disadvantage of placing would bethat the objective of wider share ownership would not be satisfied and it may bealso politically unacceptable.

Trade Sale

Trade sale to a domestic or a foreign company is the quickest route toprivatisation, as the public enterprise will not necessarily need to demonstratecommercial track record. Potential purchasers will, however, need to demonstratecommercial factors such as buying up the enterprises’ market share, if operatingin a competitive environment or the opportunity of providing unique product orservice. For overseas purchasers, this could provide opportunity to enter theotherwise closed domestic market. Where such sale takes place to an investorwho is prequalified for tendering by virtue of possessing certain strengths such asnew technologies, access to finance or markets or management which arerequired by the enterprise, this is categorized as ‘strategic sale’. This method ofdisinvestment would have the advantage of speed. Competitive bidding in someform is preferable to a negotiated sale for all types of disinvestment. Suchbidding improves governments’ selling price, and creates pressures for transparentprocesses.

Public Auctions

Public auctions are normally used for small or medium-sized public enterpriseswhich do not require technology transfers or other special inputs. This makes the

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Implications of Disinvestmentprocess very transparent, and maximises the proceeds from privatisation, providedthat adequate number of competing buyers can be assembled for the auction. Itis for these reasons that this process is politically more appealing than othermethods of privatisation such as private placement. However, auction prices maybe affected by the number of persons present when a sale is made. Adequatepublicity is needed before the auction to ensure the interest of competing buyers.Public auctions have been mainly used in numerous countries of Central andEastern Europe for small privatisations such as hotels, shops, repairestablishments and restaurants.

Mass Privatisation

Mass privatisation (also called voucher or coupon privatisation) has been widelyused in the countries in transition of Central and Eastern Europe. Massprivatisation is based on the population-wide distribution of vouchers orcertificates free of charge or for a nominal fee. Usually, these vouchers aredistributed to all adult citizens. The rationale behind this type of privatisation isthat, in these countries, ownership of assets of the means of production wasconsidered as belonging to the people as a whole, represented by the State.

In some countries, voucher holders can exchange vouchers for shares ofprivatised enterprises (e.g. Russia, the Czech Republic and Slovakia), whereas insome others (e.g. Poland), voucher holders use their vouchers to buy certificatesissued by investment funds, but not shares of privatised enterprises directly. Thereare other variations of this procedure in other countries, such as whether or notvouchers are freely tradable, whether or not foreigners could participate andwhether or not cash could be used in addition to vouchers.

The advantage of mass privatisation lies in the speedy transfer of assets from theState to individual shareholders. “Peoples capitalism” has been introduced throughthis method, by creating wider share ownership. This creates popular support forthe privatisation process and contributes to the building of broad-based consensusfor privatisation. It also contributes, albeit indirectly, the development of capitalmarkets.

The disadvantage of mass privatisation is that it creates diffused control of theprivatised enterprises, and lack of managerial skills. The ills of the publicenterprises, such as undercapitalization, indebtedness, outdated equipment andtechnology, insufficient competition and poor management are not addressedthrough mass privatisation.

Liquidation

The government may wish to liquidate the public enterprise and sell its assetsinstead of selling it as a going concern, especially when the enterprise is notviable. Liquidation occurs mainly where it is more advantageous for the State tosell individual assets instead of the entire enterprise since its break-up value ishigher than the company’s current market value as a going concern or whenprospective investors are not willing to buy the enterprise as a going concern.Liquidation has been used as a form of privatisation in Poland, particularly withsmall 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.

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c) List out three forms of disinvestment.

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18.5 SUMMARY

Privatisation as a world wide phenomenon appeared is 80s in the process tobridge the gap between the public enterprises and private enterprises.Privatisation emerged as a means to overcome the problems related to the stateowned enterprises in the developed as well as the developing nations. Stateowned enterprises do have a certain role to play in the privatisation process butprivatisation emerged as a method of developing and strengthening the privatesector. In this unit an effort has been made to discuss the different dimensions ofprivatisation alongwith different forms of disinvestment.


1. What are the different policy objectives Privatisation? Discuss.

2. How far do different methods of disinvestment help achieve the policyobjectives?

3. Privatisation is not an end in itself but a means to the end discuss.

4. Discuss the role of state in privatisation process.

18.7 REFERENCES

Candoy-Sekse, Rebecca (1988). Techniques of Privatization of State-OwnedEnterprises, Technical Paper 90, Volume III, World Bank, Washington, D.C.

Galal, A., James, L., Tandon, P., and Vogelsang, I. (1994). Welfare Consequencesof Selling Public Enterprises – An Empirical Analysis, Oxford University Press,Oxford.

Gelb, Alan and Inderjit Singh (1994). “Public Enterprise reforms in TransitionalEconomies”, 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 MarketEconomies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241-272.

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Implications of DisinvestmentSader, Frank (1993). “Privatization and Foreign Direct Investment in theDeveloping World, 1988 – 92.” Policy Research Working Paper 1202, WorldBank, Washington, D.C.

Sader, Frank (1994). “Privatization Techniques and Foreign Investment inDeveloping 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 Insightsand Lessons Learned United Nations, New York and Geneva.

Vickers, J. and Yarrow, G. (1988). Privatisation – An Economic Analysis, MITPress.

World Bank (1995). Bureaucrats in Business – World Bank Policy ResearchReport, Oxford University Press, London.


Asian Development Bank, (1985). Privatisation: Policies, Methods andProcedures, Manila.

Bishop M, Kay, J.A. and Mayer CP (1994). Privatisation and EconomicPerformance, Oxford University Press, Oxford U.K.

Galal A, Jones LP Tandon P and Vogelsang I (1994). The WelfareConsequences of Selling Public Enterprises: Case studies from Chile, Malaysia,Mexico and the U.K. World Bank Country Economics Department, Public SectorManagement and Private Sector Development Division, Washington D.C.

Ganesh G (1988). Privatisation Experience Around the World, MittalPublications, 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 – LongmanGroup, 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 ofExperience, EDI Development Studies, Washington D.C.

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Implications of DisinvestmentUNIT 19 PRIVATISATION: INTERNATIONAL

EXPERIENCE

Objectives


• List out methods of disinvestments followed by many countries around theworld;

• Survey other strategic issues of disinvestment in international experience.

Structure

19.1 Introduction

19.2 Progress of Disinvestment

19.3 Methods of Disinvestment

19.4 Strategic Issues in Disinvestments

19.5 Benefits from Privatisation

19.6 Summary


19.8 References


19.1 INTRODUCTION

International experience has shown that privatisations have been successful overa wide range of enterprises, differing in size, nature, and competitiveenvironments. The method and extent of disinvestment, as well as the peculiarfeatures employed by the various countries to make the privatisation processespopular among the public and the foreign investors, show that ownership doesmatter, 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, todeveloping countries throughout the world. In the 1990s, many governmentsintensified their efforts, selling more enterprises and shifting their attention fromsmall firms operating in competitive markets to large monopolies. Massprivatisation efforts began in Eastern Europe and the republics of the formerSoviet Union. According to a World Bank report (World Bank, 1995) thegrowing number of countries undertaking divestitures and the shifting regionalfocus was as shown in Table 19.1.

Table 19.1: Divestiture in Developing Countries, 1980-93

1980-87 1988-93a 1988-93a

Region Number of Percentage Number of Percentage Value of PercentageTransactions of total transactions of total transactions of worldwide

( $ billions) value

Africa 210 46 254 11 3.2 3

Asia 108 24 367 16 19.7 21

Latin America 136 30 561 25 55.1 57

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Privatisation andDisinvestmentEastern Europe 2 0b 1,097 48 17.9 19& Central Asia

Total developing 456 100 2,279 100 96.0 100

Industrial 240 376 174.9Countries

Divestitures 696 2,655 270.9Worldwide

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 andthe assets mothballed, and all mass voucher divestitures. The latter comprises anespecially significant form of divestiture in some Eastern European and Central Asianeconomies 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 transactionsin the six years from 1988-93 as in the previous eight years (1980-87). Althoughmost of the increase was due to the explosion of privatisation activity in thetransition economies of Eastern Europe and Central Asia, the number ofdivestitures increased more than fourfold in Latin America and more thanthreefold in the rest of the Asia. Even Sub-Saharan Africa experienced anincrease in divestitures, albeit a much more modes one that left the continentwith fewer privatisations than any other developing region. As a result of theseincreases, developing countries accounted for 86 percent of the transactions inthe 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)

TotalRegion Primary Industrial Finance Infrastructure Others revenue

Africa 0.7 0.5 0.3 0.1 1.6 3.2

Asia 1.8 6.4 2.6 7.4 1.5 19.7

Latin America 8.2 9.9 13.3 22.5 1.2 55.1

Eastern Europe and 1.4 8.9 3.7 2.0 1.9 17.9Central Asia

Total 12.1 25.7 19.9 32.0 6.2 95.9

Total number of 392 1,036 146 267 438 2,279Divestitures

Total divestitures for 126 92 35 51 152 4561980-87

Note: Figures exclude privatisations with a sales value less than $50,000, divestitureswhere state-owned enterprises were simply shut down and assets mothballed andall 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 importantsectors such as electric and water utilities, transportation, and telecommunications.Of the $96 billion in public revenue generated by divestiture in developing

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Implications of Disinvestmentcountries during this period, the largest share (viz. $32 billion) came frominfrastructure. Even the $12.1 billion in sales revenue from the primary sectorduring 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 theremainder. Further, it may be noticed from these figures that there is widedivergence in the average size of the firms disinvested. Latin America, forexample, with just one-fourth of the transactions, accounts for almost 60 percentof the value, while Central and Eastern Europe, with almost half of thetransactions, account for only 19 percent of the value. This reflects the greaterexperience with disinvestment in Latin American countries, enabling them to selllarger enterprises while Central and Eastern Europe governments, who were newto the process, were selling smaller enterprises, as well as giving away sharesthrough mass privatisation schemes.

The last decade (1993-2003) has shown that divestiture has proceeded withgreater vigour, with all governments, whether big or small, industrialized ordeveloping, whether democratic or totalitarian, resorting to disinvestment of majorpublic enterprises, such as telecommunications, airlines, airports, and utilities suchas electricity, water etc. Governments have come to believe that divestiture is anessential part of the globalization and liberalization process and that it isnecessary to divest if expectations of the people are to be met with any degreeof efficiency and promptitude.

19.3 METHODS OF DISINVESTMENT

Various methods of sale of government equity of public enterprises have beenadopted by countries in their privatisation efforts, depending on the objectives ofprivatisation. In the United Kingdom, some of them have been piecemealtransfers to the private sector as for example in British Petroleum, Cable andWireless, British Telecomm etc., while some of them have been transferredtotally to the private sector in one stretch as for example in British Gas andBritish Airports Authority. Piece meal transfers have mostly been in the natureof public offers, while total transfers have been through strategic sale, publicoffers or private placement. British Telecom sale was in the nature of publicoffer; British Coal sale was a trade sale and British Sugar Corporation sale wasa private placement. In addition, there have also been around 158 management/employee buy-outs such as in National Freight Consortium and National BusCompany etc. In France, privatisations were carried out according to thefollowing scheme, viz. 10% to the employees, 15% to foreigners, about 50% tothe public at large and about 25% to about 10 larger shareholders whocomprised a ‘stable nucleus’. In Germany, emphasis was on sale through publicoffers. However, in former East Germany, there were trade sales and publicauctions through the agency called Treuhand which was set up in 1990. By1994, Treuhand had sold over 14,500 companies and more than 132,000 acres ofagricultural and forestry real estate. Most of the companies sold were smallestablishments such as shops and kiosks. In East European countries, sale hasgenerally been through auctions, public offers through vouchers and management/employee buy-outs. In the Caribbean, most of the privatisations were in the formof trade sales. Jamaica also experimented with management leases as non-disinvestment options for privatisation of a few hotels. In Latin America,countries such as Mexico and Chile successfully disinvested major publicenterprises through the trade sale route, though employees were given someshares at discounted prices. In Africa, divestitures included cases wheregovernment retained majority control (such as in Equatorial Guinea), de factominority 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 andDisinvestmentMalawi). Privatisations have included private sales, sale of assets, managementcontracts and leasing. In Asian countries, Sri Lanka and India have mostly reliedon trade sales in their privatisation efforts. Malaysia privatized its SOEs throughtrade sale, leasing, management contracts and management buy-outs.

19.4 STRATEGIC ISSUES IN DISINVESTMENTS

The following have been the main strategies of privatisation employed bycountries which succeeded in their privatisation efforts:

1. Extent of Disinvestment

An important issue to be decided in disinvestment is the question of how muchto divest; whether there should be full divestiture (i.e. transfer of 100% ofownership and control to the private buyer or buyers), or partial divestiture (i.e.anything less than 100% transfer). Partial divestiture would imply continuance inthe choice of ownership but discontinuance in control, depending on whether thecontrolling interest is sold. The decision to relinquish control should be takenirrespective of the extent of the ownership to be sold. It does not follow thatselling a majority of shares means relinquishing control for the simple reason thateven a 20% stake or less would be sufficient for control of a company if othershares are widely dispersed. Partial divestiture could be accomplished by selling anon-controlling interest to diversified private shareholders or by transferringownership to another public enterprise. In either case, government retains controlover the decision-making process though the government may not consider theenterprise as being owned by it. Even if control is not handed over, disinvestmentmay change enterprise behaviour, and economic gains may result becausegovernment’s intervention could be impaired in a positive manner. For example,investment decisions for expansion programmes which previously could have beenconstrained by government could now be taken by the Board of Directors, whohave a vital share in the company’s progress. Decisions regarding incentives forincreasing productivity and increasing autonomy of managers could be takenwithout adverse government intervention. Partial divestitures help in determining afair price for the enterprise in an unknown environment, and thus boost futurerevenues of the government when the remaining shares are sold. Mexico is agood example, where the country benefitted from starting with partial divestiture,relinquishing control (to achieve behavioural change), while retaining majorityownership (to maximise government’s share of the results of the changedbehaviour). When the first tranche of Telmex shares in Mexico were sold, themarket valued the enterprise at US$8 billion, whereas at the second and thirdtranches, the values were US$14 billion and US$30 billion respectively. Ofcourse, between the sale of the first tranche and the subsequent tranches, thecompany had shown excellent results, barring the first year, and the stock markethad become fairly active and responsive.

2. Foreign Participation

A crucial issue to be decided is whether to permit foreign buyers; if so, whetherdirect investment (including participation in management) is to be permitted oronly indirect (i.e. portfolio) management. Foreign participation has manyadvantages. It expands the opportunities to the firm and therefore increasespotential revenue from the privatisation. Depending on the number of bidders,government could maximise the price for its holding. Indirect foreign participationwould bring in capital, increase domestic investment, and reduce the constraint ofbalance of payments. Such benefits are confined to countries where foreignparticipation in capital markets is restricted, such as in Mexico and Argentina. Incountries where capital markets are already open, such as in the UK or

5

Implications of DisinvestmentMalaysia, increased foreign participation is unlikely to increase net economicgains. Foreign direct participation helps bring in improved technical andmanagerial know-how. However, foreign participation has the disadvantage in thatsome of the buyer’s gains accrue to foreigners rather than domestic participantsand politically, this could prove tricky to the government that allows it. Antipathyto foreign participation, if widely prevalent, could result in derailing a privatisationprogramme, such as in Turkey.

3. Public Participation

Government has to decide whether sale of government assets would be made tothe public as opposed to trade sale and whether there should be a policy ofallowing individuals and institutional investors to bid for shares. One could evendecide that each privatised company should have a core group controlling it suchas in France, where the Government chooses one of the existing entrepreneursto take a controlling share of the enterprise. In the UK, the move has been topromote what is known as ‘popular capitalism’, i.e. when the shares are thrownopen for the public at large to bid, and thus become actual owners of theenterprise. Taking into account the fact that most of the shares had been underpriced, this has resulted in substantial profits having been made by individualinvestors, lucky enough to get the shares at the issue price, often after merelymaking the payment of the first instalment. This method, of course, carries therisk that the share may not do well on the opening day the stock is listed in theStock Exchanges and thus lose credibility for the programme. But such instanceshave been very rare. This policy has paid dividends, monetarily as well aspolitically in the UK. However, this method of privatisation would be successfulonly in enterprises which have good professional management.

4. Shares to Employees

Most countries recognized that, in order to elicit cooperation from labour forprivatisation, employees needed to be offered shares in the company. This hasbeen in the form of free shares, or shares at concessional rates etc. in somecountries. For example, the U.K. privatisation, employees got some ‘free shares’at government expense, ‘free matching shares’ usually placed in a trusteescheme, and preferential consideration in the way of allotment. In BritishTelecom sale in 1984, 54 free shares were given per employee. Matchingshares, two for one, were allowed up to 77 per employee. A 10% discount wasallowed for up to 1,600 shares per employee purchased under the priorityarrangements. In France, 10% of the shares were allotted to employees inevery privatisation. Sri Lanka also reserved 10% of shares for employees of thepublic enterprises being privatized.

5. Liberalization Policies

Privatisation is successful only if it is one of the liberalization policies adopted bygovernments (Vickers and Yarrow, 1988; Hemming and Mansoor, 1988).Privatisation works well only if markets function reasonably well and there are nosignificant market failures. Markets and public ownership are linked in ways thatcan reduce competition, even without a significant market failure. (Kikeri, Nellisand Shirley, 1994). This is best illustrated by reference to governments’intervention to protect high-cost SOEs from competition or give them subsidies orprivileged access to finance, or tilt what would otherwise be a level-playing fieldin order to prevent losses in SOEs and consequent drain on the government’sbudget. Thus, state ownership, created to overcome or correct market failures,can sometimes aggravate or perpetuate it. In such cases, privatisation could wellbe used to enhance competition because it reduces the government’s direct stakein protecting particular enterprises. Privatisation would tend to eliminate a

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Privatisation andDisinvestmentgovernment failure more costly to economic welfare than the market failure theSOE was created to correct, as in Guinea (Suzuki, 1991). Gains, therefore,accrue as a result of privatisation even if market structures do not change, aswas found in the case of Chile.

6. Competition

In disinvestment of public monopolies, such as public utilities governments wouldhave to seriously deal with price regulation since trading a public monopoly for aprivate equivalent does not guarantee efficiency or consumer satisfaction.Where enterprises produce tradable goods, a phased reduction of restrictions onimport of competing goods, leading to eventual elimination of all such importrestrictions would introduce needed competition. For example, Mexico, inconjunction with disinvestment, liberalised competing imports in a number ofindustries, 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 Telecommunicationsand Electricity, technology may be a restrictive factor in the creation of an idealcompetitive market. However, some competition could be introduced byunbundling of activities, such as production of ancillary goods and services andnew services such as cellular services in telecommunications. United Kingdom,for example, encouraged private entry in such markets to provide competition toBritish Telecom. Chile and the UK are good examples, where prior toprivatisation, the electricity industry was subjected to unbundling of activities andsubsequent competition. Breaking up of large enterprises, prior to sale, promotescompetition. For example, Romania converted 2, 000 of its big public enterprisesinto 6, 000 prior to privatisation. Competition prevented strategic entry deterrencenormally practised by incumbent large firms.

Competition also promotes internal efficiency and enables efficiency in productmarkets.

7. Regulation

It has been found that even where competition policy is taken to its maximumextent, it would be necessary to regulate the prices of some large divestedenterprises. Price regulation has the dual objective of lowering cost to theconsumer - to prevent exploitation - and motivating producers to keep the costsas low as possible - to increase efficiency of production while assuring them offair return on investment. For example, UK initiated a pricing formula for BritishTelecom - which it subsequently adopted in other privatised utilities - wherein theutility was allowed to raise prices only at a discount from the general rate ofprice inflation, the discount ostensibly accounting for the rate of technologicalprogress and efficiency gains. Other countries like Chile and Malaysia, followedsophisticated price-setting methodologies, where this resulted in generatingsufficient enterprise revenues to allow expansion without subsidies or consumerexploitation. The role of the regulatory machinery is crucial in the process ofprivatisation. It is important that the regulator and the regulatory processes areset in motion prior to divestiture. This makes clear the ground rules for operatingpost-divested firms and assures the consumers that they would not be exploitedat the post-privatisation stage. Regulation would be required to ensure properexercise 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 andencouraging development of capital markets. This would guarantee thatcompetition and cost efficiency would result from privatisation leading to benefitsfor consumers.

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Implications of Disinvestment19.5 BENEFITS FROM PRIVATISATION

Depending on the objectives of privatisation, international experience suggeststhat, if wisely implemented, divestiture is perfectly capable of producing annualwelfare gains in the vicinity of 5 to 10% of pre-divestiture annual sales. (seeGalal et al, 1994). In a typical developing country, the public enterprise sectorgenerates about 10% of GDP, and annual sales are 2.5% of that. If half thesector 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 governmentconsumption. Additional economic benefits might follow from unleashed privateentrepreneurial activity, accelerated capital market development, better use ofscarce administrative resources, heightened productivity on the part of theremaining public enterprise managers and workers, and other indirect effects.

Privatisation gives birth to a number of benefits. Not only does bleeding ofcontinuously loss-making SOEs stop, and capital receipts accrue as a result ofprivatisation, but also there is regular income for the government as dividend forthe share retained, besides income from taxes etc.

Efficiency also improves with change of ownership. In the UK, most privatizedenterprises showed enormous profits after privatisation. Utilities such astelecommunications, gas and electricity showed drastic reductions in pricescharged after privatisation, and even the quality of services improved.Government was a major beneficiary of privatisation, since nearly 8 billion poundsa year were contributed by the privatised companies by way of share sales, taxreceipts and dividends, while previously these very same enterprises were costingthe tax payer around 50 billion pounds a week by way of interest on borrowingsand subventions towards losses.

In Chile, net benefits from privatisation and regulation outweighed benefits fromreforming 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 CementCompany (CCC) laid the foundation for future privatisations by developing thestock market. Hence, privatisation should be assessed by more than simply itseffects 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-economicstabilization. Proceeds from disinvestment were used to retire domestic publicdebt, hence interest rates went down. Large sums were also raised frommoribund public enterprises such as Telmex. Fiscal impact of divestiture waspositive, even where no net sums were raised, as in the case of privatisation ofMexicana.

Privatisation can be a boon for citizens and employees too. In the UK, nearly11million shareholding public (nearly 25% of the population) were benefiting fromregular, 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 ofbonuses and rise in share prices. For example, in 1994-95, the bonus in BritishAirways was around 94 million pounds (which was 42% more than in theprevious year). Average earnings of employees increased in British Airways by3.75%.

Privatisation also helped the companies concerned. Privatized companies benefitedbecause productivity went up. In British Airways and British Gas, productivity per

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Privatisation andDisinvestmentemployee went up by 20% in 1994-95. In British Telecom, call failure rate wentdown from 1 in 25 to 1 in 200.

Activity

List out three important strategic issues in international experience ofdisinvestment.

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19.6 SUMMARY

In this unit, the International scene relating to privatisation has been discussed inbrief starting with progress of disinvestment, different methods of thedisinvestment as followed by different countries have been touched upon. Thisgives 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 turngiving a positive picture to the concept of privatisation.

19.7 SELF-ASSESSMENT QUESTIONS

1. What are the different methods of disinvestment followed by most countriesin the world?

2. Discuss the benefits of Privatisation.

19.8 REFERENCES





Kikeri, S., Nellis, J., and Shelley, M. (1994. Privatisation – Lesson from MarketEconomies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241-272.

Sader, Frank (1993). “Privatization and Foreign Direct Investment in theDeveloping World, 1988 – 92.” Policy Research Working Paper 1202, WorldBank, Washington, D.C.

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Implications of DisinvestmentSader, Frank (1994). “Privatization Techniques and Foreign Investment inDeveloping Countries, 1988-93, World Bank, Washington, D.C.


UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-25-27.


Vickers, J. and Yarrow, G. (1988). Privatisation – An Economic Analysis, MITPress.





Galal A, Jones LP Tandon P and Vogelsang I (1994). The Welfare Consequencesof Selling Public Enterprises: Case studies from Chile, Malaysia, Mexico and theU.K. – World Bank Country Economics Department, Public Sector Managementand Private Sector Development Division, Washington D.C.






Ramanadham V.V. (1998). – ed. Privatisation in the U.K. – Routledge,Chapman and Hall.


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Implications of DisinvestmentUNIT 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 What to Disinvest

20.2 Sequencing of Disinvestment

20.3 How to Disinvest

20.4 Summary


20.6 References


20.1 WHAT TO DISINVEST

It would be preferable to privatise a public enterprise when it loses itscomparative advantage. So long as public enterprise rather than private enterpriseis found to be a superior means of contributing to national well-being and solong it does not suffer from a comparative disadvantage, it should be preferred toother forms. The comparative advantage is to be measured in terms of thecommercial returns, social returns and a desired trade-off between them. Itwould be prudent to trifurcate the public enterprise sector into (a) those whichwill be allowed to die, (b) those to be divested and (c) those to be retained inthe public sector. A properly constituted committee could go about this exercisewithin a tight time frame, and get a list of those enterprises which should clearlybe divested. A virtual automatic selection category would consist of thoseenterprises whose presence in the public sector has no economic justificationwhatsoever.

20.2 SEQUENCING OF DISINVESTMENT

Competitive enterprises which are small relative to both the product and theproduct market should be among the first to be sold. These have the dualadvantage of not being able to exploit market power and hence could avoid thedifficult post-divestiture problems of regulation etc. and being amenable tocompetitive bidding, thereby avoiding the difficult problems of price-setting,negotiations and are capable of rapid improvements in performance (hencebuilding up of credibility for future sales). This strategy was followed in Mexico,in the competitive sectors such as hotels, auto parts, and textiles. Though thenumber of such enterprises may be large, their contribution to GDP may benegligible and hence their privatisation may not have much economic impact. Inview of this, many governments may prefer to divest their large enterprises in thefirst instance, which may have the additional advantage of visible impact on thegrowth rate of the economy, as well as indicate the seriousness of governmentintent. In such an eventuality, the temptation would be to sell the best-runenterprises first because it would be easy to find buyers for them. However, thefinancial gains would be smaller because the enterprises are already well-run.The greatest potential gains accrue from the sale of worst-run enterprises, butthe problem here is of finding buyers, not price. It may be in the interest of

2


governments to press ahead with such sales, though gains from the sale pricewould be of secondary importance. Large gains are also possible in industrieswhere damages are caused by constraints on autonomy and where quickdecisions are required, such as for marketing consumer goods (especially abroad).They would find buyers without difficulty, but the potential gains would besmaller, because they are well-run. The greatest economic gains accrue from theworst-run enterprises (not because they are unviable). But sale of well-runenterprises would help establish credibility for the programme and declare seriousintentions of the government. Ultimately, it is not so much what is disinvested buthow 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 whichothers would follow would be crucial to the success of the privatisationprogramme. Some countries, such as Guinea, made the decision to work on allfronts at once - the industrial, financial, agricultural and service sectors. Others,depending on local circumstances, have been more selective, choosing thoseenterprises first who absorb the heaviest subsidies or those which are judged tobe the most marketable. A few privatisation plans have given priority to theservice or agricultural sectors.

If the Government is keen on getting large additions to revenue, privatisation maystart with those enterprises which are easy to sell at the highest price. Thesewould be the most profitable. The next in line would be those which are notcurrently profitable, but which could be better managed in private hands. Thisstrategy was followed in Grenada. The size of the enterprise being put on themarket could be crucial for government’s privatisation programme, in the sensethat if successful, they would not only produce the largest revenue, but theywould reduce subsidy costs, and signal the seriousness of the government’sresolve. 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 shouldbe undertaken with utmost caution. Failure to observe due caution offer leads toderailment 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 preparethe enterprises for sale. Some of them are:

1) creation of legal entities making sale feasible. This entails legal transformationinto 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 thecompany changes hands, otherwise it is likely to create a sense ofcomplacency and inhibit entrepreneurship; loans receivables could be writtenoff, thereby increasing net assets and its selling price, or they could be left in

3

Implications of Disinvestmentthe company. Increase or decrease in the capital base might be necessary tobring the funding of the company in line with its business requirements;

7) clear up environmental liabilities or inclusion of such liabilities as conditions ofsale;

8) downsizing of labour force - usually the most difficult step, especially indeveloping countries; this would entail handsome redundancy benefits for thefirm and this would enable a better price for the enterprise if it is donebefore divestiture rather than leaving it to the post-divestiture stage. Workingwith Labour Unions to obtain their support for privatisation and allaying fearsof workers would be crucial for the privatisation programme;

9) restructuring of state-owned enterprises - Restructuring by the governmentespecially internal management restructuring or financial restructuring wouldbe essential but large new investments should be left to the new owners.There is, of course, the danger that restructuring could be expensive andraise the worth of the enterprise (and therefore, the price at which it is to beoffered for sale), reducing the number of potential buyers and thereby reducethe returns on the sale. However, potential buyers could be taken intoconfidence and the patterns of restructuring most appropriate for the long-term interests of the enterprises negotiated with them;

10) Consensus building i.e. developing agreement on the rationale, objectives andbasic elements of the privatisation programme among key supportconstituencies;

11) Legislation and Organisation: Establishing an adequate legislative andorganisational framework for the privatisation programme;

12) Prioritisation and Valuation : Setting a schedule for enterprises to beprivatised and establishing probable market values for near-term candidates;

13) Social Objectives : Developing specific proposals to deal with socialobjectives of an enterprise after privatisation;

14) Public vs. Private Monopoly: Establishing rules of the game for monopolisticenterprises to operate effectively in the private sector;

15) Public Awareness: Designing a training and communications programme todevelop public understanding and support, both for the process and forspecific 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 ofits shares is to let the market decide these through competitive bidding. It isimportant that bidders should be carefully pre-qualified and the regulatoryenvironment must provide incentives for modernisation. If the government’s askingprice is based on historical book value, it will have no resemblance to what thebuyer will offer because the assets would have eroded over time. On the otherhand, if the book value has not been adjusted for inflation, this is bound togrossly underestimate the market value.

3. Under Pricing

It has been found that where public enterprises have been sold, the share pricehas been usually under priced, as a strategy to achieve quick success andestablish credibility for future sales. Investors make profits and are favourablydisposed towards the privatisation programme. Where shares have beenoverpriced, investors lose and are wary of future public offerings, as for example,

4


in Turkey. Again, as a positive strategy, governments have opted to sell intranches to offset potential political and financial costs. ‘Clawback clauses’ havebeen used in certain privatisations, such as in UK where privatisation of 12regional electricity distribution companies entitle government to share in any gainsthat the company makes on subsequent sale of land, buildings or other propertythat may be undervalued in the original sale of the enterprises.

4. Discounts

Government may attempt to win political support without making large fiscalsacrifices by offering discounts to small investors and asking institutional investorsto pay higher prices for their shares, either through fixed prices or by tenderofferings.

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 upof 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 debtbecause financial systems were not deep enough, where SOEs were notsufficiently attractive and preferred buyers do not have enough cash. However, itwould be better to sell for cash, even at a lower price, than accepting debt. Cashsales provide liquidity to pay liabilities of enterprises as well as severance pay tothe redundant employees.

Activity

List, in sequence, enterprises that should be disinvested on priority.

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20.4 SUMMARY

This unit discusses the different strategies to be adopted so as to have asuccessful disinvestment. Here, the ways and means to disinvest have beendiscussed giving a clear picture as to how the disinvestment process takes place.There are different steps involved in a disinvestment process and these stepshave been taken care of in this unit. The whole unit discusses, disinvestment as aprocess.


1. Discuss the six main preparatory measures that Government must takebefore undertaking disinvesment.

2. What do you undestand by sequencing of disinvestment.

5

Implications of Disinvestment20.6 REFERENCES





Kikeri, S., Nellis, J., and Shelley, M. (1994. Privatisation – Lesson from MarketEconomies, The World Bank Research Observer, Vol.9, No.2 (July 1994), p.241-272.

UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva, p-25-27.


Vickers, J. and Yarrow, G. (1988). Privatisation – an economic analysis, MITPress.





Galal A, Jones LP Tandon P and Vogelsang I (1994). The WelfareConsequences of Selling Public Enterprises: Case studies from Chile, Malaysia,Mexico and the U.K. – World Bank Country Economics Department, PublicSector Management and Private Sector Development Division, Washington D.C.


Gouri, G and others (1989). Privatisation: The Asia - : Pacific Experience,Hyderabad, India: Institute of Public Enterprises.




Ramanadham V.V. (1998). ed. Privatisation in the U.K. – Routledge, Chapmanand Hall.


32

Privatisation andDisinvestment UNIT 21 IMPLICATIONS OF DISINVESTMENT

Objectives


• 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 publicenterprises.

Structure

21.1 Strategic Issues Arising out of Disinvestment21.2 Voluntary Retirement Scheme21.3 Retention Agreements21.4 Retraining21.5 Employee Shareholding Schemes21.6 Summary21.7 Self Assessment Questions21.8 References21.9 Further Readings

21.1 STRATEGIC ISSUES ARISING OUT OFDISINVESTMENT

a) Transparency

Transparency, which should include studies to inform the public about the reasonsfor divestiture, creates credibility and dispels doubts regarding shady deals. Bothtransparency and speed are served by a centralised policy unit/agency responsiblefor privatisation, rather than in Cabinet Commissions and Sector Ministries. Thelatter may lack the administrative capacity, create delay, have a vested interest inkeeping state firms in their original form and makes process less transparent.The privatisation agency / authority should report to the top of the politicalhierarchy, have clear mandate / authority to take decisions and consist of smallbut highly competent staff. In Mexico, a unit consisting of a mere seven people,divested hundreds of enterprises within a few years. In Philippines, a privatisationtrust headed by a qualified businessman and staffed by a small group of privateindividuals, who were paid salaries at private sector rates, disposed off more than150 non-performing assets in two years. Decentralisation of privatisation taskscould also help expedite decision-making.

b) New Investment

Privatisation programmes have been found to be successful in achieving theobjective of attracting new investment, and have been the main stimulus to flowsof international investment. In Jamaica, for instance, privatisation-related flowsaccounted for 94% of total inward foreign investment in 1987. Central andEastern Europe received the largest share of privatisation-led foreign directinvestment (FDI) viz. $2.4 billion in 1992, which represented 52.5% of total FDIinflows for that year. Latin America and Caribbean countries received, in thatyear, $2.3 billion in FDI from privatisation, while East Asia and Pacific regionreceived $302 million (UNCTAD 1994).

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Implications of Disinvestmentc) Labour Redundancy

Countries as diverse as Argentina, Japan, Mexico, New Zealand, Tunisia, and theUnited Kingdom have terminated surplus state enterprise employees prior toprivatisation. Sometimes it becomes necessary for governments to do so if anenterprise is to be sold, since investors shy away from surplus labour and theproblems of tackling redundancy. Moreover, governments are usually better ablethan private investors to alleviate adverse social consequences and thus defuseworker opposition. Resistance by workers and their unions is offset by offeringfixed workers severance payments, banning strikes, and reducing the power oflabour unions through various measures.

The prospect of political unrest arising from unemployment has led manygovernments to approach privatisation very cautiously. Governments should beprepared to meet with labour leaders at an early stage in discussion of the SOEstargeted for privatisation, both to listen to labour’s position and to reassureworkers that their concerns are being taken seriously. This would go a long wayin reducing opposition to the privatisation process, especially if it is accompaniedby a well-planned educational campaign on the need to sell shares of SOEs andthe methods of achieving it.

Labour unions distrust of privatisation is founded on the perception that it wouldinevitably be a threat to pensions and other labour rights. SOEs are, in mostcases, overmanned. In many SOEs, there are ‘phantom workers’, i.e. workerswho do not work but are paid, and therefore, reduction in labour force might onlymean elimination of ‘phantom workers.’. Sale to the private sector would almostcertainly result in reduction in the work force. The amount of reduction in thelabour force would depend on its composition. If the work force is largelyunskilled labour, then the chances of job loss are greater, since productivity couldbe maintained or improved by giving greater incentive to fewer workers. On theother hand, if the work force consists largely of skilled workers, the chances ofjob losses are minimal, since services of skilled workers cannot be easilyduplicated or dispensed with.

In Jamaica, when the National Bank of Jamaica was privatised, there were littleor no redundancy because most of the employees were trained in bankingoperations. Similar was the case with the Caribbean Cement Company inJamaica, whose operations were not labour intensive even before privatisation. InTurkey, the privatisation of Teletas (the production arm of the telecommunicationsnetwork) meant no serious staff losses because of the specialised skills that theworkers possessed. In Costa Rica, the proposed buyer of the national fertilisercompany specified that, while it intended to move the location of the firm’sresearch laboratory, all the scientists and technicians would be automaticallyretained if they were willing to move to the new site. In Tunisia, the governmentcreated jobs for workers in privatised or liquidated firms through what wasessentially a public works programme, implemented to tide workers over for atemporary period while they sought re-entry into the labour market. In SriLanka, part of the proceeds of sales of SOEs has been set aside for severancepay; in the Sudan and Mali, special funds were set up to provide loans toworkers to permit them to go into business for themselves. In Guinea, thegovernment retained in civil service positions, those who were unable to find jobsin the private sector. In Malaysia, new owners of SOEs must accept allemployees 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 surpluslabour may not be a problem, although some retraining may be required. Indeveloping countries, however, where unemployment rates are high and there is

34


little alternative employment and no social security system, governments wouldhave to balance the immediate costs involving severance pay, pensions and otherbenefits as well as retraining programmes against the benefits of relief fromsubsidy payments and long-term gains in economic growth.

Privatisation could actually be an instrument of increasing the work force overthe long term through increase of business, diversification of business etc. Overallgrowth in the economy could follow with higher employment in other sectors,such as services that might not otherwise been available. Funds diverted fromelimination of subsidies and the sale of divested SOEs could result in newdevelopment projects producing new jobs. It must be remembered that reforminga SOE would result in precisely the same extent of redundancy as privatisationwould, and therefore, this should not deter the government in going ahead withthe privatisation process.

21.2 VOLUNTARY RETIREMENT SCHEME

Most privatized enterprises in the world have been over manned. The WorldBank in a study made in five countries – Chile, Egypt, Ghana, India and Turkey,has concluded that overstaffing has varied between 20% and 90%. The normalmethod of reducing this overstaffing to desirable levels has been through adoptionof a Voluntary Retirement Scheme (VRS). This scheme provides for monetarycompensation to those employees who opt to retire. The amount ofcompensation has varied from 30 day’s pay & for every year of servicerendered or number of years of service left, whichever is less subject to amaximum, fixed at the discretion of the concerned Government. Thiscompensation serves as a social safety net for retiring workers. In countries likeIndia, minimum VRS compensation has been fixed by law; in Sri Lankacompensation is decided on a case-to-case basis. In India, a National RenewalFund (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 NRFscheme. The number of workers opting for VRS had started declining after1994-95. This could indicate loss of interest of the workers or the fallingbudgetary allocations to NRF or both. In the initial years, the allocations weresupported by contributions from the multilateral agencies. A widespread criticismof the NRF has been that while the main objective of NRF was to help inretraining, counseling and redeployment of affected workers, and in employmentgeneration, an overwhelming portion of the total expenditure incurred on NRFwas utilized for compensation payment under VRS. The rate of redeployment ofthose workers who benefited from VRS was quite low. Out of the 98,327beneficiaries under the NRF who were surveyed, only 36,889 workers wereretrained. The number of redeployed workers was still lower at 11,623. Even ifsome of the workers might not have opted for retraining and redeployment, thesefigures appear quite low; especially of those who got redeployed. Later, publicenterprises were permitted to raise resources from the market for this purpose.However, VRS could become a double-edged weapon, since good workers mayopt to go away, leaving the bad ones behind. This happened in Pakistan, when43% of 17,000 workers left with “golden handshake” (most of them productiveworkers) and created problems for the enterprises. Similarly, initial privatisationsin Sri Lanka were preceded by massive downsizing of labour. Immediately, afterprivatisation many of the good workers who had taken VRS were called back,since the new managements found that they did not possess good, knowledgeablelabour to run their enterprises.

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Implications of Disinvestment21.3 RETENTION AGREEMENTS

Privatisation can be a very painful process unless special measures are taken tocushion its negative impact on employment. One such measure is for Governmentto enter into agreements with the purchaser of the enterprise guaranteeingretention in service of employees for a certain period of time after change inownership. Such an arrangement has helped smoothen the process of transitionfrom public to the private sector. By the time the agreements expired, it wasexpected that the environment would improve considerably and that the workerswould have less problem in adjusting to downsizing. This arrangement maydepress the price which the purchaser is willing to pay for ownership of theenterprise, but it may suit the Government in quickening the pace of privatisationand transfer the likely hassle of downsizing labour to the purchaser. Suchagreements have been observed in Sri Lanka and India. For example inMalaysia, agreements provide that no staff of the privatized enterprises may beretrenched within the first five years of privatisation, except on disciplinarygrounds; 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 termsand conditions of service than those enjoyed by them while in governmentservice; such personnel shall be given the option of joining or not joining the newcompany; those not wishing to join will be retired and given their rightfulretirement benefits immediately; and those wishing to join will be offered twoschemes of service- one which replicates the Government scheme of service, andother which is commercially oriented. In the latter scheme, employees areentitled, among other things, to purchase the firm’s shares and enjoy suchbonuses as the firm’s performance may warrant. In addition to offering sharesto employees, employee stock ownership programmes (ESOPs) and employeeloyalty scheme could be considered. In Pakistan, employment is assured for oneyear after privatisation. Employees whose service are terminated after one yearare entitled to unemployment benefits for two years. They are provided withtraining and soft loans to facilitate self-employment and given priority in selectionfor overseas employment. It is noteworthy that in Pakistan, trade unions aresignatories to the agreements.

21.4 RETRAINING

In developed countries such as the U.K., labour displaced due to downsizing inprivatized enterprises are paid unemployment benefits till such time they becomeemployed elsewhere. The State merely provides a safety net and leaves it to theindividual to acquire training or skill on his own. The aim in such countries is tomake the markets operate more efficiently. This reliance on the market tocoordinate the demand and supply of skills precludes any action from the part ofthe Government in avoiding or limiting worker displacement. The Governmentonly tries to speed up the process of redeployment. By encouraging entry of alarge number of players in the market, Government ensures competition and aswell increased opportunities for displaced labour. In developing countries whereunemployment is already huge, and there is no safety net, the State is bound tointervene more positively in arranging retraining and redeployment of surpluslabour. In addition, the state arranges adequate compensation for workers beingdisplaced, so that the compensation amount serves as a safety net. For example,in India, the Government had provided compensation for those opting forVoluntary Retirement Scheme and till a few years ago undertook their retraining/acquisition of new skills for reemployment or self-employment. However, as ofnow, India does not run these training centres but merely provides compensationfor displaced workers.

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Sri Lanka and India have entered into specific agreements with purchasers oftheir enterprises safeguarding employees’ retention on conditions which are notinferior to what the employees were getting prior to privatisation – for a periodof one year. Thereafter, it is left to the management of the privatized enterprisesto deal with labour redundancy. Most privatized enterprises have resorted todownsizing labour in Sri Lanka and India. Though compensation has been paidto workers, no attempt is made by Government or by the new management ofthe enterprises to retrain labour for alternative means of livelihood. Many workershave frittered away their compensation money in social functions like marriagesetc. 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 bypublic enterprises and (2) by making it incumbent on privatized enterprises tofinance retraining programmes. Fortunately, some foreign assistance is nowavailable 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 astandard feature of privatisation policy in several countries, notably the UnitedKingdom. The UK privatisation programme provided for special terms of shareoffers for employees of the enterprises privatized. For instance, in BritishTelecommunications, employees received (a) 54 free shares per employee; (b)matching shares, two for one, up to 77 per employee; and (c) 10% discount forup to 1,600 shares per employee purchased under priority arrangements. InBritish Airways, employees received (a) 76 free shares per employee; (b)matching shares, two for one, up to 120 per employee; and (c) up to 1600shares by each employee under the priority offer at a discount of 10%. InMexico, employees have been given the right of first refusal i.e. the firm is soldto outsiders only if employees do no want to buy it. In Sri Lanka, the design ofprivatisation provides for allocation of 10% of shares to the employees.Employee share ownership plans (ESOPs) and management/employee buy-outsare other measures used to secure labour cooperation for the privatisationprocess. For example, in Russia, employees are entitled to 30% of liquidationproceeds. 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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Implications of Disinvestment21.6 SUMMARY

Disinvestment is an important part of privatisation as discussed in earlier units.This unit discusses the strategies issues which arise out of the disinvestmentprocess. Different schemes like VRS have been discussed and an effort is madeto 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




UNCTAD (1994). World Investment Report, 1994, United Nations, Geneva,p-25-27.


Vickers, J. and Yarrow, G. (1988). Privatisation – an economic analysis, MITPress.





Galal A, Jones LP Tandon P and Vogelsang I (1994). The WelfareConsequences of Selling Public Enterprises: Case studies from Chile, Malaysia,Mexico and the U.K. – World Bank Country Economics Department, PublicSector Management and Private Sector Development Division, Washington D.C.



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Ramanadham V.V. (1998). ed. Privatisation in the U.K. – Routledge, Chapmanand Hall.


1

HR Initiatives forTurnaround of

VisakhapatnamSteel Plant

CASE 1 :STATE BANK OF INDIA, 19981

Mishra was perturbed. As an AGM of the prestigious State Bank of India StaffCollege at Hyderabad, he was scheduled to take a session with the youngprobationers on the benefits of the restructuring as suggested in the McKinseyReport. He was perturbed, not only because the report was something that was noteasy to understand, but the portions of the report that he had read and understood, hewas not convinced about.

Much had changed since the time when he himself had started his career as aprobationer in 1976. Branch expansion had been phenomenal, turnover had increasedsubstantially, the very nature of competition itself had changed. Nevertheless, thenature of decision making had remained the same : banking after all was a serioussubject !

Surprisingly, the SBI was not a nationalized bank. It had been created by an Act ofParliament in 1955, a logical successor to the Imperial Bank of India, which in turnhad been created merging the four Presidency Banks in the 1930s. Its immediateobjective in 1955 was that within the next ten years to create a network of over 500branches within the length and breadth of the country !. As the only large statesponsored bank in those days, it was given the privileged status of being the treasurybank, and in the places where the RBI did not have any branches, SBI would step infor carrying on the functions, like “presiding over the clearing”. Mishra wistfullyrecalled the stories of yore when in the absence of the Collector in the District, thenext officer that could give the order for firing, was none other than the Agent of theState Bank of India. By the time the 1969 nationalization had come around, allpretensions towards these grandiose existence had fallen by the wayside.

In 1971, SBI was the un-crowned market leader, but the top management hadrealized that in the increasingly competitive environment, the position that had beenassumed as given, was no longer something that could be taken for granted. Othercommercial banks, now nationalized since 1969, were asking for their share forgovernment business as also questioning the exclusive subordinate status to the RBIthat was bestowed on the State Bank. The banks management also realized that theoperating environment had changed totally. With increasing amounts of bank fundsbeing earmarked for the statutory SLR and CRR, operating margins were beingreduced. Bank profitability was increasingly dependent on reducing operationallogistics time. There was also the danger of expanding beyond a size that couldsupplement the growth efforts of the organization. Thus in 1971, SBI commissionedIIM-Ahmedabad to suggest a new structure for the organization.

The IIM Team had done a wonderful job of organizing the 3000 odd branches in1971. The basic unit of the structure continued to be the branch. Some thirty oddbranches made up a region, and some 4-5 regions made up a circle, enshrined in theLocal Head Office. The LHO was more or less contiguous with states of the IndianUnion. Thus the Patna Circle would represent Bihar, Bhopal Circle would representMP and so on. This was however not a hard and fast rule. Delhi circle would consistof 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.1This case has been prepared based purely on press reports and an article in Business India, March

2000

2

Case Studies Each circle was headed by a Chief General Manager supported by two GeneralManagers, looking after Operations and Planning respectively. Under the GM’swould be the Regional Managers and the Branch Managers. Decisions regardingloans 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 andGMP ]. Each Circle was also authorized to have a local board, consisting of localrepresentatives of Bureaucrats, eminent personalities etc. Only major decisions wouldneed 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 intoaccount. 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 intelligenceand to perform the planning functions. In the early years, the monopoly positions ofthe SBI relegated these posts to professional obscurity !

The CGMs reported to Central Office, to their respective Deputy ManagingDirectors, which were designated on functional basis. Thus for international bankingdecisions, the DMD, IB would be consulted and so on. The DMDs in turn reported tothe Managing Director and the Chairman [ Two separate posts ]. The board at thecentral level comprised of representatives from the Ministry of Finance, RBI, industryetc. 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 transactionswas achieved. Also with increased devolution of financial powers, loan applicationsprocessing time came down sharply from an average of 6 months to an average of 2months. However, this was not without a cost. There was a feeling that the cost ofthis reduction in logistics time was being felt increasingly on the NPA [ non-performing assets] figures, which were steadily increasing. Profits were thus furtherstrained.

There was another reason for this. With the changes in the political ideology, whichreplaced structural reforms with cheap capital intensive techniques of production,loan melas became the order of the day. This was further compounded with the newrole of the Lead Development Banker being assigned to the SBI. This meant thatprofits from the other operations were increasingly under pressure. Nevertheless, thedemarcation 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, withoutany guarantee that were issued to the poorest of the poor ] was probably the bestamong all the commercial banks.

The IIM team had assured that this structure could stand branch expansion till 6000branches, after which a new structure would have to be introduced. This was provedtrue, and it was only as late as the early eighties, that minor modifications were feltnecessary. This modification came in terms of introducing a new tier of ChiefRegional Manager between the RM’s and the GMO, with the further devolution offinancial power. Thus 3-4 RM’s would report to the CRM, who in turn would reportto the GMO. This was roughly akin to the Commissioner system of Districtadministration in most of the states, which served as a buffer between the DM andthe Home Secretary. The LHO structure was followed at the CRM level, with theplanning functions too being replicated in the form of Development Officers, for thedifferent segments. There was also the enlargement of the CMC, with theintroduction of a new post called GM, Commercial, looking after specific highvolume-high value commercial account branches.

3



Towards the end of the seventies, there was a major turbulence in the form of therecommendations of the Pillai Committee report. Among its various recommendationswas one that was destined to have a major impact on the recruitment policy of theSBI. 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 the25,000 officers in the SBI. But this merger meant that Probationary Officers, whojoined as OG-I’s, would now be joining at the JMGS-1 scale, making them junior to allOGII officers.

The start of the nineties saw further changes in the operating environment. Theliberalization policy that swept the county saw the coming of a large number ofprivate banks, with state-of-the-art communication technology, with highly specializedsegments. This was in response to the fact that the financial services market wasgetting highly focused, and highly segmented. Specialization had became the order ofthe day. Competing banks were getting learner and thinner and fighting over marginsthat were getting reduced further.

The SBI here was at an inherent disadvantage. As an organization that was a logicaland moral extension of the state, it could not flout any of the rules that the FinanceMinistry introduced. Not only did it have to strictly adhere to the CRR/SLR norms, italso had to strictly follow the rues that 40% of all advances be made to “prioritysectors”, 25 % be made to the weaker sections etc. This left little money to goaround for advances to the Corporate World, which was fast emerging a highlyprofitable and discerning segment.

Profitability was further affected by the provisioning for the NPA’s as suggested bythe stringent norms of the Choksey and Narasimhan Committee reports.Computerization which could have helped in reducing costs significantly, was a majorissue with the SBI unions. The other banks however were able to leverage this insetting new standards for operational logistics. The HDFC Bank touted that it couldprocess a loan application within 36 hours. The customer too was getting wiser, andsmarter, and more choosy. For the SBI this was a major shock. Mishra had wrylycommented once that for an organization that never had any problems getting itscustomers, 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 turninginto its weaknesses. The massive branch network, now some 8500 odd branches,was introducing a heavy liability on the profits. Their contribution too in mobilizingdeposits was being questioned. In Patna Circle, with over 500 branches it wasestimated that 3 branches, Patna Main, Dhanbad, and Jamshedpur, accounted for allthe net profits. Some 40 branches supported the losses of the remaining 450. TheNPAs, which nevertheless were still above the other commercial banks, were alsoincreasing. There was also a flight of very qualified officers at the middlemanagement 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 depositsfrom the average householder, no doubt leveraging its “government” image continued.This infact provided the very backbone to support the large volume advances thatwere being sought after by industrial houses. [ RBI rules prohibited lending more thana specified percentage of deposits to one borrower. This immediately put a lot ofsmaller banks out of the reckoning. Alternatively they had to recourse to consortiumfinancing. ]

4

Case Studies Efforts were made to correct the situation and gear up to the market requirement. Toget closer to the customer, specialized branches were opened. Thus branchescatering specifically to Industrial Finance, Corporate Accounts, International Banking,and Personal Segments were set up. This did help somewhat, but the topmanagement realized that more needed to be done. The IIM structure had outlived itspurpose, and in 1996, McKinsey and Co. were brought in to look at the situationafresh and recommend a new structure.

Table : Positioning of Different levels of Officers in State Bank of India

pre IIM report post IIM & Pillai reports pre McKinsey

Level-10 MD & Chairman MD & Chairman MD & Chairman

Level-9 DMD DMD DMD

Level-8 Secretary & Registrar CGM CGM

Level-7 Dy. Secretary GMs GM

Level-6 District Officer SMGS-6 [ CRM ] DGM

Level-5 Staff Officer -1 SMGS-5 [ RM ] AGM

Level-4 SO2 SMGS-4 Chief Manager

Level-3 SO3 MMGS-3 Manager

Level-2 OGI* MMGS-2 Deputy Manager

Officer OGII JMGS-1* Asst. Manager*Level-1

Clerical Levels

* indicates direct entry level as Probationary Officer.

As Mishra read again the brief circulated from Central Office regarding therecommendations of the McKinsey Report that wure being implemented, he was stillperturbed. Not entirely convinced that this new structure would fit the existingorganization in the same way that the IIM structure had done, he also saw severalconflicts in the implementation process, including those with the organizationalculture. Not entirely convinced himself, he wondered what sort of job he would do inconvincing the young probationers at the lecture.

Issues for Discussion:

1. Discuss the need for organizational change in the SBI in the seventies to thenineties. 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?

5



Annexure

BRIEF CONTAINING THE PRINCIPLE RECOMMENDATIONSOF THE MCKINSEY REPORT

The Background : The banking industry in India is facing tremendous pressureswith respect to profitability. This is not only on account of increased competitionbut also on account of more stringent banking regulations. With the process ofglobalization process, banking customers are also looking for products and serviceswhich are available internationally. There will thus be a need to create new productsto meet the changing customer requirements.

The Diagnostics : The consultants, McKinsey and Co. have observed that the bankenters the era of deregulation with a strong capital base and an expense-to-incomeratio, with is comparable with world class banks. However, with an ROA of0.22% in 1993-94, the SBI is behind private sector banks [1.3%] and the foreignbanks operating in India [3.2%]. Market share has slipped from 25% five yearsago to 20% now.

The consultants, while devising strategies for the Bank have kept in view thefollowing significant areas for business development. [1] to retain and nurture highvalue corporate clients who contribute substantially to Banks income and profit, [2]to avail of new opportunities that have opened up for the Bank for undertakingLeasing and project Finance, [3] to develop mid market business, by financing largenumber of mid sized corporates, [4] to focus on opportunities for mortgage lendingas well as consumer durable finance, and [5] to fully utilize the large networkof 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 institutionalvalues. To retain its position in the country as a pioneer in Development Banking.To maximize shareholder value through high sustained earnings per share, and tobuild an institution with a culture of mutual care and commitment, a satisfying andexciting work environment and continuous learning opportunities.

Mission : “To retain the Bank’s position as the premier Indian financialservices group, with world class standards and significant global business,committed to excellence in customer, shareholder and employee satisfaction, and toplay a leading role in the expanding and diversifying financial services sector, whilecontinuing emphasis on its development banking role.”

Values : Excellence in customer service ; profit orientation ; belonging andcommitment to the bank ; fairness in all dealings and relations ; risk taking andinnovation ; team playing, learning and renewal ; integrity and transparency; anddiscipline in policies and systems.

Strategies and Systems : the existing market segmentation was given a re-look inthe light of the emerging environmental changes. While in the highly regulatedenvironment, there was limited scope for competitive strategies such as costleadership, produce differentiation, focusing on customer groups etc., in acompetitive situation, focused attention assumes a lot of significance.

6

Case Studies The broad strategy has been to create SBUs to deal with specific customer groups/business activities requiring focused attention. These customer groups arerequired to be handled in an integrated manner, i.e. both in respect of planningand 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 theNBG, 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 otherSBU being global Merchant Banking and the Link Office

4. Associates and Subsidiaries : The SBU’s identified under this group areAssociate Banks and other Subsidiaries.

A fifth business group has also been identified, viz. Personal Banking Group,with three SBU’s namely Consumer Finance, Mortgage Finance and Credit Cardsunder it. For the present, this group has been put under the charge of NBG.

Value Propositions : In deriving the strategy, Value Propositions have beenidentified for each Group. Broadly speaking, value proposition is that attributewhich the Bank is striving to add to the products/services being offered to thecustomers so as to make the offering competitive in the market place andattractive to the customers.

Organizational Structure : The organizing principles are as follows :

1. A lean and integrative corporate center, focusing on long term planning andpolicy formulation, with no active role in daily operations : center to add valuein areas requiring cross business unit perspectives or expertise

2. Targeted business units, each with a distinct profit and loss responsibility for adistinct definable set of customers

3. A senior management team, with common performance aspirations and clearaccountability organized on the basis of a simple structure

4. The key processes identified for streamlining are : credit and risk management,improved balance sheet and performance management, progressive anddifferentiated human resources process an technology management. Theinspection and audit systems would need to be realigned with the variouschanges taking place in the strategies, systems and structures.

7



The Apex Management Structure will have:

1. The Chairman as the CEO

2. Four staff functionaries under the corporate center, viz. DMDs with thedual 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) MD and Group Executive : Corporate Banking Group

(b) MD and Group Executive : National Banking Group

(c) DMD : Associates and Subsidiaries

(d) DMD : International Banking

4. All the above eight functionaries report directly to Chairman and areindependently 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

2. Circles are to be divided into two focused networks [a] commercial, and [b]Development and Personal Banking

3. Planning to be integrated with operations. Planning support to be provided by[a] business planners, for network GMs and [b] Sales Planners for AGMs

4. Special re-emphasis on loan recoveries and NPA management by providingsupport at the various levels in the LHO.

LHO and Network Headquarters : The LHO will be headed by a CGM andsupported by three staff functionaries of the rank of DGMs to oversee policy andstrategy formulation and policy implementation in the areas of Financial Management,Credit Management and Personnel and Services. The three functionaries aredesignated as Circle Financial Officer, Circle Credit Officer and Circle DevelopmentOfficer. Two network headquarters each under a GM have been created tomanage the Commercial Banking and Development and Personal Banking networkBranches.

Branch Structure : The structure at the branches would be reviewed after thenetwork configuration stabilizes.

1



CASE 2 : CORPORATE PLANNING AT SAIL,1989—93

It was the February of 1993 and Dr Sengupta had mixed feelings. As the SeniorDeputy Director with the Steel Authority of India Ltd., a public sector undertaking, hewas in charge of the corporate planning activity in the organization. On one hand hewas elated because after two and a half years of hard work by his team, theCorporate Plan 2005 document had been finalized [a brilliant document he thoughtpersonally], had been accepted formally by the Board, but on the other hand he wasdepressed because of the impending revision of the numbers : was this to mean thatall the work had gone to waste ?

In 1993, SAIL was a mammoth public sector undertaking. [ It still is !] Turnover12000 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 couldtrace its roots back to 1954, when Hindustan Steel Limited was set up with the taskof 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 theproduct mix and the volume of production [ in any given year, SAIL would be movingclose of 50 million tones of raw materials ], was mind boggling. As his ChiefEconomist had one remarked, “you have to see the rolling mills of Bokaro, toreally understand the sheer dimensions of operations”

In 1980s, the steel industry was in midst of transition. Still predominately influencedand 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 entryof the private sector into the capital intensive but profitable blast furnace route [ BF-BOF ] of steel making. The private sector was free of course to enter into thealternate route [ the DR-EAF ], which was quite energy intensive and had all theassociated problems of energy shortages. The result was an industrial structure thatwas highly skewed. SAIL and TISCO, were the major dominant players accountingfor over 65% of the total market. The rest of the market was fragmented. Evenwithin this market, the major producers were subject to administered price control,where the Joint Plant Committee of the Ministry of Steel would determine the pricesof steel in consultation with the main producers, taking costs of production intoaccount. [ a possibly apocryphal story recounts once of a jocular remark of RussiModi, CMD of TISCO, “Thank God for SAIL !” ]. Distribution too was tightlycontrolled, with most of the distribution powers being held by the DevelopmentCommissioner of Iron and Steel, a post usually held by an IAS officer of the rank ofJoint Secretary. Thus controlled production, prices, distribution and investments werethe market characteristics that Krishnamurthy was functioning against1.

Within this framework, thinking about profits was something that did not comenaturally to SAIL employees. Planning again was not part of the culture of theorganization. And before Krishnamurthy, planning meant the annual production plan.Planning was basically supply side determined, most of the industry worked under acorruption of Say’s Law that “Supply will create its own Demand” : “what can beproduced can be sold”. Planning was also in volume terms, prices and profitabilityhaving little inputs in the determination of the strategic choice.

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 topresent illustrations, of either correct or incorrect handling of managerial problems.

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Case StudiesBefore 1985, the fortunes of SAIL had been mixed. Productivity was low and outputhad stagnated. Capacity utilization was low [ in the range of 60-80% ]. Morale waslow, and the company, despite the presence of administered prices, had madecontinuous 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 tocapacity, and second, for adding to this capacity, substantial investments would haveto be made. Resources and investments were going to be very important.

Corporate planning in SAIL laid its genesis to this. In 1986, Krishnamurthy createdthe Corporate Planning Directorate, separating the planning functions fromOperations. The subsequent task was more difficult : finding someone to head thefunction. Krishnamurthy’s choice eventually fell on Arvind Pande, [IAS, 66MP], thenJoint Secretary with the Prime Ministers Office. The offer was also convenient toArvind Pande, it came at a very opportune time : he was due to be repatriated to hishome 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 findsuitable office. In 1986, SAIL had offices spread all over the city, the HT house atCurzon Road, Express Building in B S Z Marg, etc. After much debate anddeliberation, and direct intervention ant the Chairman’s level, it was decided tosurrender part of the second floor, albeit cramped, to the freshly inducted recruits ofCorporate Planning Directorate.

Said A J Malhotra, Dy Manager [who was pulled out of the Central MarketingOrganization], in the initial days, it was difficult even to get a peon, let alone anofficer to do the work !. Ravi Garg, who followed Arun from Finance, was equallyupset at the loss in the facilities that his new assignment presented. Neverthelessover the months, things settled down.

The First Corporate Plan was prepared, and presented. Corporate Plan 2000 was arepetition of history. The National First Five Year Plan had been an agglomeration ofprojects : an accounting plan. SAIL’s endeavor was none more. It was a collection ofnumbers, but nevertheless a good collection of numbers. it gave Krishnamurthy theteeth to fight the Project Appraisal Division of the Planning Commission, for moneyso badly needed for investment [ in the 1980s all investments in the Public Sector hadto be cleared by the Public Investment Board, of which the PAD in the PlanningCommission was the first step] and with the much needed money, things were on thego in SAIL.

Corporate Planning was not the only job that was entrusted to the Directorate.External interfaces was an important task. Parliament questions, ministerial repliesetc consumed much of the time of the officers, inasmuch as Pande felt the need tostrengthen the Directorate. Additions came in the form of an Economics cell, startedby Anita George, a bright MBA from Boston. Sanjay Sinha, from the Policy Groupwas tempted to move over, as was Anoop Sharma. Prasad came in as the SeniorEconomist from the Planning Commission and S C Sharma, from the Ministry ofIndustries joined as the Economic Advisor. Corporate Planning would now function asa “think tank” for the company.

1 From 1991 onwards the structure of the industry changed drastically. Free licensing, even of the BF-BOF route, withdrawal of FEF, and the APM led to the setting up of large capacities, in excess ofdemand, especially in the profitable HR Coil segment. On the external front the collapse of the SovietUnion, and the resulting economic crisis thereof, led to international prices being depressed and therewas evidence of large scale dumping. These events however took place after the Plan had beenpublished.

3



With personnel firmly in place, things started to happen in the CP Directorate.Business environment scanning started in a serious manner, with a bulletin beingpublished for top management. Diversification started being looked at afresh : therewere projects of Caprolactum and Carbon Black at Bokaro, Almora Magnesite atNainital, and other joint ventures. Fresh approaches were made to improvingproductivity through the direct intervention of the Organizational Systems group, asmall cell in the Directorate created to look at ways in which enhancements could bemade in productivity levels.

The activities of the Planning Units having stabilized, it was decided undertake theambitious target of revising the Corporate Plan 2000. In 1988, work on the SecondCorporate Plan started. The Directorate decided to go about the process in a morescientific manner, making this a strategic plan rather than an accounting plan. In theapproach note to the Plan, Prasad, the Chief Economist, wrote “the planningprocess must rest on scenarios and be able to generate multiple options. One ofthe weaknesses that we have had do far is that we have never been able tosuggest 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 takenplace in the environment, there was need to revise and update the plan. ThusCorporate Plan 2005 was initiated, with the objective of providing both a productionand 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 planningprocess 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 approachand the priorities that the new plan would have. This was debated at a number oftop management workshops, and a final theme developed.

2. Given the crystallized approach, planning cells of the nine units were called forconsultations at Corporate Office, and given instructions that each unit shouldprepare a Corporate Plan for itself under the assumption that it was a standalone 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 itshas to reach that vision. This was to be an unbounded exercise and units weretold to do a lot of deliberate day dreaming. Each plan should also be broken downinto functional plans, covering areas like operations, finance, raw materials,personnel etc.

3. At the corporate office “expert groups” were formed to look at each functionalarea across the whole organization. Thus the “expert group” on productionswould be required to look at the production plan of the whole company withoutany plant biases. Ditto for finance and other functional areas. There were a totalof nine functional groups.

4. In 1990 a series of workshops were held at the management Training Institute atRanchi were consistency was looked at among both the unit level plans and the“expert groups”. There rounds of consolidation exercises were done. In 1991December, Dr S R Jain led the board of Directors through the presentations andfinally approved the Corporate Plan numbers. The final plan over its entireperiod had an outlay of over Rs 42,000 Crores.

5. The levels of investment had run into some rough weather. To some it seemedrather 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 possibleto push this target through the PIB.

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Case Studies6. In a series of workshops held at Ranchi, the Corporate Planning group had towork hard, to push the consolidation figures through. The task had beenlaborious, it was never easy bringing to convergence fundamentally divergentviews. 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 ofthe Tenth plan.

7. The consolidation exercises had not been easy. Naturally, Bhilai and Bokaro hadobjected to toning down of their investment plans. In some cases there wereradical differences in the technology that should be adopted. PBCC Vs StampCharging was one. There were also variances in the external competitionscenario that were presented.

8. In 1992, while preparing the final plan document, the economic environmentchanged. Delicencing of the industry had started : operations wanted to reworkthe numbers. Import tariff rates had gone down : marketing wanted to reworkthe numbers. Exchange rates had changed : finance wanted to rework thenumbers. Nucor had come out with a new technology : projects and R&Dwanted time too to rework the numbers. Individual units too started to clamorabout wanting to change the Plans.

9. The Corporate Plan was accepted wholeheartedly by the board in 1992.Corporate Communications films were made and circulated. Groups fromCorporate Office went to the plants for making presentations and clarifying anydoubts.

10. Late 1992, the exercise finished. Dr S R Jain, had retired, and M R R Nair tookover. 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 BestGroup Award at a simple but impressive ceremony on SAIL day. Heads ofPlanning 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 bemade for the 8th five year plan. The Finance Directorate gave a five yearinvestment 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 ofthe document were released. Set A, which contained the investment chapter and wasreleased to a select few, and Set B, without the investment chapter, which were forgeneral circulation. It was Prasad, who led the writing team, who insisted on separatechapters for assessing the operating environment, the strategy statements, thefunctional activity plans, and giving credence to the then imperatives, specificchapters on Value Addition in SAIL, and Environment Management. The lastchapter The Constraints to Growth, listed some major factors why the plan targetsmay not be met. To drive home the point it was decided that the subtitle : “Growthwith 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 highgrowth path. Distinct from the earlier Plan, the document identifies not only thetargets, but more important the “strategies” that need to be adopted…”

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Again

“Change is the hall mark of any growth process. Managed change will be one ofthe strengths that SAIL will exploit to retain the spirited growth..”

In all, over 12 executives had worked continuously for 2 years on the preparation ofthe Corporate Plan at Corporate Office alone. The numbers that must have workedin the units were probably more to the tune of 50-60. As Sinha, the economistremarked, the sheer volume of data and paperwork generated, succeeded in bring outa lot of ideas about the organization. An important spin-off was the bringing theplanning functions across units closer.

As Dr Sengupta looked at the glossy cover of the new Corporate Plan, he could butstop the gushing feeling of pride. It had been a tough job, but worth it. The finaldocument, when presented to the visiting World Bank team had drawn muchappreciation. 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 ofthe Computer Services Division being asked to report to it. The Quality functionbecame an important part of the Directorate as did the MOU function which involvedsubstantial interaction witrh the Ministry of Steel.

The recent communication by the Finance Directorate was however a source ofworry to him. Following a recent meeting with the Working Group of the 8th FiveYear Plan, the resources available had been pruned down. The Investment outlay forthe perspective plan would have to be curtailed from 20,000 Crores to 13,000 Croresfor the 8th Plan Period.

As Dr Sengupta made his way to the scheduled meeting with the Chairman, he couldnot help wondering on the futility of the whole exercise. The ink had not yet dried onthe Corporate Plan Document, and there was already talk of revising the figures. DrSengupta shook his head regretfully at the inevitability of events.

6

Case Studies THE KEY PLAYERS IN THE SAIL STORY

Dr V Krishnamurthy : Formerly with BHEL, and MUL, also Secretary, HeavyIndustries, was brought in by Rajiv Gandhi , to turnaround the perennial loss makingcompany. A charismatic leader, he used all techniques to motivate employees, anddelivered profits. Started Corporate Planning in SAIL by bringing in Arvind Pande asDirector Corporate Planning. Left SAIL in 1989 to become Member PlanningCommission. Vision : “SAIL to become the third largest steel producer in theworld..”

Dr S R Jain : An internal man, joined as management Trainee Technical and grewwith the organization. In between, was also CMD of HEC and CIL. Came back asVice 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 asa technologist. You can come and see me any time if you want me to wear thetechnologist 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 toChairman was not automatic. Reportedly had to face stiff competition from thecurrent 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 theBoard. Joined SAIL in 1986, having resigned from the IAS. Last positing, JointSecretary Prime Minister’s office. In SAIL started off as Director CorporatePlanning and then assumed charge as Director [Personnel and Corporate Planning].In between also held concurrent positions MD Rourkela, IISCO and Director inCharge Raw Materials. Succeeds Nair as Chairman in 1997.

7



A BRIEF ON SAIL AND ITS UNITS

SAIL : SAIL was originally set up as a holding company, with HSL and BSL. Lateron the Holding Company concept was dropped. It is now a vertically integratedcompany, 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 longproducts and plates. Long products are wire rods, bars, structurals, etc. and are usedprimarily 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 railwaymaterials : It was set up with British aid and technology. It has recently gone in forsubstantial investment for completely revamping the iron and steel making process.Loss making, but with this new investment, costs have come down. Skeptics sayhowever that capitalization of this investment will see that this unit never makesprofit.

RSP : [1961] Rourkela was set up with German assistance, It has a capacity of 1.6mt, and is probably the most versatile plant in the SAIL fold, producing a large varietyof flat products, as well as CRGO sheets and also space application steel. There isalso a fertilizer plant attached to the steel plant. Breaks even. Substantial investmentsrequired to upgrade technology.

BSL : [1973] Bokaro was originally planned to be set up as a separate company, withUSAID help. At the last minute, this project was aborted and the Government turnedto USSR. It is now a 4.00 mt plant, producing primarily flat products , such as HRcold, CR Sheets etc which are primarily used in the white goods industry, consumerdurables etc. Profit making, but of late has started only breaking even. Howeverthere is substantial excess capacity in the HR market. Capital investment undertakenin terms of introducing concast.

IISCO : The Indian Iron and Steel Company [ est. 1918 ] located at Burnpur in WestBengal was originally funded by the British and nationalized in 1972. It was brought inas a subsidiary in 1978 within SAIL. Loss making. SAIL has been trying for sometime to hive this unit off. JICA, Swaraj Paul, Mittals, etc all have turned down thisoffer. 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. ManufacturingFerro alloys, a vital input in the steel making process. Perennially loss making. But ofstrategic importance to prevent cartellization of the other players in the market. Lossmaking.

VISL : Vishvisweriya Iron and Steel Limited. Located at Bhadrawati, Karnataka.State owned, SAIL acquired initially 40% of the share, now holds 100%. Perenniallysick, mainly due to high tariffs and consumption of power. May break even, after theintroduction of a new blast furnace.

8

Case StudiesASP : [1965] Alloy Steels Plant, Durgapur. Uses small electric arc furnaces toproduce special and alloy steels. Losing market share to domestic production andimports. High cost producer and thus loss making unit. Requires massive capital andtechnology injection.

SSP : [1980] Salem steel plan was set up using French technology. Gets slabs fromASP and abroad, rolls them into stainless sheets. Only brand that is consumer friendlyin India.. Requires technology injection. Some talk of going in for backwardintegration to meet demand in the south Indian market. Initially profit making, but dueto 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 termmission of SAIL has been recognized as growth with profitability

The emphasis is on maximization of internal generation of resources throughincreased production, sustained enhancement of quality of products and services andharnessing the market potential in a competitive environment.

The growth strategy identified in the planning horizon upto 2005 is aimed at exploitingthe latent potential of SAIL plants through further modernization and technologicalupgradation. No greenfield capacity will be created.

The production of crude steel from the five integrated steel plants will grow to a levelof 18.9 mt in 2004-05 from 9.87 in 1991-92. The corresponding saleable steel targetsis 17.5 mt from 7.48 mt. The share of flat products in saleable steel will be 73.4% in2004-05 compared to 56.5% in 1991-92.

100% of the crude steel production in the ISPs will be through the BOF route, and97% of the crude steel will be processed through continuos casting. Obsolete andenergy intensive open hearth furnaces will be phased out.

The plan aims at a 30% reduction in specific energy consumption and a doubling ofworks manpower productivity by 2004-05.

Increased production will mean an increased demand for raw materials. Therequirement of iron ore will increase to 32.3 mt, while that of coking coal andlimestone 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 steelproduction, making SAIL a net foreign exchange earner.

The capital investments for new schemes meant for modernization and expansion ofSAIL steel plants and the captive mines during the period 1992-2005 is envisaged ataround Rs 23,200 crores, and for the service units like RDCIS, CMO etc, at aroundRs 1950 crores. In addition the subsidiary units like IISCO, VISL, and MEL wouldrequire approximately Rs 10,000 crores for their modernization. The total internalgeneration in the planning period in SAIL, excluding subsidiaries is expected tobe Rs 36,000 crores.

The gross margin to capital employed ratio is projected to improve from the currentlevel of 17% to 32% by the terminal year. ..

The plan envisages the payment of dividend of 30% [on equity] by the terminal yearof the Plan.

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ISSUES FOR DISCUSSION

1. Examine the efficacy of the elaborate planning process in SAIL .

2. Evaluate on a scale of 1-10, the success of the Corporate Plan.

3. If Dr Sengupta were to repeat the exercise all over again, what should he do ?

4. What is the importance of the Vision exercise in the detailing of the Planningprocess?

5. Are numbers sacrosanct in the planning exercise. What is the differencebetween planning and strategic planning?

6. How can planning be used to create sustainable competitive advantage? Is thisbeing created in SAIL.

1



CASE 3 : GLOOM TO GLORY:THE SUCCESSFUL TURNAROUNDOF THE SINGARENI COLLIERIESCOMPANY LIMITED

Prologue

‘Gloom to Glory” is the story of one of the most amazing and unbelievablecomebacks in the plan of government economics and the roles played by a visionarypolitical leadership, professional management and a newly awakened labour force.

It was in the year 1996 that Singareni Collieries Company Ltd (SCCL), the 107 yearold state public enterprise, was experiencing stormy weather. Its financial perform-ance hit rock bottom with accumulated losses of over Rs.1200 crore. It maladiesincluded an excessive baggage of over 100 confrontational trade unions giving onestrike 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 conditionswhich pushed the only coal-mining company in South India to the brink of sicknessand uncertainty. A period that had in store a gloomy and doubtful future for all itsstakeholders – the government, customers and about one lakh workforce.

Against this gloomy scenario, the Government of Andhra Pradesh, under the vision-ary leadership, stood up to the challenge and took some bold decisions and firmactions – the result of which was a miraculous and remarkable turnaround.By 2002-03, the company wiped out all its losses and entered the year 2003-2004with net profits. It was a glorious year – a year of complete satisfaction, happiness,success and achievement. It’s a story to be shared and learnt from the experiences.This case is a sincere attempt to highlight the ups and downs of Singareni Collieriesand the remedial actions in the form of reforms that contributed to the turnaround ofthe company.

The case study on the spectacular turnaround of this company explains the variousforces that lead to sickness of public sector entities. It also explains how newparadigms, the state and the SCCL management in reforming a sick public sector unithave drawn.

Introduction

Coal: Mother Nature’s Dark Child: Man is blessed with abundance of naturalresources, including mineral wealth, that play vital role in the development of acountry and promote the economic growth when explored and made best use ofthem.

Coal, which is one of the important minerals, is known to man since ages and thisnatural wealth has been put to diverse use in the modern world. Regarded as thefuel for growth, coal is an important input for power generation, a vital infrastructurefor economic development. The mineral provides around 23% of global primaryenergy 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.


2

Case Studies power generation in the world. The world coal consumption is projected to go upfrom 4.7 billion tonnes in 1999 to 6.4 billion tonnes by 2020 primarily in China andIndia, which are expected to account for 75% of the increased consumption.

Energy Consumption: Commercial energy consumption in India has grown fromover 26% to 68% in the last four and half decades. Coal accounts for 63% of thecountry’s energy needs. The current per capita primary energy consumption in Indiais about 243 kgoe/year, which is well below that of developed countries. Driven bythe 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. Consider-ing the limited reserve potentiality of petroleum and natural gas, eco-conservationrestriction on hydel projects and geo-political perception of nuclear power, coal willcontinue to occupy center-stage of India’s energy scenario.

Coal Mining in India commenced in 1774 and the production level increased from6.19 million tonnes in 1900 to around 340 million tonnes in 2002-03. In India, coalproduction is still significantly under the government control and ownership, withCoal 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 thecountry’s total coal production. Singareni Collieries Company Limited, owned jointlyby the Central Government and the Government of Andhra Pradesh, accounts for10% of the national production with only 7% of national coal reserves.

Challenges: A majority of PSUs continued to operate in post-liberalisation era facingthe 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 towardsnewer paradigms of accountability, economic viability and transforming to be morecompetitive. Several PSUs became sick and were either closed or privatised.

Liberalisation and economic reforms had also impacted the coal industry in asignificant way. The coal industry as subjected to greater regulatory changes,competition, rapidly changing technology and consumer preference.

Policy Reform

Marketsopened

Reduced fund allocations

Labour reforms

Privatisation

Sickness

Changed Scenario

Protected markets turnedcompetitive

Funds inflow stopped,losses

Immune labour madeaccountable

New competition fromprivate/foreign players

PSUs losses no longer fullyabsorbed by government

Impact on PSUs

Monopoly lost

Resource crunch

Employee insecurity

Customers Reign,quality-cost imperative

Loss-making PSUsfaced with sickness/closure

Change Needed

Become market-oriented

Turn profitable

Employee attitude

More customer and qualityfocused

Workout a completeturnaround

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The structural adjustment and the liberalisation programme announced by theGovernment of India offered both) opportunities and threats in the form of:

• Free pricing and distribution of coal;

• Pressure on demand from domestic coal companies andimported 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 andclosure, is among the few Indian public sector units to have redefined, re-evolved andre-engineered itself and made significant strides towards profitability and viability in aliberalised 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 SingareniCollieries Company Limited (SCCL), and its script listed in the London StockExchange.

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 ofcomputerisation

1989: Introduction of Blasiting Gallery method at Godavarikhani (GDK-10 Inc.)

1994: Introduction of Input Crusher and Conveyor technology in an Opencast minefor 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 wipedout. Entered net profit regime.

4

Case Studies Promoting Industrial Development

The giant State enterprise, SCCL is an important engine of economic growth inAndhra Pradesh. It contributes around Rs 400 crore as royalty and sales taxto the State’s exchequer.

Sector-Wise Offtake 2002-03

With a base of about 6,000 vendors, the company has spurred the growth of ancillaryindustries in the State. The economic prosperity of the entire coal belt in AndhraPradesh is dependent on SCCL. In consonance with the national policy, SCCLfacilitates the development of small scale industries and local industries. Developmentof 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 qualityof life all around.

Singareni Collieries has several strategic advantages ranging from huge coal reservesto client proximity being the only coal-producing company in South India. Thecompany harnesses its locational advantage to service a large market in and aroundits areas of operations. About 3,500 major, medium and small-scale industries form itscustomer 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 SCCL’s coalproduction. Thirty seven cement plants situated in the states of A.P, Karnataka andTamil Nadu consumes 13% of its coal production. The balance 9% is supplied toabout 3400 small and medium scale industries.

With spurt in industrial growth in the southern states and huge increase in demand forelectricity, Singareni will have to play a key role in empowering the economies downsouth of the country. With the new Electricity Act providing opportunities forindependent power production and distribution, the demand for SCCL coal is poised toincrease further.

Others 9%

Cement13%

Power78%

5



Role of Swot Analysis for Turnaround of SCCL

Introduction

The SCCL embarked on a variety of strategies to improve the performance. Themeans 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 moreimportant parameters to portray the then situation.

Strengths

1. The organization is more than hundred years old.

2. It has a pool of well trained human resources.

3. The human resources have high and proven level of technology absorptioncapabilities and are “second to none”.

Weaknesses

1. High accumulated loss.

2. Became potentially sick to be re-referred to BIFR.

3. Employees have been displaying low level of commitment/light attitude towardsimprovement in performance, importance of productivity, work culture, changesand reforms, job satisfaction, wage levels, work norms, concern for aspirations ofother sections of public, need for thrift etc.

4. Employees have been exhibiting minimum level of awareness on companyparameters, problems in nearby organizations, management processes, role ofcoal sector on the economy of the down stream organizations, importance ofquality, importance of work norms, ownership particulars of the company,reforms process of the company etc.

5. Difficult IR situations with multiple unions and frequent strikes.

6. Reduced production and wage earned due to IR situation.

7. Assumption of guaranteed employment, irrespective of change in number ofmines and firm views about the system of employment of dependents.

8. Drudgery in some of the jobs like manual filling of coal into tubsand such other underground operations.

9. Communication process not upto the mark and needed overhaul.

10. The coal sector is deregulated.

11. Disturbed social fabric-role of extremism in organizational aspect.

6

Case Studies Opportunities

1. High scope for expansion

Threats

1. Closure of non-performing organizations in the vicinity and elsewhere.

2. Phasing out of subsidies from Government.

3. Insistence by Government on a minimum I.R.R. (16%)for opening of new mines.

4. Erstwhile cost driven pricing structure and its tendency to build up inertia in theorganizations.

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 thestrengths, opportunities and evolving methods of counter threats. Detailed and higheremphasis was laid on eliminating/minimizing the “weaknesses” the I.R. situation andthe resultant effects in terms of reduced production, increased losses hurting theorganization, wages lost by employees on account of unfavourable I.R situations etc.

The various methods followed by management are with emphasis on:

1. Communication to all employees about organizational status.

2. I.R. scenario

3. Motivational needs

4. Improvement of working conditions

5. Strengthening of welfare measures and social development

6. HRD methods

7. Frequent reviews

8. Education of family members

9. 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), Establishmentof communication cell & interaction with media strengthened.

b) A mammoth exercise is done to communicate facts and figures to all the employ-ees at mines and depths. (of over 1 lakh). A number of committees are consti-tuted for this. The members are from Mining/IED/E&M/Finance/Personnel/Bestworkers. The scope of communication is vast. This communication to the rankand file is done 11 times. I.E.D. helped design of the informations template. Thishas helped in creating awareness among the employees and their role in im-provement of organization.

7



Motivation Plans

With the help of I.E.D the employees were explained work norms and the need toimprove work turnout. The concept of fair day work was explained. Improvedproductivity linked wage incentive plans were made use of. A system of payment of10% of the company’s profit to the employees was initiated. There was good im-provement in productivity performance.

Reforms for Turnaround of SCCL

The closed business environment before the economic reforms of 1991 had left littleplace for performance, provided little incentive for innovation and entrepreneurship.When the windows of liberalisation were opened, much like the spencer mousewondering where the cheese went, the company was caught unawares.

The half-a-decade period from 1992 to 1997 was when the strife between the needto change and the reluctance to it became apparent. Globally, the psychological strifebetween 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 abouttheir model more than their success. Honeywell is an interesting parallel. The USgiant, after nearly a century of brilliant performance, starting with a small chancediscovery to control heat in coal furnaces, had run excuses by 1995. Ironically its riseand slope was being able to adapt or resist change and position itself to the techno-logical requirements of the 19th century.

But Singareni had more than surface resistance to change .It had a trade unionproblem that was hell bent on walking down a suicidal path of confrontation with themanagement. The turbulent phase in the company’s history saw the accumulation ofhuge losses and inability to keep up its financial commitments. Poor Industrial Rela-tions characterized by a number of illegal and catcall strikes, militant trade unions,indiscipline and deterioration in work norms set the foundation for the downwardslide.

Several other factors also catalyzed the downward path, viz. administered coalpricing by the government which did not allow increase in sales prices despite peri-odic wage hikes and a groaning interest burden had all added to its losses. Badpractices like huge stores inventory and power pilferage from its colonies burgeonedpower 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, theGovernment of India initially provided sufficient budgetary support to the company toaugment its production capacity by opening new mines or introducing mechanisationin the existing mines. In view of the growing energy requirements and in pursuanceof the socialistic policies of the government, the emphasis was more on enhancingcoal production rather than project viability.

Frequent strikes, law and order problems, low productivity, apart from un-remunerative coal price vis-a-vis cost of production during the period 1989-90 to1991-92 affected the financial health of the company.

8

Case Studies Referral to BIFR

Apart from Industrial Relations (IR) problems and regulated pricing, other adversefactors like skewed debt-equity ratio and huge interest burden resulted in heavylosses for the company during 1989-90 to 1992-93. SCCL became a sick industrialcompany and was referred to the Board for Industrial & Financial Reconstruction(BIFR) during May 1992. However, due to a liberal financial package extended bythe Government of India in consultation with the State Government of AndhraPradesh and sustained efforts by the management and unions, a modest financialturnaround was achieved. The company earned profits of Rs 17.76 crore andRs 26.64 crore in 1993-94 and 1994-95 respectively. By March 1994, SCCL cameout of the BIFR purview.

Poor Industrial Relations

The IR scenario in SCCL has been characterised by a number of illegal and cat callstrikes. The number of strikes reached a peak of 475 nos. in 1991-92. There weremultiple trade unions. The management had no details of actual patronage ofworkers.

There was also a spurt in activities of militant trade unions especially during theperiod 1989 to 1993. The average number of strikes during these four years was 446with a production loss of 1.83 million tonnes per year. This had contributed to grossindiscipline and deterioration in work norms in the company in general and inBellampalli region in particular.

Low Equipment Utilisation & Man Productivity

The frequent IR problems in the pre-1997 period also adversely affected machineutilisation. Singareni made substantial investment for procurement of Heavy EarthMoving Machinery (HEMM) in opencast mines and mechanised longwall units inunderground mines

The availability and utilisation of HEMM in opencast mines and longwall units inunderground mines were lower than the norms on account of poor work cultureprevailing in the company at that time. The performance of conventional hand section(manual mining) underground mines also suffered on account of poor IR scenario andlaw & order problems. The productivity in terms of overall output per manshift(OMS) in these underground mines was stagnant at around 0.60 tonnes from 1992-93to 1996-97. The low productivity levels in the mines coupled with the periodic wageincrease of workmen through National Coal Wage Agreements resulted in steepincrease in the cost of production from underground mines as the wage componentaccounts 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 werecontinued to accommodate the huge workforce of about 1.14lakhs. The huge lossesincurred in these mines on account of low productivity affected the financial health ofthe company.

Non-adherence to Quality Commitments

About 85-90% of coal output of the company is supplied to thermal power andcement plants. Marketing of coal with emphasis on coal quality did not gain theimportance in view of huge demand-supply gap.

Selective mining and segregation of shale/stone/clay bands present in coal seamswas not given due attention. This resulted in numerous complaints from dissatisfiedcustomers and prolonged disputes with them. Customers’ confidence in gettingassured coal supplies was also greatly undermined due to IR problems resulting inloss of production.

9



Inefficiency in Operations

All the operations in the mines and departments were undertaken with departmentalequipment and manpower. The low operational efficiency of departmental manpoweraffected the performance of mines and financial health of Singareni. Despite risingcosts, the management could not make the workforce or unions to accept the bringingin of private players as partners to cut costs and increase efficiency. There was nooutsourcing of activities during the early 1990s.

Administered Pricing

Coal prices were fixed by the Government of India upto 1996 and in view of thelikely impact of such price increase on power, railways, cement and steel sectors, theadministered prices were invariably pegged down, leaving SCCL with little or nomargin. Hike in input costs like wages due to periodic wage revisions under NationalCoal Wage Agreements (NCWA), interest costs, stores etc., were also not fullycompensated in the annual/bi-annual price revisions by the Central Government. TheYearly average cost of production was Rs 731 /ton during 1996-97 but the averagesale price was fixed at Rs. 529/ton. This impacted the company’s bottom line.

Burgeoning Power Cost

During the period 1980 to 1990, there was an increase in the number of privatecolonies in mining areas. Some of the residents of these private colonies began to tappower illegally from SCCL powerlines. SCCL was incurring huge expendituretowards the power bills due to such illegal drawal of power. The power consumptionreached an all time high of 630 million KWH in 1996-97.

Increase in Inventory

The company procured mining machinery from various countries/companies keepingin view the specific requirements of the projects. Joint protocols were entered withcountries like U.K., France, China and Germany for introduction of modem technolo-gies like Longwall, BG and In-pit crusher- conveyor technology. The stock of variousequipment components/spares in the stores increased from Rs 238 crore in 1993-94to Rs 379 crore in 1996-97.

Adverse Capital Structure

The company took up several mining projects in the 1970s and 1980s with the help ofliberal infusion of equity and loans by the Government of India. This was made tostep up coal production for meeting the escalating energy requirements of the coun-try. The increasing loan component and interest costs resulted in skewed debt-equityratio 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 interestand loan instalments during the eighth plan period.

SCCL’S IR Problems (pre-reform period)

• 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 mainreason for the large number of strikes.

• There was a spurt in activities of militant trade unions like SIKASA (A bannedoutfit of Peoples’ War Group) especially during the period from 1989-90 to 1992-93. The average number of strikes during these four years was 446 Nos. with aproduction loss of 1.83 million tonnes/year. The number of strikes reached a peakof 475 in 1991-92.

• Frequent strikes, law and order problems and high cost of production during theperiod from 1989-90 to 1991-92 affected the financial health of the Company.Manpower reached a peak of 1,16,918 in 1990-91.

10

Case Studies • Low literacy levels, extreme hardships in working conditions, strong opposition toinnovation 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 ortwo but in battalions. Successful and resilient companies, like great individuals andnations of character, emerge stronger from testing times. Singareni CollieriesCompany Ltd., emerged stronger and victorious. The reforms story of SCCL hasmany marvellous facets, but most significantly reforms were humane, logical,transparent, beyond ISMs, performance-oriented and incentive-based. The traditionalperceptions of the role of the Government, Management, Labour, Technology andMarket 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 atrevamping its operations in order to put the company back on the growth track.

The need for urgent remedial action was realised as the company’s accumulatedlosses rose to Rs 1,219 crore and the performance by 1997 had hit rock-bottom-theworst ever in its history of over 100 years. The management identified the areas forintroducing the reforms, articulated the needed change and brought about aphenomenal turnaround. The company decided to take on the problems headon.Introspection and open brain-storming made the problems clear and a lateralapproach to finding solutions strengthened the plan of comeback.

New Approach

Unifying trade unions throughpath breaking elections

A high pitch communicationdrive harnessing media,launching literacy programmes

Focussed multi-facetedworkers’ welfare programme

Establishing outsourcing ofnon-core and ancillaryactivities through public-private partnerships

Innovative programmeslaunched like Dial-your-GM,field visits, interactions,follow-ups

Used innovative financialinstruments like debt swaps

Fuel Supply Agreements.Technology infusion forquality testing, workforcevisits to client sites

Focus on safety, environmentprotection, labour welfare.

Historic Errors

Succumbing or reacting towild catcalls/strikes

Neglecting the issue

Lip service or ignore issue

Persisting with status quo

Oblivious to issue,maintaining distantmanagement style

Accumulating losses,banked on Government’swrite-offs or support

Oblivious to issue. Bankon regulatory industrystatus.

Sporadic moves

Problems Identified

Industrial unrest throughmultiplicity of trade unions

Low literacy and awarenessamong workforce

Poor quality of life forworkers

Inefficient and high cost ofoverburden removaloperations

Management inaccessible tolabour force at large

Huge interest payments

Little Customer Care orQuality Consciousness

Lack of clear Corporate Blueprint for growth

11



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 theState Chief Minister. Hon’ble Chief Minister directed the management to conductlabour union elections. Trade union elections were held in September 1998 inSCCL for the first time in the history of the coal industry in India. Elections wereheld under Secret Ballot system to elect one recognized union at the company leveland one representative union at the area level. This put in place a mechanism thatenabled Mine Managers to concentrate more on production and productivity matters.The company successfully conducted trade union elections in 1998, 2001 and 2003.

Election Benefits

• Wild catcall strikes ceased.

• Management IR focus time reduced with only one union at the company leveland 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 protectedenviron to a fiercely competitive market condition and from employee-manage-ment confrontation state to one of partnership.

• The management harnessed the first step towards consolidating industrialrelations through the trade union reforms with several positive measures includ-ing building good communication strategies transparent management systems,innovative and effective welfare measures to integrate the workforce into amotivated and significant force to achieve its goals.

Financial Restructuring Package

The Government of India approved a financial restructuring package in 1999 forSCCL, which included:

• Infusion of fresh equity of Rs. 268 crore by the Government of Andhra Pradeshand Rs. 257 crore by the Government of India during the ninth plan period from1997-98 to 2000-01.

• Ten year interest-free moratorium on Rs. 663 crore of overdue interest on theGovernment 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, thecompany saved Rs. 61 crore in a four-year period.

12

Case Studies Cost-Cutting Measures

• Rationalization / Right sizing of manpower was undertaken by the Singarenithrough the introduction of voluntary retirement scheme for certain categories ofworkmen. 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 incolonies.

• Inventory reduction by adopting rate contracts for spares & fast moving items.

Particulars Inventory Inventory Level in Number(Rs. in crores) of Months Consumption

1997-98 243.36 8.13

1998-99 218.82 6.62

1999-00 206.90 6.58

2000-01 210.13 5.80

2001-02 185.44 4.74

2002-03 190.90 3.80

Public-Private Partnerships / Outsourcing

The company employed outsourcing of over burden removal (OB)as a strategic initiative to:

• 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 donedepartmentally. The company saved about Rs. 1,610 crore by partly outsourcingOB removal in opencast mines since 1997.

Outsourcing of Ancillary Activities

Learning lessons from the success in outsourcing of OB removal operations, thecompany started off-loading of ancillary services. Some of the services outsourcedinclude:

• 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 alsoallowed the management to concentrate on core activities.

Communication Strategies

The management grasped the potential risk of lack of strong internal communicationand workforce reach-out programmes. There has also been a growing perceptionamong the workforce that the management is isolated, distant and insensitive to theneeds of workmen. The management therefore realized that an effective two-waycommunication at all the levels is necessary.

Most of the difficulties in the communication process in SCCL were due to its labourintensive nature of the industry with majority of the workforce being illiterate andunaware of conventional rules and procedures and the direction in which the com-pany should be moving.

Apart from these barriers, some of the conditions like geographical distance betweenemployees of the organization in terms of location of the mines spread over 350 Kmsin 4 districts was also an important barrier. The indulgence and interference ofextremist activists in coal belt areas was another major factor hindering the processof communication.

With a view to bring out awareness among the workmen, maintain transparency inadministration and to bridge the communication gap, various communication methodsto interact with the groups, individuals and their families, etc, have been taken up bythe management. Some of the steps taken in this direction are:

Communication Cells

• The company opened communication cells for creating a stable platform forcontinuous interaction with workmen and their families.

• The cell uses the television as a medium for bringing home the key issues facingthe company. Every week an exclusive programme titled “Singareni Tarangalu” istelecast in local TV Channels.

• The company also disseminates information to its employees through in-housemagazine “Singareni Vaarthalu”.

• Pro-active press meets, posters & pamphlets on various issues are used toeducate workmen.

Visits by Multi Departmental Teams

Multi-departmental teams comprising of members drawn from various disciplines visitmines and departments to highlight the performance of the company and the issuesconcerning production safety, welfare etc.

• The teams use local language and dialect and visual aids to communicate effec-tively.

• They also visit workmen colonies and townships in the evenings to maximizecoverage.

• Subjects of topical interests are also discussed with the workmen, suggestionsare invited and implemented wherever feasible.

14

Case Studies Results of Effective and Continuous Communication with EmployeesThrough Multi-Departmental Teams

• There is better appreciation by employees of the challenges faced by SCCL inthe liberalized environment.

• Workmen have realized the need to improve production, productivity, reducecosts, extract good quality coal and satisfy the customer’s needs. They aremotivated to realize their responsibilities.

• Multi-Departmental Teams have cultivated the minds of workmen to listen to theviews of Management and appreciate the realities. Earlier they were onlylistening to unions and responding to their wishes. Workmen were not aware ofthe Management’s views and the company’s interests, the other side of the coin,before forming their own ideas on various issues. Now management is in aposition to explain its views to workmen on issues like dependent employment,re-deployment of surplus workmen, privatization etc.

• The press was also reporting the union’s views and views/actions ofManagement were coloured as harmful to the interest of the workmen. But nowthere is a significant change in the attitude of the press and their role issupportive for harmonious industrial relations.

• There is good improvement in Industrial relations due to this effective communi-cation channel with workmen, union leaders, press and officers. The previoustrend of workmen to go on strike on slight pretext is arrested and now they aredebating and seeking reason/facts in strike calls. Cat-call strikes are reducedsignificantly.

• Thus Multi-Departmental Teams have proved to be effective for communicationwith workmen, officers, trade unions and press. They are contribution toimprovement in industrial relations, productions, productivity, and profitability ofSCCL. They have become the main channel to take contentious issues toworkmen, 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 in1996-97 due to implementation of various corrective measures, cost reductionprograms, better communication with workmen leading to their effective participationetc, is summarized below.

Customer-Centric Measures

• To improve coal quality, selective mining has been introduced for separation ofclay bands.

• Customer meets have been arranged for getting first hand details of their griev-ances.

• Automatic samplers and electronic weighbridges installed to avoid quality andquantity disputes.

• Fuel supply agreements entered into with major customers with penalties,bonuses and commitments to keep up customer satisfaction and ensure assureddemand.

Use of IT

• In-house software development group (SDG) comprising of trained personnelfrom various disciplines constituted to develop department-wise applications.

• INTRANET established between. Kothagudem, Ramagundam and Hyderabadoffices.

15



• Underground Mine Management System (UGMMS) introduced for the first timein the Indian coal industry at No. 5B incline at Kothagudem.

• Opencast Mine Management System (OCMMS) introduced at Manuguruopencast-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 HeavyEarth Moving Machinery.

HR and Welfare Strategy

Human Resource development through training and continuous upgradation of skills isan important thrust area of the Management. The company has a well-establishedHuman Resource (HR) department with 10 vocational training centers and a fullfledged Training Institute (Nargundkar Institute of Management) to impart in-housetraining.

Leading HR Consultant, Dr. B. Ratan Reddy, Institute of Public Enterprise hasimparted training for the executives and Trade Union Leaders together for overa period of two years from 2002-04. This intensive training helped theemployees to change the mind set of the employees and helped them to visualiseabout 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 effectivecommunication skills.

SCCL recognises workmen as stakeholders in the company’s progress andwelfare of workmen continues to be an important corporate philosophy of thecompany. The average expenditure per employee on welfare which wasRs. 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 onworkmen 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 BalakrishnaMurthy of USA. Many employees and their families are participating in thiscampaign. The aim of the literacy missions is to enable the miner to read thenotices and newspapers and understand their pay particulars.

• Housing: Over 47,250 quarters were provided to employees and the housingsatisfaction 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 schoolsrun by SCES the company has provided land / infrastructure to 17 privateschools on a nominal rent basis. Rs. 8.31 crore was spent on running theeducational institutions during the year 2002-03.

• Amenities: Thirty-three employee recreation clubs, 11 stadia and 10 communityhalls have been provided in the mining areas. SCCL spends more thanRs. 50 lakh per year for maintenance of these facilities.

16

Case Studies • Water Supply: The company spends around Rs. 30 crore per year for supplyingabout 22 million gallons of drinking water per day to its colonies and surroundinghabitat.

As an important welfare measure, SCCL commissioned Godavari Water SupplySchemes in the Bellampalli region (7.50 MGD), Ramagundam region (7 MGD)and Manuguru area (4 MGD) benefiting around 4.37 lakh residents in companyquarters and 2.83 lakh residents in nearby private colonies and hutment areas.

• Swap: SCCL launched a unique scheme under the title Special WelfareAmenities Programme (SWAP) in 1997-98. In SWAP, both colonyrepresentatives (workmen) and management decide on the works to be carriedout in their respective areas. Separate budgetary provisions are made underSWAP, which has cut down delays in execution of works. It has also enabled thecompany to undertake improvements as per the felt needs of workmen.

• Drainage & Sanitation: SCCL spent Rs. 28.26 crore on Special WelfareAmenities Programme (SWAP) from 1997-98 onwards for improving civicamenities like drains, sanitary lines, etc in workmen colonies.

• Medical & Health: The company administers seven hospitals with 1006 bedsand 43 dispensaries in its mining areas. Around Rs. 50 crore was spent formedical care in 2002-03, including Rs. 1.84 crore for referral of 3,465 employeesand their dependents to speciality hospitals. Construction of a 50-bed hospital atBhoopalpalli in Warangal district is under progress

• Community Development: ‘Singareni Seva Samithi” is a social serviceorganization formed within the company to undertake community developmentactivities for the benefit of unemployed children of employees and bringhousehold transformation in coalfield areas. The activities undertaken by thesamithi include providing vocational training on various trades like sewing, sari-rolling, welding, etc., and assistance to eligible employee’s children for attendingrecruitment camps of Indian Army, State Police, CISF, etc.

• To inculcate the habit of savings amongst the employees, SCCL took theinitiative of disbursing the wages through banks. All the employees haveopened bank accounts and the habit of savings is reflected by way of increasedbank deposits in the coal belt areas by above 50%. All workmen receive theirwages 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 itsemployees from 1999-2000 onwards. Around 10% of the company’s profitwas 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 profitfor the year 2002-03.

Landmark in SCCL History (2002-03)

The year 2002–03 was a watershed in the history of Singareni Collieries as hasnotched up the highest ever production, profitability and productivity.

• Production of 33.24 million tones of coal during 2002-03 was the best everproduction 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 andwas 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 dispatchedto power sector the highest ever in the history of SCCL. Power sector dispatchesconstituted 78% of total dispatches during 2002-03.

• Gross turnover of Rs. 3689 Crore achieved during 2002-03 is the highest everturnover in the history of the company.

• Due to series of innovative productivity improvement measures cost of productionreduced by a record 6.4% in 2002-03. As against Rs. 861 per tonne cost ofproduction during 2001-02, the cost of production during 2002-03 was Rs. 806 pertonne.

• The company attained the highest ever profitability of Rs. 417 crore as profitsafter 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 (since1965-66).

Other Achievements

• In 32 years history of All India Resource Competitions, the SCCL team for thefirst time bagged the overall first place for the year 2002-03 in the national levelcompetitions. 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 about74 exhibitors in the trade fair from India and abroad.

• SCCL bagged the coveted FAPCCI (Federation of Andhra Pradesh Chamber ofCommerce and Industry) Award for best “outstanding performance” amongindustries of Andhra Pradesh for 2002-2003.

• SCCL has also bagged the prestigious Coal India Productivity OrganizationalAward for the year 2002-2003, for outstanding improvement in productivitythrough 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 company’s stall wonthe first prize for “Design and Concept” in National Category.

• During 2002-2003, Coal production commenced from KTK-3A Incline inBhoopalpalli and Koyagudem opencast project in Yellandu area with a projectedcoal 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 corporatescarry out outsourcing of certain activities as a strategic business initiative.

Outsourcing is adopted for the following reasons:

• 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 coaltransport from mine to Coal Handling Plants and for driving of tunnels / Shaft sinkingfrom surface to reach underground coal seams.

Introduction of outsourcing for overburden (OB) removal in a new mine throughprivate contractual operations in SCCL was launched in a small way atGouthamkhani open-cast mine, Koyagudem, in September 1993.

Subsequently, contractual operations for OB removal was introduced in other newmines – Medapalli OC in Ramagundam and IC – “D” Block in Yellandu area wherethe company could not afford to invest in machinery.

Later, this concept was extended to other mines where a huge backlog in OBremoval 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 removalwere:

• Gradual Decline in Underground Hand-Section Production: Undergroundhand section production reduced from 12.73 Mt in 1988-89 to 11.07 Mt in1992-93 with corresponding fall in productivity levels from 0.72 tonnes permanshift to 0.61 tonnes. Further, growth in machine-mining was not to theexpected levels. Hence, production from opencast mines had to be augmented tomeet the ever increasing demand.

Crisis Management

Consequent to the trade union elections, there has been a significant improvement inthe 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 bythe strike notice of all recognized trade unions in January-February 2003. Followingthe management’s decision to introduce Surface Miner technology at Koyagudemopen-cast mine, trade unions gave a call for strike. A deliberate disinformationcampaign was launched with the introduction of this technology being equated withprivatization and loss of jobs.

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Corporate Communication Policy

In continuation of the various communication activities initiated in 1997, the companyin 2003 brought out a comprehensive corporate communication policy. The policy – aunique experiment in public sector – aims at reaching out to about 1 lakh workforcespread over 67 mines to develop the spirit of bondage among workmen and execu-tives. Some of the objectives of the policy are:

• ‘Singareni Day’ will be celebrated on December 23 every year to promote thespirit of Singarenism.

• Full-fledged corporate communication cells are established in each area andseparate budgetary allocations are made for communication and PR activities.

• ‘Mine Sadassu’ were started at each mine and departments. They are alsoconducted in hospitals, workshops, powerhouses, etc. The Mine Manager andthe executives enlighten the workmen on the current issues concerning the coalindustry and educate them on various policies communicated by the corporateoffice.

• Padayatra was a new initiative launched by the company as ‘Workers VaddakuManagement’ (Management at the door steps of workmen). Under this pro-gramme, a group of executives headed by the Area GM conducts Padayatrateam consist of executives from all major disciplines including medical & healthand members of Singareni Seva Samithi (SSS). The members hold placards andbanners containing appropriate the catchy slogans to raise awareness level onissues like water conservation, anti – AIDS, etc. In the Padyatras the localmedia are also involved and this is hailed as one of the best transparent initiativeswhich 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 ofwages through bank is perhaps the best innovation carried out. This has not onlybrought the PSU and the banking community together for mutual benefit, but also ledto the empowerment of company’s employees. Before this practice was introduced,wages were paid to workmen at mines in the form of cash. A World Bank study inthe coal belt regions concluded that payment of cash has contributed to increase inconspicuous 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 anovel activity for the benefit of the retired workmen. It has set up ‘Area TerminalBenefit Cell’ at each area to speed up settlement of benefits due to workmen onsuperannuation, death, etc.

Group Gratuity Scheme

In SCCL Gratuity paid out of working capital funds as and when the claim isadmitted. In other words the amount provided is not being invested specifically. Intune with the changing times and to protect workers interest fully and plan for healthyfinances for the company in the long run, the company launched Group GratuityScheme in Obtober 2003. State PSUs like APSRTC, APDDC and Central PSUs likeWestern Coal Fields have been successfully operating such Group Gratuity Schemes.

20

Case Studies Under the Group Gratuity Scheme, the company would set up a trust fund in collabo-ration with LIC and will earmark Rs. 200 crores initially. The job of investment andactuarial valuation would be taken over by the LIC free of charge and interest will bepaid by LIC on the accumulated funds. The employer has to pay an initial contributionat 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 govern-ment audit, during the review of the company’s performance, has observed thatSCCKL incurred an avoidable expenditure of Rs. 218 crore during five years (endingMarch 2001) on power consumption. Not only power wastage, but also illegal tap-pings of power and power pilferages have become rampant.

Eco-Friendly Mining

• 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 hasbeen developed. One such area is Ramagunam wherein temperature reduction wasnoticed to the extent of 2o Celsuis. Literacy campus and workshops are organizedregularly to bring environmental awareness.

• 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 isa key mission area in the state government’s resolve towards a “People-friendlystate”. In this direction, SCCL has launched an innovative programme called‘Surrounding Habitat Assistance Programme (SHAPE)’. Some of the objectives ofthe SHAPE include:

• Involving the local villagers where mining activities are planned as stakeholders.The slogan of SHAPE is “PARTNERS IN PROGRESS”. Instead of SCCLdeciding on welfare measures for its workers and local villagers, theSHAPE aims at fulfilling the felt-needs of the local community based ontheir assessment.

21



• 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 basicinfrastructure, will be on the ‘USER PAYS PRINCIPLE”. The concerned localbody (gram panchayat / municipality) will compulsorily enter into a memorandumof understanding (MOU) with the management. The MoU will specify therespective responsibilities of the local body and the management. While thecompany will partially meet the cost of capital expenditure, the respective localbody will be entirely responsible for maintenance of the asset including all recur-ring expenditure.

• The company proposes to spend around Rs. 193 crore for welfare activities insurrounding 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 besensitive to the quality and transparency in coal supplies.

Singareni has about 3,500 major, medium and small-scale industries on its customerlist, which include diverse industries such as thermal power plants, cement, paper,textile, tobacco, ceramics, pharmaceuticals and brick kilns. About 94% of coalsupplies are to power houses, cement units and captive power plants under the coresector linkage.

Challenges Ahead

Singareni Collieries completed the turnaround from a loss making PSU into a profit-able one during the year 2002-2003. With the highest ever production and profits, thecompany has transformed into an organization with sound fundamentals.

With huge coal deposits and growing demand from the energy sector in particular, thecompany is gearing up for higher production challenges. With a transformed manage-ment and motivated workforce, it is looking forward for more successful yearsahead.

The Challenges for the Company in the Near Future Include:

• Possible reduction in import duty of coal.

• Rationalization of railway freight rates.

• Tightening environmental stipulations regarding ash content, stricter implementa-tion of Kyoto protocol to discourage use of coal to reduce emission of green-house 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 thereserves in

• Open-cast mines are limited.

22

Case Studies Issues for Discussion

1. Discuss the effect of effective and continuous communication with employees. Inyour opinion what other measures can be taken to communicate with employees?

2. What do you understand by customer focussed services? How does this conceptapplies to the coal companies? Discuss.

3. The case discusses the strategy for turnaround. Discuss its advantages anddisadvantages.

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).

1



CASE 4 : H.R. INITIATIVES FOR TURNA-ROUND OF VISAKHAPATNAMSTEEL PLANT

Introduction

Visakhapatnam Steel Plant is the largest PSU in the entire South India in terms ofinvestment, which is Rs. 8500 Crores. The study of Turnaround of VSP and its HRInitiatives for the same is an eye opener for any HR professional. A Company whichwas written off and informed to BIFR of its cumulative losses over Rs. 5000 croreshas 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 duringthe year 2003-04. One has to make an in-depth study to note reasons for such aTurnaround.

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:

• Harness our growth, potential and sustain profitable growth;

• Deliver High Quality and Cost Competitive Products and be the first choiceof customers;

• Create an inspiring work environment to unleash the creative energy ofpeople;

• Achieve excellence in Enterprise Management;

• Be a respected Corporate Citizen, ensure clean and green environment anddevelop vibrant communities around us.

Mission: To attain 10 million ton Liquid Steel capacity through technological up-gradation operational efficiency and expansion to produce steel at InternationalStandards of cost and quality; and to meet the aspirations of the stakeholders.

Core Values:

• 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.


2

Case Studies Objectives

The objectives that have been arrived through a series of Brain Storming Sessions ofSr. Executives are as follows:

1. Expand plant capacity of 5 Mt by 2007-08 with the mission to attain 10.0 Mtcapacity in two subsequent phases.

2. Wipe out accumulated losses by 2006-07.

3. Be amongst top five lowest cost liquid steel producers in the world by 2006-07.

4. Achieve customer satisfaction levels on par with world class organization by2006-07.

5. Make RINL the employer of choice by caring for employees. Develop people asknowledge workers by 2005-06 and achieve an improvement of 5 percentagepoints in employee’s satisfaction levels every alternate year.

6. Be ranked as an excellent business organization by 2006-07

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 ofGodavari on 28th March, 1990 at 09-31 hrs opened by Shri Bonda Kannayya, seniormost employee of Blast Furnace”. This clearly amplifies people’s power and partici-pation in public sector units the temples of modern India as referred by our late primeminister Pandit Jawaharlal Nehru. PSUs have come off age with a determination toexcel against the sea of limitations both in terms of socio-economic conditions andalso the technological advancements. After independence the successive govern-ments always placed greater emphasis on development of Indian steel industry. Thesix integrated steel plants (major plants) of which 5 are in the public sector were setup during the 50s and early 60s. Though India has abundance of iron ore and otherraw materials for iron making besides the advantage of cheap and skilled labour, itwas not able to cope up with technological changes successfully in the field of ironand steel making. Thus for years, Indian steel industry was not able to grow at theexpected 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 shorebased plant at Vizag took a definite shape during the 5th Five Year Plan. ErstwhileSoviet Union agreed to help in setting up of Visakhapatnam Steel Plant (VSP)popularly known as Vizag Steel. Visakhapatnam Steel Plant is the only shore basedintegrated steel plant with the available technology of 1980s.

The plant is located amidst nature’s bounty, in a city fast emerging as the face of thefuture and also bestowed with the picturesque Ghats on one side and the mighty Bayof 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 Chennaito Calcutta and 7 kms to South West of Howrah – Chennai Railway line.

3



VSP Earlier

The salient features of VSP earlier are as follows:

• 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:

• Investment over Rs. 8,500 Crores

• 3.0 MT Liquid Steel Capacity

• 115-120% Capacity Utilization of all Production Units

Year Gross Sales Profit Labour(Rs. in crores) (Rs. in crores) Productivity

(t/m/yr)

2002-03 5,059 521 253

2003-04 6,174 1521 262

• 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 — 6882

POSCO — 7904

TISCO — 8265

NIPPON — 9858

4

Case Studies • 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 internalresources.

The Evolution

Visakhapatnam Steel Plant was initially conceived as a unit of SAIL to augment itslong product capacity and also to service its southern markets. During early 70s,three steel plants were conceived for South India one each at Visakhapatnam inAndhra Pradesh, Vijayanagar in Karnataka and Salem in Tamilnadu. Ultimatelybecause of massive civil agitation “Visakha Ukku – Andhrula Hakku” in AndhraPradesh, announcement was made in parliament in April 1970 for VisakhapatnamSteel Plant and foundation stone was lain on 20th January, 1971 by Late Mrs. IndiraGandhi, the then prime minister of India. Feasibility report was made in October,1973, Indo-Soviet agreement signed in June, 1979 and comprehensive revised DPRmade in November, 1980. Finally the project was sanctioned by the Government inJuly, 1982 and a separate company Rashtriya Ispat Nigam Limited (RINL) for VSPwas 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 expectedprogress did not take place and the project became unviable. Therefore in 1986,a rationalized concept was adopted in which some of the envisaged facilities weredropped to lower the capital cost and the name place capacities of steel making androlling mills were uprated to make the revenue generation more attractive. The finallytrimmed 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 installedcapacity of 2.2 Mt and one Universal Beam will was deleted completely and the totalcapacity of finished steel from the three mills was uprated to 2.41 Mt from installedcapacity of 1.93 Mt. This has put a tremendous pressure on production front toperform beyond the installed capacities.

The Restructuring

This long gestation period of almost 22 years from concept to commissioning, let toescalation of capital cost of the plant. Original estimate in the year 1979 wasRs. 2,256 crores which increased to Rs. 3,897 crores by 1982 and further increasedto Rs. 6,849 crores in 1986. Under the rationalized concept after dropping certainfacilities, the total capital cost finally stood at Rs. 8,594 crores, when it was declaredfully 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 meetpart of the project cost due to inadequate budgetary support and release of funds byGOI. As a result this company has to bear high interest and depreciation burdenresulting in continuous losses year after year. In fact the company even beforecommencing 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 twostages of capital restructuring in 1993 and 1998 converting all its loans into equity andpreferences shares. By this Government of India (GOI) converted Rs. 3,330 croresof its loan and Rs. 791 crores of interest on GOI loans into equity / preference sharesthereby bringing the total investment of GOI in the form of share capital with zeroGOI Loans. This resulted in lowering the interest burden on VSP by Rs. 521 croresannually.

5



The Global Scene

World’s crude steel picked up at a significant rate only after the 2nd world war. With ameager production level of 28 million tones (Mt) in 1900, the production crossed 100Mt mark in 1927. The production in 1943 was 159 Mt which sharply fell to 111 Mt in1946. Only then the growth was faster, reaching a level of 211 Mt in 1951, 305 Mt in1959, 433 Mt in 1964, 529 Mt in 1968, 630 Mt in 1972, 703 Mt in 1974 and 746 Mt in1979. The seventies witnessed one of the most severe economic crises on account ofpetroleum oil. This had a pronounced impact on the overall economy of the world andparticularly steel industry. The world production of steel started declining to 644 Mt in1982. The production improved to 683 Mt in 1983. 710 Mt in 1984, 719 Mt in 1985,714 Mt in 1986. During 90’s’crude steel production increased from 728 Mt in 1991 to842 Mt in 2000. There has been continuous increase in production during ninetiesexcept for the years 1992 and 1997. Finally world steel production touched an all timehigh of 965 Mt during the year 2003 and poised to cross 1 billion tonne mark in theyear 2004.

Major steel producing countries of the World till 50’s are only five, viz., USSR, USA,UK, France and Germany. During 60s and 70s, steel production started picking up inJapan and only after 1975 steel capacity started coming up largely in Easternhemisphere. China, Japan and Korea emerged as leading steel producers during thelast 25 years. The growth in China has been spectacular from 57 Mt in 1991 to over200 Mt in 2003. In contrast, Indian steel industry had inconsistent growth producingaround 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 capitaconsumption of steel of the world is about 150 kg while some of the developedcountries over 400 kg. Chinese consumption level of steel had improved tremendouslyduring last few years to around 140 kg. Against this, consumption in India hasincreased to present level of around 30 kg from consumption in India and all effortsshould be made in this direction.

QUO – VADIS

In tune with our vision to become a world class organization, we need to first find outwho is really world class and bench mark with them. Firstly our aim should be tobecome world class in steel making which is our core business before endeavoring toour ultimate goal of becoming a world class organization. With the big boost receivedfrom turnaround, Vizag Steel has earnestly started its journey towards this vision.

World Steel Dynamics, a leading publication from United States, every year publisheda list of top World Class Steel makers. The list includes the elite steel companies likePOSCO of South Korea, Severstal Steel of Russia, Shagang, Anshan Steel and BaoSteel of China, Tata Steel of India, BHP Steel of Australia, CST and Gerdau ofBrazil, China Steel of Taiwan and Nippon of Japan.

There are about 20 key attributes on which World Steel Dynamics judges world classsteel makers. They are: (1) cash operating costs (2) profitability (3) balance sheet(4) dominance in country / region (5) domestic market growth (6) harnessingtechnological 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 toprocure raw materials (15) alliances, merges and acquisition (16) pricing power withlarge buyers (17) product quality (18) skilled and productive work force (19) stockmarket performance and (20) threat from nearby competitors.

6

Case Studies The first 3 attributes which are basically finance related contribute to 26 points out of100 and the balance 74 points are almost equally divided among the remaining17 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 VSP’sGovt. owned status, attributes (9), (15) and (19) are not relevant at present. Theattributes (12) and (14) speaks of ownership of iron ore and coking coal mines forwhich VSP has started its efforts already. Of the remaining twelve attributes, weshould concentrate mainly on five attributes namely technological up gradation, costreduction, environment and safety, expanding capacity and quality of product as VSPis 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, workingon similar lines to assess our own ranking on the lines of world steel dynamics, VizagSteel stands some where around 15th position among the top 20 world class steelmakers. This gives us a lot of self satisfaction. The need of the hour is to benchmarkourselves with these world class steel making companies and continuously improveourselves integrating the various initiatives till we achieve our goal. Working in thisdirection, a Centre for Business Systems (CBS) which was formed recently, hasorganized a number of workshops involving a cross section of employees. Throughconsensus the earlier vision, mission and objectives were revisited for revision andnew business strategies have been identified for a time bound implementation. Aconcise 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 resolveto bring in continual improvements through innovation and people involvement, theday is not very far when Vizag Steel ultimately becomes a world class organization.And our journey towards excellence continues.

7



HUMAN RESOURCE MANAGEMENT AT VISAKHAPATNAMSTEEL PLANT

Introduction

One of the primary objectives to the Company is to develop a well-knit personalpolicy and a comprehensive personnel programme that will be result-oriented and todevelop an organizational culture, which motivates employees to contribute their besttowards achievement of organizational objectives. In accordance with this objective,VSP has given considerable emphasis on development of human resources, as wellas formulation and implementation of progressive personnel policies, systems, rules,and procedures to synchronize organizational needs with individual aspirations. Sinceinception, VSP has laid emphasis on effective man management as it subscribes tothe belief that effectiveness and success of the organization depend largely on theskills and commitment of the people.

Brief History

The Personnel & Administration Development was established along withestablishment of the Company in the year 1982. Initially, the department wasoperated from RTC Complex at city which was later shifted to CISF Barracks andAuxiliary Shops premises respectively located in the plant premises. Since then thedepartment has professionally spread in the entire plant keeping in view of therequirements of the personnel working in the Company to give personnel services atthe door step of the internal customers.

Transformation and Metamorphoses of the Function

Emphasis on Personnel and Industrial Relations functions have been graduallyconverted into HR functions linking with HR strategies and plans for attainment ofthe organizational goals and objectives. Human resources have been put abovemachines, as after all the machine is made by man. Year after year, the HRMfunction has been enriching itself through renewed vigor to meet the challenges andrequirements during project, commissioning and operation stages. The department hasmet successfully the requirements at each stage and nurtured itself as a functionwhich can turn around the Company. Although the HR professionals have seenturbulent period in the initial stages of project and commissioning one the systemshave set into operation, the fruits of seeds that have been sown by personnelprofessionals have started yielding results. Apart from highest Labour Productivity inthe integrated steel plants of India Human Resources at Visakhapatnam Steel Plantare breaking records after records day after day achieving peaks of production andall 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 theoverall policy of Human Resources Management of the Company. It is believed thatpeople are the key to success and the performance of the Company depends on themto a great extent. Hence special attention is given towards people management. Forthis, the organization has developed the Human Resources Policy to achieve the plansand target of the Company. It enables individuals to work efficiency and take pride intheir work besides feeling important. It make people feel safe, secure and trusted.People in the organization are encouraged for their efforts through a system ofrewards and recognition. Its environment encourages team working, creativity andinnovativeness. In the organization, the people’s ownership for the work and responsi-bility is obtained through empowerment. Employees are one of the main components.

8

Case Studies HR Mission

Creating a highly motivated, innovative, competent and compact employees, workingin a climate of relations where human dignity is respected, opportunity exists forcreativity in an environment of trust, friendliness, co-operation and collaboration forCorporate 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 directedtowards making RINL a global player and a world class Company. HR Mission ofVSP though not documented is as given below:

“Creating a highly motivated, innovative, competent and compact employees, workingin a climate of relations where human dignity is respected, opportunity exists forcreativity in an environment of trust, friendliness, co-operation and collaboration forCorporate 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 mostprecious resources of the Company. The approved HR Policy of the Companyis as follows:

To realize the full potential of employees, the Company is committed to;

••••• Provide work environment that makes the employees committed andmotivated for maximizing productivity.

••••• Establish systems for maintaining transparency, fairness and equality indealing with employees.

••••• Empower employees for enhancing commitment, responsibility andaccountability.

••••• Encourage team-work, creativity, innovativeness and high achievementorientation.

••••• 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 theCompany is as follows:

Focus

••••• 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 existsfor Training as well as HRD, which have the requisite infrastructure facilities anddemarcation of the functions of the Training and HRD are as follows:

9



TRAINING HRD

Skill Development Management Development

Technological Courses Behavioral Development

Computer Training External Nominations

Safety & Health O D Initiatives

TQM & ISO Surveys

Refresher Courses Performance Appraisal

CMC for JOs HRIS

Library & Information Service Expert Talks

Apprentice Training Professional Development

Fresher’s Training Project based Training

Industrial Training & Visits

SkillAnalysis

Training Needs Survey

Nomination to ExternalProgrammes

Training NeAnalysis

CurriculumDevelopment

Feedback/Evaluation

Annual Training Plan

Circulation of Training Plan

On-line Nominations

Delivery of Training

10

Case Studies Design and Delivery of Training

The Training and Delivery of Training plays a pivotal role in importing requisitedevelopment to the Human Resources. A chart depicting the Design and Delivery ofTraining 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:

• Six sigma

• S B G

• 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:

• 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.

11



Knowledge Management

KM News is the focal point for dissemination of knowledge and knowledge sharingat VSP. Knowledge Management definition and plan at VSP is given below:

KM is about being able to identify, capture, share, retrieve, disseminate & evaluateorganization’s intellectual assets, which can be to the Company’s advantage to savecost and time.

• 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

• 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 atVSP. Major components of Appraisal of Executives are as follows:

• 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 crucialimportance in VSP. Several initiatives have been taken towards this end. VSP hadadopted a multi-skill and multi-trade pattern of working with emphasis on flexibility injob deployment for ensuring optimum utilization of its human resources. Productivework culture has been ensured by well-planned and timely stress on attitudinalchanges and positive work ethics through tailor-made human resources developmentprogrammes.

Industrial Relations

VSP, by following a strategy of education and persuasion of the employees and withthe firm handling of indiscipline has been able to establish by and large a cordialindustrial relations climate. This has seen concerted efforts for a fuller utilization ofmanpower, stabilization of multi-discipline approach to work, elimination of restrictive

12

Case Studies and wasteful work practices and inculcation of strict discipline in the organization. Aconstructive industrial relations climate has been evolved through a conscious policyof combining ‘firmness’ with ‘fairness’.

The overall Industrial Relations scenario in RINL/VSP is peaceful, cordial andhealthy. A host of proactive IR measures which inter-alia include Confidence BuildingMeasures between Union-Management, extensive communication, continuousinteraction with Unions were taken for building Harmonious Industrial Relations.

Participative Management

To sustain the spirit of the participative culture, a total of 66 Participative Committeesare being functioning with participation both from the Management and the workers.Approximately 15% employees are given an opportunity of participation in theseforms at VSP including the Quality Circles and Suggestion Schemes, etc. These havehelped the organization in accomplishing the organizational goals through the activeemployee’s involvement.

Participative culture exists at various levels in VSP to bring out real democracy at theplace of work. The process of participative form is given below:

• Functioning of 66 Committees:

• Participation of 15% Employees including QC’s Suggestion Schemes

Central SafetyCommittee

Canteen ManagingCommittee

SportsCouncil

Shop Floor SafetyCommittee

ShopfloorCo-operationCommittee Management Un

Interaction withRecognized Un

and Two MajoUnions

Joint ParticipativConsultative

Fora-managemeRepresentative

Recognized UnioMembers

13



HRM Sailent Feature

HRM and VSP has certain salient features with which it attempts to distinguish fromTraditional Personnel Management, they are:

• 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 profession-ally run company. They can be seen at an askance as given here under:

• 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 isa living, achieving and performing culture. Some of the aspects of the Work Cultureare as under:

• 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

Today’s Grievance is tomorrow’s IR Problem. VSP has carved out a unique way ofdealing the grievances. The Grievance Redressal procedure at a glance is given inthe diagram with grievances received and redressed during the last four years to givean idea of Grievance Management at VSP.

14

Case Studies Grievance Redressal: The Informal Way

Grievances Received and Redressed

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:

• Neat, clean & pollution free environment

• Occupational Health Care

• Canteens and Canteen extension points

Grievance of theEmployee

Registration of Grievancesin the Register at Shop Floor

Personnel Office(Throu’ Telephone, Personal,

Recording, Informal Interactions)

Segregation andcommunication to the

concerned agencies

2000-01 2001-02 2002-03

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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 LabourProductivity achieved during last 3 years are given below to have an idea:

Labour Productivity

(t/man/year)

Measures Taken to Control Absenteeism

Absenteeism is a menace every where. The Integrated Absenteeism Control Meas-ures are implemented at VSP are worth emulating. They are:

• 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 writtencommunication 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 ‘Companycares to its employees’ various Statutory and Non-Statutory welfare and Socialsecurity measures have been provided by the Company for the benefit of employeesand their families.

2001-02 2002-03 2003-04

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Case Studies Welfare Facilities

Unique Welfare Facilities and Social Security Schemes are implemented at VSP. Theimportant features of welfare have been indicated below to give an idea that VSPcares for people through welfare plus policy:

• 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 otherorganizations and achieved excellence. The components Employee Relations havebeen indicated hereunder to have an idea:

• Managing 19 Unions of Regular Employees, 17 Unions of Contract Labourand 9 Mines Unions

• Managing Steel Executives Association 5 SC/ST Associations 100 oddWelfare Associations, Crafts Unions and Interest Groups and Social Organi-zations.

• 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 hasbeen a way of life at VSP and the various schemes of recognition are as listed below:

i) Departmental Awards

• Safety & Housekeeping awards

• Environment Preservation awards

• Ispat Udyan Puraskar

• Productivity awards

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• Energy Conservation awards

• Oil Conservation

• Fire Awareness awards

• Best Training orientation

• Raj Bhasha awards

• Best Branch award

ii) Team Awards

• Quiz, skit related safety, environment & energy

• Quality Circle awards

• Special performance awards

• Sports related awards

iii) Individual Awards

• 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 onlybelieves in implementing the scheme but also improves the same in true letter andspirit.

• 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

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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 Executivemanpower as a strategy which has been followed to reduce the non-executive manpower and to increase the executive manpower. For in-stance, 15,202 non-executive manpower in the year 1994 has been reducedto 12,222. Similarly, executive’s strength which was at 2,281 in 1994 hasbeen 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 tominimum 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 intoopportunities

• Introduction of Non-Unionized supervisory Cadre and strengthening ofsupervisory 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 ownstrategies. VSP is no exception to this and the HR Strategies that are being followedare indicated below:

• Collaborative Approach in dealing with Major Unions

• Informality in Interactions with Unions/Associations

• Incentive Scheme with Focus on:

• Needs of the Organization

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• 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.

Awards

Awarded Rs. 1.00 Crore as Prime Minister’s Trophy for the year 2002-03 adjudgingas Best Integrated Steel Plant in India. Besides, some of the prestigious awardsbagged by the Company in the areas of the Safety, Quality Environment, Productionand Productivity, Management, etc, are as follows:

a) Safety

• Ispat Suraksha Purashkar for highest percentage reduction in accidentrate for 14 times.

• Greentech Safety Silver Award for 2002-03 by Greentech Foundation

• Best Safety Award from Government of A.P.

• Steel Minister’s 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 ofEnvironment.

• Nehru Memorial National Award for Pollution Control – 1992 – 93 & 1993– 94 by IIM.

• Award from AP Pollution Control Board for best efforts in rain waterharvesting.

• Environment Excellence Award – Green tech Silver Award for 2002 byGreentech Foundation.

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Case Studies c) Government

• Award from Ministry of Heavy Industries for achieving MOU Targetsfor 2002-01.

• Rated Excellence among all PSUs in 2002-03 for fulfilling MOU targets byMinistry of Steel.

• Winner of SCOPE Award for best Turn around effort by a PSU in2001-02 & 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” forpropagation of Official Language.

• Rolling Shield for “Ecological Protection” instituted by the Ministry ofInformation & Broadcasting for 2002.

• Udyog Excellence Gold Medal Award for excellence in Steel Industry byMinistry of Steel.

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 Manage-ment, 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 RINL’s Stall at the International Trade Fair.

• Vizag Steel’s Global rating has gone up to 67th position in 2002 amongstWorld’s Largest Steel Producing Companies.

The Testimony

The efforts of VSP have been recognized in various forums and some of the majorawards received by VSP are:

••••• 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 NationalQuality Competition 1996.

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••••• Steel Minister’s 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 ratefor 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 successin the world competitive village. This path has to be treaded very carefully to achievea status where it can leave its competitors way behind. To chalk out a growth path itis also necessary for us to understand the world steel market since the level of steelconsumption in a country has long been regarded as an index of industrialization andeconomic maturity attained in a country.

Technological Revolution

Technological advancements in the recent past, especially in the field of informationfeature technology and communication, have changed the face of business. Theindustrial revolution heralded a new chapter in civilization by putting new forces in thehands of man in adapting nature to fulfill his needs. This revolution sustained anddrove human society for the last three centuries or more.

Today we are privileged to witness another revolution within the industrial revolutioncalled “Information Technology”. The future of human society is interlinked with thisemerging force. Soon, no aspect of our life can remain untouched by this omnipotentforce. IT brings with it tremendous force of improving efficiency, productivity and theconvenience of having the world at our finger tips. Just as the industrial revolutionbrought a quantum improvement in productivity through mechanization of manualactivities, the IT revolution is taking productivity to new heights through automation ofthe industrial activity. IT is contributing towards improving human productivity as wellas machine productivity.

The speed at which decisions are made makes computers thousands of times moreefficient than manual operations. Hence, the high precision manufacturing becomespossible. Planning, implementation and monitoring by crunching massive amounts ofdata are again possible through computers which if done manually would take monthsto complete and ultimately render the information useless. The increase incompetition makes it all the more necessary for industry to adopt IT as an initiativefor surviving in today’s market place.

This perception of a corporation as an organic being is helpful in understanding thatthe people, systems and technology are strongly interlinked to produce the wholewhich is greater than the sum of the parts.

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Case Studies Use of IT in HRM

That IT HRM interaction can only survive us in today’s Liberalised and Globalizedworld. 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 wasestablished with an investment of Rs. 100/- from each citizen of India has lostapproximately Rs. 50/- from every citizen could make a come back and reclaimapprox. Rs. 20/- on behalf of each citizen hardly in a period of 2 years.Let us look at what has brought the Turnaround.

Machines — Same

Money — Same

Market — Same

Materials — Same

Methods — Same

Environment — Same

Technology — Same

Conclusion

Success of Human Resources functions of Visakhapatnam Steel Plant from therelentless efforts of the VSP work force. This valuable asset of about 16775 steelemployees have been contributing to positive cultural changes, increased productivityand excellence in organization. Undoubtedly employees are the driving force behindthe 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 THECOMPANY”. The Innovative HR Practices will no doubt make VSP a “WORLDCLASS 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 fromtime to time. If yes, then why? Discuss.

3. ‘Financial position is linked to other performance factors’. Discuss.

4. Discuss the HR Policy of VSP.

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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

MS 92 Complete Book

Documents

Transcript of MS 92 Complete Book