UNIT-III: PUBLIC SECTOR AND PRIVATISATION

PUBLIC SECTOR ENTERPRISE

A Public sector enterprise is an industrial, commercial or other economic activity owned and managed by the central or state Government or jointly by both.

International centre for public Enterprise(ICPE), Yugoslavia defines a public sector as “ A public enterprise is an organization which is

1. owned by public authorities including central, state or local authorities , to the extent of 50% or more;

2. is under the top managerial control of the owning public authorities, such public control including the right to appoint top management and to formulate critical policy decisions;

3.is established for the achievement of a definite set of public purpose, which may be multidimensional in character;

4. is consequently placed under a system of public accountability;

5.Is engaged in activities of a business character;6.Involves the basic idea of investment and

returns;7. and which markets its outputs in the shape of

goods and services.

OBJECTIVES OF PUBLIC ENTERPRISES

Help in the rapid economic growth and industrialization of the country and necessary infrastructure for economic development.

Earn returns on investments and thus generate resources for development.

Promote redistribution of income and wealth.Create employment opportunities.Promote balanced regional development.Assist the development of small scale and ancillary

industries.Promote import substitution, save and earn foreign

exchange for the economy.

Act as a countervailing force and put up an effective competition to undertakings in the private sector and

Gain control over the commanding heights of the economy.

Rationale for state owned/public enterprises

At cheaper rates/control monopolyCapital formationInvestment in infrastructureLack of private incentive to engage in

promising economic activitiesTo gain national control over strategic

sectors.

Growth and role of public sectorPeriod Total Investment No. of Enterprises

I Plan 29 5

II Plan 81 21

III Plan 948 47

III ANNUAL PLANS 2410 73

IV Plan 3897 84

V Plan 6237 122

VI Plan 18150 179

VII Plan 42673 215

VIII Plan 135445 246

IX Plan 193121 242

X Plan 274114 233

XI Plan

ROLE PLAYED BY PSU’S IN THE DEVELOPMENT OF OUR ECONOMY

Share in National Income:during 42 years (1960-61 to 2001-02) 1/4th of GDP

Doubled their share in GDPCommanding heights of the economy:Command in all almost all strategic sectors of the

economy coal, oil, refining electricity, tele -communications, iron and steel, paper, newsprint and the like.

Where it controls more than 80% of total installed capacity.

Share in capital formulation:Share of public sector in total investment(%)

SHARE OF PUBLIC AND PRIVATE IN TOTAL INVESTMENT(%)

PLAN PUBLIC SECTOR PRIVATE SECTOR

I 46.40 53.60

II 54.60 45.40

III 63.70 36.30

IV 60.30 39.70

V 57.60 32.40

VI 52.90 47.10

VII 47.80 52.20

VIII 36.50 63.50

IX 34.70 65.30

PSE’S AND EMPLOYMENT:Minimizing unemployment 10% of the total

employment is in organized sector.And90% is accounted for by the organized sectorExport earnings:Export earnings of PSU’s have favorable impact

on India's balance of payments condition.Balanced Regional DevelopmentBy locating themselves in backward areas, help

remove regional imbalances in development.

Industrialization and Economic DevelopmentEncouragement to ancillary industriesResource mobilizationPerformance

Reasons for poor performance of public sector enterprises

Political interferenceHigh cost of DelayFear of scamsHead less plantsIneffective ManagementHuge InventoriesTrade UnionismUnimaginative production and unfavorable

pricing policiesUnutilized Capacities

Other reasons are Wrong choice of locations Uncertainty of financial allocations Poor quality of products High cost Higher social costs corruption

PUBLIC SECTOR REFORMS

Reforms: The 1991 industrial policy brought the public sector units on par with private units. Upto September 30, 2006, 296 cases of public sector units were referred to BIFR.

 Reforms: One of the major initiatives towards public sector

was to bring all public sector enterprises under the system of Memorandum of Understanding (MoU), it gives clear targets to PSUs and ensures operational autonomy to them for achieving those targets.

In 1997, the government identified 11 public sector enterprises as Navaratnas and decided to give enhanced powers to board of directors of these enterprises to facilitate their becoming global players. IPCL & VSNL have since been privatized and presently there are only 9 Navaratnas.

PRIVATISATION

Privatization may be understood as the process where by activities or enterprises that were once performed or operated by the Government and its employees are now performed, managed or owned by private business and individuals, often with much better results in terms of cost and quality of service. Privatisation achieves these results by replacing government monopolies with the competitive pressures of the market place to encourage efficiency, quality and innovation in the delivery of goods and services.

OBJECTIVES OF PRIVATISATION

To improve the performance of PSU’s so as to lessen

the financial burden on tax payers.Increasing size and dynamism of the private sectorDistributing ownership more widely in the

population at large.Encouraging and facilitating private sector

investments, from both domestic and foreign sources.

Generating revenues for the state.Reducing the administrative burden on the state.

FORMS OF PRIVATISATION

The first major programme of Privatisation was adopted in UK, followed by France and many other OCED Countries, former communist countries and developing nations. These countries used one or a combination of the following methods of privatization.

FORMS OF PRIVATISATION

Initial Public Offer: Under this method, the shares of public sector undertakings are sold to the retail investors and institutions.

  Strategic role: In this method, government sells its shares in the PSU to

a strategic partner. As a result, the management passes over to the buyer.

  Sale to Foreigners: This is a variant of the strategic sale method, where

the buyer is not a domestic company but a foreign company Equal access voucher programme: This form of privatization involves

distribution of vouchers across the population and attempts to allocates assets approximately evenly among voucher holders

  Management- Employee buyouts- in this method of privatisation,

managements and employees themselves buy major stakes in their firms.

Disinvestment: The New Industrial Policy 1991, advocated privatisation of public sector enterprises. For privatisation, the government has adopted the route of disinvestment, which involves the sale of public sector equity to the private sector and the public at large.

The government of India enunciated a policy to divest up to 20 percent of its equity in select public sector undertakings to mutual funds and investment institutions in the public sectors as well as workers of these firms.

In his address to the joint session of Parliament in Feb 2001, the President stated that “The governments approach to PSUs has threefold objective: the revival of potentially viable enterprises; closing down of those PSUs that can be revived; and bringing down government equity in non-strategic PSUs to 26 percent or lower. Interests of workers will be fully protected through attractive Voluntary Retirement Schemes (VRS) and other measures”

 The government has adopted two methods of

disinvestment: i. selling of shares in select PSU’s and ii. Strategic sale of a PSU to a private sector company.

DISINVESTMENT OF EQUITY IN PSE’S

YEAR TARGET PROCEEDS

1997-98 4800 902

1998-99 5000 5371

1999-2000 10000 1860

2000-2001 10000 1871

2001-2002 12000 5632

2002-2003 12000 3348

2003-2004 14500 15547

PROBLEMS OF PRIVATE SECTOR

Profit generation is the main motiveFocus on consumer durables sectorMonopoly and concentrationDeclining share of net value added in total outputInfrastructure bottle necksContribution to trade deficitIndustrial disputesIndustrial sicknessProblems relating to finance and creditThreat from foreign competition

Regulatory Framework with Reference to Insurance, Power & Telecom Sector:

On the recommendations of the committee on reforms in the insurance sector, popularly known as Malhotra Committee, The Insurance Regulatory & Development Authority (IRDA) was constituted as an autonomous body reporting to Central Government, to regulate and develop the business of insurance and re-insurance in the country in terms of the Insurance Regulatory & Development Authority Act 1999.

IRDA was formed with a mission, “To protect the interests of the policy holders, to regulate, promote and to ensure orderly growth of the insurance industry and or matters connected there with or incidental there to”.

As on date there are 15 life insurance companies including one public sector company and 14 general insurance companies including 5 public sector companies are regulatory by the authority.

Regulatory Methodology: The authority has always believed in openness and transparency, it has followed the practice of prior consultation with various interests. It has issued draft regulations and guidelines, generated discussions on the various issues and finalized its regulations in an open manner. Many of the regulations have been looked into by international bodies and found to match up to world standards.

ISSUES UNDER CONSIDERATION:General Insurance sector is heading towards

de-tariff regime by January 2007. Existence of tariff was considered contrary to free market principles and insurance products need to be priced based on market forces.

 Health insurance in India is the thrust area for

providing insurance to one billion population of India

 

Regulatory Framework for Power & Telecom Sector:

In mid 1990’s, reforms were introduced in two important infrastructure areas i.e., Telecommunication and power. Prior to 1990, telecom sector was entirely Government owned. In 1991, ordinary telephone, which is considered as basic service accounted for only 9.5 million for a population of 846.3 million.

The policy changes in the Telecom sector have come in through two major policy reforms initiatives i.e., NPT 1994 and NPT 1999. Prior to this, the telecommunication industry was regulated on the basis of guidelines and regulations formulated under the Indian Telegraph Act 1885, The NPT 1994 allowed limited opening for the private sector for cellular services in metro areas.

The major policy shift came when the government set up in 1997 the Telecom Regulatory Authority of India (TRAI) for the sector. The next major development for the reforms was the New Telecom Policy called NPT 1999. Under this policy the government allowed more private sector investment and competition with a view to provide most modern telecom services to the people.

The powers enjoyed by the TRAI were challenged and the government issued an ordinance in 2000 and reconstituted the TRAI and also set up Telecom Dispute settlement Appellate Tribunal (TDSAT). This reduced the role and functions of the TRAI as compared to 1997 Act.

POWER SECTOR:

A shift in the power sector policies came during 1990’s with liberalization and opening of generation for private participation, concessions for independent power producers and undertaking of reforms in the SEB’s In mid 1990s reforms of SEBs were taken up with the liberalizing the SEBs and setting up State Regulatory Commissions.

To speed up the reforms & to provide for distancing of Government from determination of tariffs, the Electricity Regulatory Commission Act was enacted in 1998. It created the Central Electricity Regulatory Commission, The 1998 Act made uniform organizational framework and scope for powers for the state commissions to be set up by the state Governments.

The progress of reform was not uniform and some states delayed in creating regulatory bodies and restructuring of SEBs. Hence, the new Electricity Act 2003 was enacted by the Parliament replacing the existing laws. It provides the roadmap for the transformation of the electricity industry by taking measures conclusive to its developments, promoting competition, protecting interest of consumers and supply of electricity to all areas and rationalization of electricity tariffs.

Establishment of Regulatory commissions and Appellate Tribunal as mandatory and transparent regulatory framework are considered important features of the Act.

State Commissions: the powers of the state regulatory commissions are similar to CERC in scope, in respect to their respective jurisdiction. The organizational structures and the role , responsibilities of the state commissions have been laid down to achieve some degree of commonness and consistency and for developing sustainable regulatory framework.

State level regulatory commission have a very significant role in the Distribution reforms that are envisaged under the Electricity Act 2003. The state commissions have to act as the effective instrument to regulate the power utilities in the distribution to protect the interest of the consumers and also promote competition.