Public Sector Undertakings

Topics covered

  • Public Sector Classifications 
  • Objectives of Setting up Public Sector Unit (PSU)
  • Departmental Organisation 
  • Public Corporation 
  • Government Company 
  • Joint Enterprise 
  • Development Corporation 
  • Role of Public Sector in the Upliftment of Society 
  • Maharatna, Navratna and Miniratna status 
  • Challenges of PSU’s in India today:
  • Government initiatives to help PSU’s 
  • Conclusion 

Public Sector Classifications

  • The public sector can be classified into:-
    • Departmental Undertaking – Directly managed by concerned ministry or department. (e.g. Railways, Posts etc.)
    • Non-Departmental Undertaking – PSU (e.g. HPCL, IOCL etc.)
    • Financial Institution (e.g. SBI, UTI, LIC etc.)
  • The rationale behind the establishment of PSU’s was Industrialisation and establishment of Capital Goods Industries and Basic Industries. The organizations that are not a part of the public sector are termed as private sector that works to raise profit for the organization.

Objectives of Setting up Public Sector Unit (PSU)

  • To reduce inequalities and accelerate the economic growth and development of a country.
  • To generate a better quality of employment
  • To create an industrial base in the country
  • To provide resources to the government
  • To develop basic infrastructure in the country
  • To promote exports and reduce imports

Departmental Organisation

  • It was, at one point of time, the prominent form of organisation of the public enterprises for two reasons.
    • First; it was easy for a government to create an enterprise within the organisational framework of one of its already existing departments.
    • Secondly, in the initial stages of developmental planning, the -lumber of such enterprises with commercial functions was small.

The Major characteristics of Departmental enterprises are:

  • The enterprise is financial by annual appropriation from the treasury and all or major share of its revenues are paid into the treasury.
  • The enterprise is subject to budget accounting and audit controls applicable to other government activities.
  • The permanent staffs of the enterprise are civil servants, the method by which they are recruited and the conditions of service under which they are employed are ordinarily the same as for other civil servants.
  • The enterprise is generally organised as a major sub-division of one of the central government departments and is subject to direct control of the head of the department.
  • Wherever this applies in the legal system of the country concerned. the enterprise possesses the sovereign immunity of the state and cannot be sued without the consent of the government.

Public Corporation

  • It is an autonomous form of the organisation “clothed with the power of the government, but possessed with the flexibility and initiative of-private enterprise” according to F.D. Roosevelt. the President of USA while discussing the Tennessee Valley Authority.
  • Public Corporation may be understood in general terms as an autonomous commercial organisation established at government’s insistence outside the framework of government department and company legislation.

The following are the major characteristics of Public Corporations.

  • It is wholly owned by the State.
  • It is generally created by, or pursuant to, a special law defining its powers, duties, immunities and prescribing the form of the management its relationship to established departments and ministries.
  • As a body corporate, it is a separate entity for legal purposes and can sue and be sued, enter into contract and acquire property in its own name.
  • Except for appropriations to provide capital or to cover losses, a public corporation is usually independently financed.
  • It is generally exempted from most regulatory and propitiatory statues applicable to expenditure of public funds.
  • It is ordinarily not subject to budget accounting and audit laws and procedure applicable to non-corporate agencies.
  • In majority of cases employees of public corporations are not civil servants and recruited and remunerated under terms and conditions, which the corporation itself determines.
  • It may not be wholly owned by the State.
  • Every public corporation need not be the result of a special enactment.
  • Some of the restrictive regulations applicable to government departments expenditures and the audit system can also be imposed on pull corporations.
  • Some of the employees of public corporations, specially at the top level are from the civil services.

Government Company

  • The joint stock company is another organisational form of public enterprises. The ‘company form’ which may also be called a `government company’ is described in many countries as an enterprise registered under the Companies Act of the land in which the government and/or public enterprises hold at least 51 per cent of equity capital.

Advantages of Government Companies are as follows.

  • A government company is far easier to constitute than a public corporation, which requires specific legislation, while only seven signatories of the memorandum and articles of association are required to get a company, registered under the Companies Act in India.
  • The company farm enables the government to diversify its ownership in the company by either selling or buying equity shares. It can easily transfer the company to private sector by simply reducing its share capital to less than 50%.
  • The creation of a company form of public enterprise suggests the government’s will to allow the public enterprise to work under the same set of law as those applying to private sector enterprise.
  • The company form of organisation of public enterprise gives certain conveniences to government as far as its relationship with the enterprise is concerned.

Joint Enterprise

  • State participation in an economic activity along with the private sector has led to the creation of a specific type of organisational form, which is known as joint enterprise.

Factors responsible for the emergence of Joint Enterprises.

  • Government will to set up joint enterprises with private sector may be in context of the following situations:
    • Lack of initiative to participate in the private enterprises which can be secured by government’s participation; or
    • Government wants to conserve its limited resources and invite private capital so that the government can extend its coverage to more fields in the public sector.
    • The government’s decision to enter into partial ownership of a going, private enterprise may in the following situations.
    • For conversion of loans of the private sector into equity capital
    • For regulating the monopolistic operations or public interest potential or a enterprises;
      • For overcoming the ‘sickness’ or `mismanagement’ of a private enterprise
      • For governing profit in case of a private enterprise;
      • For continuation of previous management, in case of nationalisation of private. enterprise; and
      • For limiting cost compensation, in case of nationalisatioin or foreign private enterprise.
    • There has been a progressive increase in the number of, joint enterprises the world over, especially in the wake of privatisation wave.

Development Corporation

  • It is difficult to exactly define ‘Development Corporation’. On the basis of empirical evidence world over, especially in the developing countries, it may signify an autonomous agency-in the public sector, primarily to promote, rather than to operate, economic activities through a system of subsidizing.
  • The promotional activity of a Development Corporation is as follows.
    • It promotes an activity which otherwise might not come into existence.
    • It accelerates an activity which otherwise‘ would materialise at a small outputs and in a sectorally unbalanced manner.
    • It promotes a desired pattern of economic activity, meaning thereby the expansion of desired sector of activity, promotion of unites of desired sizes, attainment of desired balance of payments, development of certain economic activity in the desired region, etc.

Role of Public Sector in the Upliftment of Society

The public sector plays a major role in uplifting the economic condition of society in various ways.

The major role of the Public sector can be explained below:

  • Public sector & capital formation – This sector has been a major reason for the generation of capital in the Indian economy. A large amount of the capital comes from the Public sector Units in India
  • Creation of Employment opportunities – Public sector has brought about a major change in the employment sector in the country. They provide a lot of opportunities under various domains and thus helps in uplifting the Indian economy and society.
  • Development of Different Regions – Establishment of major factories and plants has boosted the socio-economic development of different regions across the country. Inhabitants of the region are impacted positively with respect to the availability of facilities like electricity, water supply, township, etc.
  • Upliftment of Research and Development – Public sector units have been investing a lot to introduce advanced technology, automated equipment and instruments. This investment would result in the overall cost of production.

Maharatna, Navratna and Miniratna status

  • Status of Maharatna, Navaratna and Miniratna is given to the Central Public Sector Companies (CPSE) in India.
  • The Department of Public Enterprises under Ministry of Heavy Industries & Public Enterprises is the nodal department for all the Central Public Sector Enterprises (CPSEs).
  • It makes policies and guidelines for the performance evaluation and improvement of the PSUs/ CPSEs.

Eligibility Criteria

Maharatna

  • Having Navratna status.
  • Listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.
  • Average annual turnover of more than Rs. 25,000 crore, during the last 3 years.
  • Average annual net worth of more than Rs. 15,000 crore, during the last 3 years.
  • Average annual net profit after tax of more than Rs. 5,000 crore, during the last 3 years.
  • Should have significant global presence/international operations.

Navaratna

  • A CPSE which falls under the Miniratna (Category – I and Schedule ‘A’ CPSEs), has obtained rating of ‘very good’ or ‘excellent’ in 3 of the last 5 years.
  • A CPSE which has composite score of 60 or above in the 6 selected performance parameters, namely;
  • Net profit to net worth
  • Earnings per share
  • Profit before interest and taxes to turnover
  • Profit before depreciation, interest and taxes to capital employed
  • Manpower cost to total cost of production/services
  • Inter-Sectoral performance

Miniratna

  • Those CPSEs which fulfill these two criteria are eligible to be considered for grant of Miniratna status.
  • The CPSEs which have made profits in the last 3 years continuously
  • The CPSEs which have positive net worth.
  • As of 2019, there are 10 Maharatnas, 14 Navratnas and 73 Miniratnas.
  • There are nearly 300 CPSEs (central public sector enterprises) in total.

Challenges of PSU’s in India today:

  • Failure in its objective of Capital and Public Sector Formation, the role of public sector in collecting saving and investing them during the planning ear is very important. Moreover, during the first and second five-year plan it was 54% of the total investment. Furthermore, we see a decline to 24.6 % in the year 2010-11.
  • Problems in Administration like Poor policy making and poor execution, Over-staffing, Very high operation costs, Lack of a realistic and proper pricing policy, Lack of vision and motivation for self-improvement, Wastage of resources or under-utilization of resources
  • Some of the public sector enterprises, particularly some of the loss-incurring enterprises are suffering from endowment constraints as the selection of sites of these enterprises were done on political considerations rather than on rational considerations.
  • PSU’s were formed for creates millions of jobs to fight the obvious problem of unemployment in India. However, the number of people without employment in March 2011 was 150 lakh. In some of the public sector units there is the problem of surplus manpower which is creating drainage of resources unnecessarily leading to increase in the unit cost of production. Political considerations have also contributed towards overstaffing of unskilled workers in these units.
  • Under-utilisation of the production capacities are one of the common constraints from which almost all public sector enterprises are suffering. In 1986-87, out of the 175 public sector units 90 units had been able to utilize over 75 per cent of its capacities, 56 units achieved utilisation of capacities between 50 and 75 per cent and the rest 29 units could somehow managed to utilize under 50 per cent of its capacities.
  • Some of the public sector enterprises in India are suffering from technological gap as these enterprises could not adopt up-to-date technologies in their production system leading to high unit cost and lower yield. Enterprises like I.I.S.C.O., E.C.L. etc. are suffering from this constraint.

Government initiatives to help PSU’s

  • Disinvestments, the Department of Investment and Public Asset Management (DIPAM) have initiated the process of diluting government stake in public sector undertakings (PSUs). The government increased its disinvestment target to over Rs 1 lakh crore for the current financial year in the last budget. In the interim budget 2019-20 presented in February this year, it had pegged the disinvestment target of Rs 90,000 crore.
  • Privatization of PSU’s, A high level group of secretaries on disinvestment have approved India’s biggest disinvestment drive since last 20 years. Bharat Petroleum Corp Ltd (BPCL), Shipping Corp of India (SCI), THDC India and NEEPCO will be now privatized, as Govt. will sell its entire stake from these public sector companies.
  • The government’s move to consolidate 10 public sector banks into four large ones is ostensibly aimed at improving operating efficiency, governance and accountability and facilitates effective monitoring. However, the mergers will bring their own set of challenges and may not lead to value accretion for shareholders.
  • Granting greater managerial autonomy to the board of PSUs could significantly boost their performance. Heavy industries and public enterprise ministry has taken a number of steps like enhancement of delegation of powers to the profit-making PSUs and setting up of the Board for Reconstruction of Public Sector Enterprises to revive the sick companies, an official release said.
  • Government is considering issues of retirement age and revision of wages of the public sector employees , provide equity, in terms of salary and wages, for sick CPSEs.

Conclusion

  • Being the largest commercial enterprises in the country, PSUs provide a huge leverage to the government (their controlling shareholder) to intervene in the economy. Their intervention is either directly or indirectly to achieve the desired socio-economic objectives. PSUs play a key role in steering the national economy in the right direction.