Ashwin’s Commerce World

PUBLIC ENTERPRISES, PUBLIC UTILITIES & PUBLIC PRIVATE PARTNERSHIP

MEANING AND CHARACTERISTICS OF PUBLIC ENTERPRISES

All industrial and commercial undertakings owned, managed and controlled by the Government are called public
enterprises or public undertakings or public sector undertakings. These enterprises are known collectively as the public
sector.
CHARACTERISTICS:
1. State ownership. A public enterprise is wholly owned by the Central Government or State Governments(s) or local
authority or jointly owned by two or more of them. In case the enterprise is owned both by the Government and
private sector, the State must have at least 51 per cent share in ownership.
2. State control. The ultimate control of a public enterprise lies with the Government which appoints its Board of
Directors and the Chief Executive.
3. Government financing. The whole or a major portion of the capital of a public enterprise is provided by the
Government.
4. Service motive. The primary aim of a public enterprise is to render service to the society at large. It may have even to
incur losses for this purpose. However, public enterprises are expected to generate surplus in course of time.
5. Public accountability. Public enterprises are financed out of public money. Therefore, they are accountable for their
results to the elected representatives of the public, i.e., the Parliament and the State Legislature. That is why, the
working of public enterprises is scrutinised by the Committees of the Parliament or the State Legislature.
6. Autonomous bodies. Public enterprises are autonomous or semi-autonomous bodies. In some cases they work
under the control of Government departments. In other cases these enterprises function as companies and statutory
corporations.
OBJECTIVES
1. Economic development. Public enterprises were set up to accelerate the rate of economic growth in a planned
manner. These enterprises have created a sound industrial base for rapid industrialisation of the country. They are
expected to provide infrastructure facilities for promoting balanced and diversified economic structure of development.
2. Self-reliance. Another aim of public enterprises is to promote self-reliance in strategic sectors of the national
economy. For this purpose, public enterprises have been set up in transportation, communication, energy, petro-
chemicals, and other key and basic industries.
3. Development of backward Areas. Several public enterprises were established in backward areas to reduce regional
imbalances in development. Balanced development of different parts of the country is necessary for social as well as
strategic reasons.
4. Employment generation. Unemployment has become a serious problem in India. Public enterprises seek to offer
gainful employment to millions. In order to protect jobs, several sick units in the private sector have been nationalised.
5. Economic surplus. Public enterprises seek to generate and mobilise surplus for reinvestment. These enterprises earn
money and mobilise public savings for industrial development.
6. Egalitarian society. An important objective of public enterprises is to prevent concentration of economic power and
growth of private monopolies. Public sector helps the Government to enforce social control on trade and industry for
ensuring equitable distribution of goods and services. Public enterprises protect and promote small scale industries.

ROLE AND RATIONALE OF PUBLIC ENTERPRISES

1. Filling of gaps. At the time of independence, there existed serious gaps in the industrial structure of the country,
particularly in the field of heavy industries. Basic and key industries require huge capital investment, involve
considerable risk and suffer from long gestation periods. Private sector concerns do not come forward to establish such
industries. Public sector has helped to fill up these gaps.
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2. Employment. Public sector has created millions of jobs to tackle the unemployment problem in the country. Public
sector accounts for about two-third of the total employment in the organised industrial sector in India. By taking over
many sick units, the public sector has protected the employment of millions. Public sector has also contributed a lot
towards the improvement of working and living conditions of workers by serving as a model employer.
3. Balanced regional development. Private industries tend to concentrate in certain regions while other regions remain
backward. Public sector undertakings have located their plants in backward and untrodden parts of the country. These
areas lacked basic industrial and civic facilities like electricity, water supply, township and manpower. Public enterprises
have developed these facilities thereby bringing about complete transformation in the soci-economic life of the people
in these regions.
4. Optimum utilisation of resources. Public enterprises make better utilisation of scarce resources of the country. They
are big in size and able to enjoy the benefits of large scale operations. They help to eliminate wasteful competion and
ensure full use of installed capacity. Optimum utilisation of resources results in better and cheaper production.
5. Mobilisation of surplus. The profits earned by public enterprises are reinvested for expansion and diversification.
Moreover, public sector concerns like banks and financial institutions mobilise scattered public savings thereby helping
the process of capital formation in the country. Public enterprises earn considerable foreign exchange through exports.
6. Self reliance. Public enterprises have reduced considerably the need for imports by producing new and better
products within the country. These enterprises are also earning considerable amount of foreign exchange through
exports.

CRITICISM OF PUBLIC ENTERPRISES [ARGUMENTS AGAINST PUBLIC ENTERPRISES]

1. Delay in completion. Often a very long time is taken in the establishment and completion of public enterprises. Delay
in completion leads to increase in the cost of establishment and benefits extracted from them are delayed.
2. Faulty evaluation. Public enterprises are in some cases set upon political considerations. There is no proper
evaluation of demand and supply and expected costs and benefits. There are no clear cut objectives and guidelines. In
the absence of proper project planning there is under-utilisation of capacity and wastage of national resources.
3. Heavy overhead costs. Public enterprises often spend huge amounts on providing housing and other amenities to
employees. Though such investment is useful for employees but it takes away a large part of capital and the project
suffers from financial difficulties.
4. Poor returns. Majority of the public enterprises in India are incurring loss. In some of them the profits earned do not
yield a reasonable return on huge investment. Lack of effective financial controls, wasteful expenditure and dogmatic
pricing policy result in losses.
5. Inefficient management. Due to excessive centralisation of authority and lack of motivation public enterprises are
managed inefficiently. High level posts are often occupied by persons lacking necessary expertise but enjoying political
support.
6. Political interference. There is frequent interference from politicians and civil servants in the working of public
enterprises. Such interference leaves little scope for initiative and freedom of action. Public enterprises enjoy little
autonomy and flexibility of operations. There is rigid control over them.

FORMS OF PUBLIC ENTERPRISES.

DEPARTMENTAL UNDERTAKINGS. .PUBLIC CORPORATIONS. .GOVERNMENT COMPANY.

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DEPARTMENTAL UNDERTAKINGS
Departmental undertaking is the oldest and traditional form of organising public sector enterprises. A departmental
undertaking is organised, financed and controlled in much the same way as any other Government department. It
may be run either by the Central Government or by a state government. It is managed by government officials under
the supervision of the head of the department concerned.
Some examples of departmental undertakings are: Indian Railways, India Post, All India Radio, Doordarshan, etc.
FEATURES
1. Part of Government. The undertaking is organised as a major sub-division of one of the departments or ministries of
the Government. It is subject to direct control by the head of department. The ultimate authority lies with the
concerned minister who is responsible to the Parliament or State Legislature. The undertaking has no separate entity
distinct from the Government.
2. Government financing. The undertaking is financed through annual budget appropriations by the Parliament or the
State Legislature. The revenues of the undertaking are paid into the treasury. It is wholly owned by the Government.
3. Executive decision. A departmental undertaking is set up by an executive decision of the Government without any
legislation.
4. Accounting and audit. The undertaking is subject to the normal budgeting, accounting and audit procedures
applicable to other Government departments.
5. Civil service code. The enterprise is managed by civil servants whose methods of recruitment and service conditions
are the same as for other civil servants of the Government.
6. Sovereign immunity. Being an integral part of the Government, a departmental undertaking cannot be sued without
the consent of the Government.
MERITS
1.Easy formation. It is very easy to set up a departmental undertaking as no registration or special law is required. The
undertaking is created by the administrative decision of the Government and no legal formalities are involved.
2. Direct Government control. The undertaking is under the direct and complete control of the State. Therefore, it is
more effective in achieving the objectives laid down by the Government.
3. Public accountability. There is maximum degree of Parliamentary control on the undertaking. Such control keeps the
management alert. Accountability of departmental undertakings to Parliament is complete as their management is
under the ministry concerned.
4. Proper use of money. The risk of misuse of public money is minimised due to strict budget, accounting and audit
controls. There is proper financial discipline over public funds.
5. Secrecy. It is easy to maintain secrecy of policy because the Government can avoid disclosure on the plea of public
interest.
DEMERITS
1. Lack of flexibility. A departmental undertaking functions under strict Parliamentary control. The minister and top
officials also interfere frequently in its workings. As a result, the staff of the undertaking gets little opportunity to
exercise initiative. Lack of autonomy reduces the flexibility and efficiency of operations.
2. Lack of motivation. In the absence of competition and profit motive, there is little incentive for hard work and
efficiency. There is hardly any link between reward and performance, and promotions are based on seniority. This
leads to complacency and a ‘devil may care’ attitude. As losses are borne by the Government treasury and tax payers,
these are not taken seriously. Employees try to shift responsibility and shirk duty.
3. Red tapism. There is excessive centralisation of control which results in red tapism. Decisions are generally delayed
due to bureaucratic procedures and political interference. The enterprise cannot be run in a business-like manner. It
fails to adapt itself to changes in technology and market conditions.

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4. Financial dependence. A departmental undertaking has no independence of funds because all its earnings are
deposited into the Government treasury. It cannot take long-term investment decisions as it is at the mercy of
budgetary appropriations of the Government.
5. Inefficient management. A departmental undertaking is managed generally by Government officials and civil servants
who are sent on deputation. They are overburdened with paper work and cannot pay undivided attention to
management. These officials generally do not possess the necessary expertise and experience in management.
Moreover, their tenure is not stable and they can be transferred at any time. Therefore they adopt a carefree attitude
and lack a sense of responsibility.

PUBLIC CORPORATIONS
A public or statutory corporation is an autonomous corporate body set up under a special Act of Parliament or State
Legislature. The Act or statute defines its objectives, powers and functions. A public corporation seeks to combine the
flexibility of private enterprise with public ownership and accountability. E.g. LIC

FEATURES
1. Corporate body. It is a body corporate established through a special Act of Parliament or State Legislature. The Act
defines its powers and privileges and its relationship with Government departments and Ministries.
2. Legal entity. It enjoys a separate legal entity with perpetual succession and common seal. It can acquire and own
property in its own name. It can sue and be sued and can enter into contracts in its own name. It enjoys perpetual
existence.
3. Government ownership. The public corporation is wholly owned by the Central and/or State Government(s).
4. Financial independence. It enjoys financial autonomy. Its initial capital and borrowings are provided by the
Government but it is supposed to be self-supporting. It can borrow money from the public and is empowered to
plough back its earnings.
5. Accounting system. The corporation is not subject to the budgetary, accounting and audit regulations applicable to
Government departments. It is generally exempt from the rigid rules applicable to the expenditure of public funds

MERITS
1. Operational autonomy. A public corporation enjoys internal autonomy as there is no Parliamentary interference in
its day-to-day working. Therefore, it can be run in a business-like manner. Freedom from political interference and
bureaucratic control encourages initiative and efficiency. There is independent management.
2. Quick decisions. A statutory corporation is free from prohibitory rules applicable to the expenditure of public funds.
It can take prompt decisions and easily adjust to changes in technology and market conditions. It has less red tapism
and fewer bureaucratic procedures.
3. Motivation. The service conditions of employees are better than those of Government servants. Therefore, a public
corporation can attract and retain talented and experienced managers. There is greater incentive for hard work and
performance.
4. Parliamentary control. The performance of a statutory corporation is subject to scrutiny and discussion by the
Parliament. Such Parliamentary control helps in ensuring proper use of public money and improving performance in
the public interest. The interests of consumers are protected due to the inherent services motive.
5. Efficient management. The directors and top executives of a statutory corporation can be drawn from different
occupations. Professionals and experts can be appointed at important positions in the corporation. The corporation
can borrow money from the public and thus finance expansion programmes without undue delay. It can be run in a
business like manner and use its funds with greater freedom.

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DEMERITS
1. Difficult formation. It is very difficult and time-consuming to set up a public corporation because a special law has to
be passed in the Parliament or State Legislature.
2. Nominated board. The directors of a corporation are appointed by the Government. Quite often civil servants are
appointed who do not possess required skills and experience in management. As a result, efficiency is low. Lack of
competition and profit motive also lead to slackness and inefficiency. There is lack of personal touch.
3. Rigid structure. The constitution of a statutory corporation is rigid. Its objects and powers cannot be changed without
amending the statute. Amendment of the statute is a time-consuming and cumbersome process.
4. Abuse of monopoly. A statutory corporation may misuse its monopolistic power to exploit consumers. It may charge
unduly high prices to cover up inefficiency. It may also indulge in antisocial practices causing injury to public interest.
5. Excessive accountability. There are frequent debates and discussions on the reports and workings of public
corporations. Ministerial and political interference in day-to-day working do not allow internal autonomy in actual
practice.

GOVERNMENT COMPANIES
A Government company is a company in which not less than 51 per cent of the paid-up share capital is held by the
Central Government or by one or more State Governments or jointly by the Central and State Governments. It is formed
and registered under the Companies Act, 1956 /2013 which contains special provisions relating to Government
companies. E.g. Hindustan Insecticides Ltd., Hindustan Antibiotics Ltd.
FEATURES
1.Incorporation. It is registered or incorporated under the Companies Act.
2. Separate legal entity. It is a body corporate independent from the Government. It can acquire property, make
contracts, sue and be sued in its own name. It enjoys perpetual existence.
3. Ownership. It is wholly or partly owned by the Government. Where it is partly owned, the share of the Government is
at least 51 per cent of the total share capital.
4. Management. It is managed by a Board of Directors nominated by the Government and other shareholders.
5. Own Staff. Its employees are not Government servants. Their appointment and service conditions are independently
decided by the Government Company itself. They are not governed by civil service rules

MERITS
1. Easy formation. It can be easily formed as no separate statute is to be passed in the Parliament or State Legislature. It
can be created by an executive decision of the Government.
2. Internal autonomy. It is relatively free from bureaucratic control and political interference in day-to-day functioning.
It is a separate entity and autonomous body. In the absence of direct ministerial control, it can manage its affairs
independently. It can be operated on commercial principles, and can be sensitive to the needs of consumers.
3. Flexibility of operations. The objects, powers and organisational set up of a Government company can be altered
easily as no stature has to be emended; only the provisions of the Companies Act have to be observed. The company
can take prompt decisions regarding management, finance and other related matters. Wherever necessary, the
Government can exempt it from the provisions of the Companies Act, subject to the approval of Parliament.
4. Expert management. It can appoint professional managers on high salaries. It can offer better conditions of service
than those available to Government officers. Therefore, efficiency of management can be high. A Government
company's working can be compared with similar companies in the private sector. Parliamentary discussions on its
annual reports tend to make the management cautious and efficient.
5. Prompt decisions. The management of a Government company can take quick decisions required for successful
working of business.

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DEMERITS
1. Lack of accountability. A Government company evades its constitutional responsibility to the Parliament. Being the
major or sole shareholder, all decisions are under Government control. Annual general meeting, election of directors,
audit and other controls become a farce. The Government can exempt a Government company from several provisions
of the Companies Act. The Parliament is not taken into confidence in the creation of a Government company.
2. Autonomy in name. The independent character of a Government company exists in paper only. Politicians, ministers
and Government officials interfere in its working. Executive agencies of the Government can materially reduce its
autonomy.
3. Board packed with yes-men. The directors of a Government company are appointed by the Government. The board
usually consists of politicians and civil servants who may not be able to follow sound business principles. They are
interested more in pleasing their political bosses than in efficient operation of the company.
4. Fear of exposure. The annual reports of government companies are placed before the Parliament. Therefore, their
working is exposed to the glare of public and press criticism. The strong phobia of public accountability often results in
undue publicity and unwarranted criticism of the companies. Therefore, the management is often demoralised and
does not take initiative to enter new areas of activity. This has an adverse effect on the efficiency and profitability of the
enterprise.

PUBLIC PRIVATE PARTNERSHIPS (PPPs)

Public private partnership means partnership between public sector and private sector in financing, designing and
developing infrastructural facilities. It refers to the participation of private sector in Government projects. In a PPP
project the private sector contributes money, technical know-how and managerial expertise.
PPPs are being increasingly used to build infrastructural facilities in the following areas.
1.Power (generation and distribution) 2.Transport (roads, railways, airports and toll bridges)
3.Water (collection, treatment and distribution) 4.Health care (hospitals)
FEATURES
(i) PPPs are used in Government projects of high Priority
(ii) These PPP projects are for public benefit.
(iii) The main objective of PPPs is to combine the funds, expertise and experience of both the public sector and the
private sector.
(iv) The Government remains actively involved throughout the life of a PPP project.
(v) PPPs can take several forms depending on (a) the degree of responsibilities handed over by the Government to the
private sector. (b) the level of risk transferred, and (c) the tenure of the contract. The most basic form of PPP is a Service
contract, where by the Government gives short term (1-3 years) contracts for specific services like hiring the security
staff or renting cars for its officials. The most advanced form of PPP are divesture and Built Own Operate (BOLT)
whereby Government sells its shares/ownership in a public utility.

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