Forms of Public Enterprises

UNIT 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
3.5 Self Assessment Questions
3.6 References and Further Readings

3.1 EXTENT AND SCOPE

The nature and scope of public sector flows from the strategies and policies
governing economic development and the structure of the economic system of
a country. In developing countries, it has been targeted at acceleration of
economic development with social justice. In industrialised countries like France,
Italy and the UK, it was intended primarily to ensure supply of essential goods
and services at reasonable prices and to augment countrys competitive
capabilities in selected areas.

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

Economic planning served as a tool for launching relatively massive programmes

and projects for economic and social development. These led to large
investments by the state in different sectors of the economy primary, secondary
and tertiary. The public sector investments were not limited to enterprises which
assumed autonomous forms of organisations in the manufacturing and service
sectors of the economy - but also extended to departmental undertakings such as
the 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 3.29
mn sqkm, and a population exceeding 1000 million, with density variance ranging
from a high of 655 persons per sqkm in one state to as low as 8 persons per
sqkm in another. The level of economic and human development also varies very
widely from one state to another. Inequalities are marked in all economic
parameters and development coefficient are low. As a result, the public sector
engaged in the task of accelerated economic development involving one-sixth of
the human race, took on multiple roles, multiple forms and multiple strategies of
operation.
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Public
A wide Enterprise:
spectrumAnof activities covered by the Central Government alone included
Overview
many 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 electrical
equipments;
Manufacturing defence-oriented products;
Manufacturing transport equipment including ships, passenger cars and
aircraft; and
Producing and marketing of consumer goods like textiles, watches.
B . Services
Developing and operating infrastructure facilities, such as railways, road
transport, 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, upliftment
of backward classes of society and skill upgradation;
Promoting tourism;
Promoting Research & Development;
Providing institutional finance for development and exports and commercial
banking services; and
Promotion of life and general insurance

The scope of public sector gets wider when the state level public sector is
included. Besides service and promotional activities, the states widened the area
of manufacture and services. Nevertheless there is a qualitative and dimensional
difference between the enterprises run by the Central Government and those by
the State Governments. While the former were established mainly to achieve
industrialisation and economic development of the country as a whole, the latter,
other than the State Electricity Boards and Transport Corporation, were smaller in
scale (though larger in number about 1000) and were supplementary in character.
These were intended more to utilise natural resource available in the respective
states or to develop skills and provide employment. Several of these were
established with social orientation; others for political reasons. These may be
grouped under the following dispensations:
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 Forms(forests,
to maintain control over the natural resources of the state of Publicminerals,
Enterprises
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, or
if provided, at high prices; and
to satisfy political pressure groups.
The state level enterprises, which have taken corporate form, include a variety
of 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
Womens development
Land mortgage banks
Electricity Boards statutory bodies, now in the process of
corporatisation in many states.

The number of enterprises for which returns were filed at the end 2002 was
840. In terms of number of enterprises Kerala led with 109 undertakings,
followed by West Bengal 82, Karnataka 76, Orissa 68, Maharashtra 65. The
states with 50 to 60 undertakings were Gujarat, Punjab, Tamil Nadu and with 20
to 50 undertakings Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Madhya
Pradesh 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 of
13 years (1972-85), employment level tripled from 0.7 mn to 2.1 million.
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Public Enterprise:
The number An
of Central public enterprises had grown from 5 in 1951 to 244 in
Overview
1990 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 (vacillating
practically within a narrow band), the investment expanded from about Rs 1000
billion to Rs 3246 bn. (See Table 1.1)

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

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

Out of a total equity of Rs. 1017 billion, the share of the Central Government
was of the order of Rs. 864 billion or 85 per cent. This reflects the dominant
stake 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 of
key 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 in
different states and union territories followed no specific economic rationale (See
Table 3.5). While there was a preferential treatment assigned to less developed
states, in practice, it all depended on the nature of projects and programmes,
local and political pressures, availability of natural resources and the nature of
developmental activity.

Some examples of the investments undertaken with added emphasis on

development of backward regions are:
Nagaland Pulp & Paper Mills (Nagaland)
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 Cement Plant in Bokajan (Assam) Forms of Public Enterprises

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 the
Central public enterprises, in 2001-02, some 50 per cent was accounted for by
sick units takenover from private ownership.

Product Profile

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

Financial Services

Public sector has played a catalytic role in promotion of industry by offering

credit 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 institutions

set up by Government of India empowered by an Act of Parliament to finance
all 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 small
entrepreneurs, generation and distribution of power, fishing or providing shore
facilities for fishing, maintenance, repairs, testing services of machinery or
vehicles. The Bank also assists industrial concerns engaged in the research and
development of any process or product or in providing special and technical
knowledge or other services for promotion of industrial growth. Tourism
development and related facilities have been recognised as industrial activity
which could be financed by IDBI. Three subsidiaries IDBI Bank, IDBI Capital
Market Services and IDBI Intech offer a vast range of services to corporate
and other business segments. The services offered by IDBI include project
loans, 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 2001-02
amounted to Rs. 160 billion (for one year) and disbursals amounted to Rs. 112
billion for the same year and the total assistance including assets given on lease
at the end of March 2002 stood at over Rs. 620 billion . Loans and advances
to industrial concerns at end-March 2002 was Rs. 450 billion. The significant
financial support rendered for industrial development can be gauged from the
scale of assistance.

Another development banking institution which is rendering financial services is

Small 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 institution
for 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
CompanyEnterprise:
Ltd Anand two associate organisations, namely, Credit Guarantee Fund
Overview
for Small Industries and Technology Bureau for Small Enterprises.

The scope of financial assistance of SIDBI covers the entire spectrum of Small
industry sector, including tiny, village and cottage industries and assistance is
rendered through suitable schemes for setting up of new projects, expansion,
diversification, and modernisation of existing units. Financial services rendered by
SIDBI 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 financial
services enterprises, which have taken the corporate form and are in the business
of 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 Corporation

along with four subsidiaries (GIC) were set up by Acts of Parliament as statutory
corporations, the former for life insurance activities and the latter for carrying out
the general insurance business in and outside the country. These were created
out of the nationalised private companies operating in the respective fields.

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

Infrastructural Sector

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

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

A new innovation is a special purpose vehicle (SPV) with equity participation of

the Ministry of Railways and Gujarat Pipav Port Ltd., formed to provide broad
)
gauge connectivity to the Port of Pipav. SPV is a firm which embodies a
financial contract. It has no management and no employees, but is a legal
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person, which is governed by contractual obligations. Forms of Public Enterprises

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

Multiple financing pattern is involved in regard to NHDP, some of which are on

BOT (Build, Operate and Transfer) principle. Work on BOT projects worth over
Rs. 26 billion is in progress. Over 20 projects costing Rs. 68 billion are under
implementation under the BOT plan.

3.3 ROLE OF DEPARTMENT OF PUBLIC

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

DPE serves as a nodal agency for the public enterprises and assists in policy
formulation pertaining to the role of such enterprises in the economy. It lays
down policy guidelines on performance improvement and evaluation, financial
accounting, personnel management and related areas. DPE also provides an
interface between the public enterprises and other official organs such as the
parliamentary committees. It is also concerned with all matters relating to MOUs
between public enterprises and the administrative ministries/departments; overall
policy matters relating to composition of board of directors, categorisation of
posts, delegation of powers to board of directors, and broad parameters
regarding pay structure and perks of top executives.

DPE compiles regularly the Annual Survey of Public Enterprises and presents
an analysis of the data. It constitutes the principal source of information on
Central public enterprises.
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Public Enterprise:a An
DPE provides forum in regard to settlement of commercial (except taxation)
Overview
disputes between two or more enterprises and between the enterprises and
external agencies, such as port trusts.

Role of Administrative Ministries

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

The respective administrative ministry processes the cases of appointment of

Chairman-cum-Managing Director and board level directors through the Public
Enterprises Selection Board (PESB) and secures the approval of the
Appointments Committee of the Cabinet. The budgetary support to any loss
making enterprise and the capital expenditure beyond the limits delegated to the
enterprises are processed by the ministry for getting approval of the competent
authority such as the Planning Commission or the Ministry of Finance. The
administrative ministry has the prerogative of issuing directives to the enterprises
under 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 an
enterprise. It is commonly recognised that the public sector is intended for public
good. The enterprise dimension is reflective of the commercial character of the
activity, again for the stated objective. Germane to this is the concept of
freedom to operate in a competitive environment.

The dilemmas of the public enterprise system are the dichotomies of public
accountability and commercial freedom, on the one hand, and social
responsibility and profit maximisation, on the other. One has to carve out
balancing modes of accountability, with autonomy and social responsibility with
profitability 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 a
constant quest, discussion and debate. Where the accountability should end and
autonomy begin or how to intermesh these two opposing stands is the million
dollar question. So is the balancing trick between the other two seemingly
opposite phenomena. The quest is universal but equally daunting.

The Administrative Reforms Commission of India observed as early as 1967 that

since the public enterprises are financed from public funds, it is imperative that
these operate within the confines of public accountability. The essential feature
of this accountability in a democracy is the supervision and control exercised by
the Parliament (or legislature, by whatever name called). The need for such
supervision and control is all the greater in a country like India which is
committed to a developing and equitable society.

On the relationship of public enterprises with the government, the Commission

had observed that excessive external control inevitably has a frustrating effect on
the management; it weakens its initiative and restrains it from taking quick
decisions on the spot. At the same time, government must have the power to
issue policy directives, exercise strategic control and make the necessary
coordination keeping in view its responsibility for the effective implementation of
the socio-economic programmes of the country. It is, therefore, necessary to
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provide for a proper system of coordination and control of Forms of Public
the public Enterprises
undertakings
while adequately safeguarding their operational autonomy.

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

There obviously have to be limits to autonomy. At the same time, delegation of

authority and freedom for initiative must be left to those who have to produce
results.

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

Paul Appleby, who in the mid-1950s, examined the Indian administrative system
with special reference to administration of governments industrial and commercial
enterprises (Appleby, 1956), pointed out that in a democratic framework, it is
inevitable that Government retains powers of control to intervene, while granting
delegation of authority consistent with accountability.

The subject of accountability was one of the main themes in a seminar organised
by the Bureau of the Public Enterprises in 1979 (Seminar, 1979). The seminar
discussed inter alia three dimensions of accountability, namely, to whom, for
what and how it is to be ensured. It was recognised that public enterprises
are accountable to the public at large because it is the public money which is
invested in those enterprises, which boils down to the representatives of the
people, in the state legislatures or in the Parliament, as the case may be. The
rationale is the assumption that the accountability to Parliament or the state
legislature can ensure that the investments are optimally used for achieving the
objectives of the undertaking. To achieve this, it was recognised that suitable
information system from the enterprise to the government and through
government to the Parliament was a pre-requisite. Accountability for what
underlines the need for clear cut objectives to be given for each public
undertaking. Unless the objectives are well-defined, it would be difficult to hold
the management of the enterprise accountable. In order to ensure accountability,
the control system has to be so devised that both the Parliament and the
government are enabled to oversee the working of the enterprises without
interfering in the day-to-day administration of the undertakings.

In a report, the Economic Administration Reforms Commission observed that

what had taken place in the name of accountability were certain distortions. It
said:

There can be no accountability if there is no perception of what is to be done

and 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 an
enterprise has necessarily to be tempered with by a system of checks and
balances. What is required is a clear set of objectives for these enterprises and
9
Public
wider Enterprise: An of the control system to ensure fulfilment of those objectives.
understanding
Overview
The equilibrium between autonomy and control can be maintained provided the
public enterprises, the government and legislature play their part being fully
conscious of the boundaries of each. Authority delegated to the enterprises
needs to be exercised fully without reference to any external authority. Where
the authority vests with outside agency, it is imperative on the enterprise to seek
approval from appropriate agency. The legislature on their part should not
concern itself with the day-to-day running of an organisation. A certain amount
of 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 where
some door is open for intervention and, therefore, for the exercise of authority.
The business world is, however, changing in the global context. Even the private
enterprise is learning new rules of the game. The concern for different
stakeholders and not merely of the shareholders is emerging as a new goal.
Corporate governance is making the impact. The public sector has to transform
itself for survival.

While the theoretical framework is obvious, certain practices and tendencies tend
to become eroding factors. This phenomenon is often termed as back seat
driving or calling the tune. Informal and covert relationships subsist between
the public enterprise management and the executive arm of the government.
Such interference is not open and, therefore, not susceptible for any easy
identification; nor could it be easily tackled. It prevails in the matter of
recruitment which falls within the delegated sphere of authority of public
enterprise management or in the award of contracts or in spheres of activities
within the domain of an enterprise, such as expenditure on advertisement,
entertainment, foreign travel. Here, the judgement of public enterprise
management is superimposed by an external authority. While some negative
features have crept in, it is important to recognise that some healthy conventions
and formalised procedures have been established with regard to central public
enterprises over time. These need to be taken note of:

1) Questions and interpellations of the concerned Minister in Parliament are

governed by certain conventions. Questions relating to day-to-day
administration of public enterprises or questions which tend to throw work of
the ministries and the public enterprises incommensurate with the results to
be obtained therefrom and questions which seek to obtain information which
the Member may obtain directly by addressing the management of public
enterprises, are not admitted.

2) The scope and functions of the Parliamentary Committees on Public

Undertakings consisting of 15 Members from Lok Sabha and 7 Members
from the Rajya Sabha, are well defined . The Committee inter alia is to
examine, in the context of autonomy and efficiency of the public
undertakings, whether the affairs of the public undertakings are managed in
accordance with sound business principles and commercial practice.

3) The areas of responsibilities of the government and the public enterprises are
defined more clearly. Certain powers have been reserved for the
government in regard to appointment of top executives at board-level; for the
rest, the public enterprises themselves have been given more authority and
responsibility with regard to the affairs of those enterprises. Capital
expenditure upto specified limits could be incurred by public enterprises under
the system of delegated authority. Unless deficit is anticipated, revenue
budget need not be placed for approval to the government.

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4) In order to ensure accountability, the reporting systemForms of Public Enterprises
of enterprises to the
government has been streamlined and formalised. As part of the system,
Quarterly Performance Reviews are conducted in the administrative ministries
with the participation of chief executives of public enterprises and
representatives of Planning Commission and the Department of Public
Enterprises. The system of MOU also serves as a tool for accountability.
The question that seriously needs to be addressed along with autonomy is the one
of accountability. In the name of accountability there are many players in the
field.
Public enterprises are owned by the state. As these enterprises are created by
investments from the funds of the exchequer, they become accountable. It is not
easy to define the precise degree of control that accountability involves. Equally,
it is difficult to strike a balance between the requirements of accountability
consistent 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 by
members of Parliament, debates in the House and interpellations of the minister
serve as instruments of control.

The indirect control is exercised through multiple agencies including the

Comptroller & 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 Sengupta

Committee is the concept of Memorandum of Understanding (MOU) a system
which was conceived in early 1988 on the South Korean model of performance
contracting. It was intended to give greater autonomy to PEs and at the same
time to ensure their greater accountability.

The 1991 Industrial Policy of the Government of India envisaged that the MOU
system needs to be extended to all public enterprises, excepting those which
being sick needed to be referred to the Board for Industrial and Financial
Reconstruction (BFIR). One could see the reasons for the latter exclusion, but it
is these enterprises which needed planning and commitment even more unless
these were those which were non-revivable despite reasonable turnaround
strategies.
The main objectives to be achieved through the MOU System are:
fostering of a contractual relationship between government and Public
enterprises;
providing an objective evaluation mechanism on agreed criterion and the
actual performance of the public enterprise annually;
achieving performance improvement through recognition of outstanding
performance through an assessment by a group of experts associated with
the MOU System (mostly retired chief executives, senior level professionals
and retired civil servants, who were associated with public sector
management. Some outside professionals were also included).
The thrust of the MOU system is to specify measurable goals and to assess the
achievements related to targets. The system takes cognisance of the measures
accepted both by the government and the public enterprise management.
Parameters were set to measure the achievements in a 1 to 5 scale with the
grading of Excellent, Very Good, Good, Fair and Poor ratings - computed from
11
Public Enterprise:
the actual An
performance against the targets related to the various facets of
Overview
working of the enterprise, such as financial and fiscal achievements, inventory
management, customer satisfaction and project management.

A High-Power Committee (HPC) is supposed to guide and oversee the

operations of the MOU system and to evaluate the performance based on actuals
at the end of the year against the understandings arrived at the beginning of
the year. It operates- under the chairmanship of the Cabinet Secretary. The
members include Finance Secretary, Expenditure Secretary, Planning Secretary,
Secretary, Programme Implementation, Chairman, Public Enterprises Selection
Board and Chief Economic Adviser. The Secretary, Department of Public
Enterprises is the Member-Secretary.

The HPC is assisted by an actively engaged Ad Hoc Task Force of Experts and
the Department of Public Enterprises, serves as Secretariat for the MOU system.
This system included granting of Awards, called MOU Awards for outstanding
performance. 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 of

public enterprise and the government with the latter represented by the secretary
in the concerned administrative ministry. It is an annual exercise. A significant
aspect of the system is evaluation of managerial performance through objective
criteria both quantitative and qualitative. This system is in operation for a
decade-and-a-half with refinements introduced from time to time. About 100 to
108 enterprises are covered by the MOU system from year to year. While a
system like the MoU is a sine qua non for the public sector to ensure autonomy
and accountability, the system has not achieved the desired results. Among others,
the reasons are insistence on soft targets, non-fulfilment of conditions promised
by the government and the continuing frequent interface between the government
and the public enterprises, and sometime frequent change of the Directors.

To sum up, the scale and dimensions of investment in the public sector make
large claims on scarce national resources. The public enterprises could not,
therefore, be left entirely free of control and accountability. The argument is not
about 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 in
balancing the two opposing concepts of autonomy and accountability. Public
enterprises have no escape from the dual role expected of them. While, they
have to take care of public interest, these must operate as efficient commercial
entities, creating value for all stakeholders. While the grant of navratna/
miniratna status to selected enterprises and the system of MOU in operation
over a decade are attempts to address the issue of autonomy consistent with
accountability in the public sector, these need to be streamlined and reinforced
with commitment from both sides, the government and the management of the
public enterprises.

The Audit Function

Public enterprises in the corporate mode operate under the provisions of the
Indian Companies Act. Their accounts are to be certified by the statutory
auditors appointed by the government. The appointment of auditors, who are
accredited members of the Institution of Chartered Accountants, are always made
on the advice of the Comptroller & Auditor General of India (CAG). The
accounts certified by the Chartered Accountants are subjected to supplementary
or
12 test audit by officers of CAG. The Companies Act also empowers CAG to
 Forms ofthe
issue directions to the statutory auditors on the manner in which Public
auditEnterprises
is to
be conducted.

In respect of the enterprises set up under the specific Acts, like Airports
Authority of India, Food Corporation of India, the accounts are also required to
be audited by CAG, under the provisions of the relevant Acts. CAG presents its
reports 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 CAGs office and two
part-time experts from outside the government. The reports of Audit Board
based on efficiency audit are given as a separate report, called Reviews of
Some of the Activities of Selected Public Undertakings. Report 3 brings out
individual cases of gross irregularities through audit paras. The audit paras are
examined by the Parliamentary Committee on Public Undertakings for suitable
direction.

A question that is often raised is whether the public enterprises are not being
subjected to double audit leading to excessive control on their transactions, in
comparison to companies in the private sector which are also set up under the
provisions of the Indian Companies Act. The latter are audited by the Chartered
Accountants only. This view is countered by CAG, that as massive investments
are made with public money in the public enterprises and as it is the
constitutional 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 enterprises

by the Central Vigilance Commission (CVC), a statutory authority set up with the
approval of the Parliament. CVC exercises superintendence over the vigilance
administration of the various ministries or the corporations established by or under
any Central Act and government companies. CVC has jurisdiction over the
Central Bureau of Investigation (CBI), an investigative wing with discretionary
powers of scrutiny and filing of charge sheets against various functionaries.

Vigilance angle is generally perceived as prevention and control of illegal

gratification, possession of disproportionate assets, forgery, cheating, abuse of
official position with a view to obtaining monetary gain for self or any other
person, lapses, such as flagrant violation of systems and procedures. It is the
sweep of vigilance machinery which leads to a fear psychosis in public
enterprises, which are expected to function on commercial basis with the
intention of earning maximum financial returns. The existence of multiple checks,
financial and others, does affect the freedom of action which is demanded of a
vibrant 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 of
the Constitution of India considers a government owned (51 per cent or more of
equity) undertaking as a part of the state and these controls cannot be dispensed
with unless the government equity stake is reduced below 51 per cent.

13
Public Enterprise: An
Activity
Overview
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. The
scope of public enterprises cannot be limited to the centre alone as the state
owned enterprises also play an important role in the economy of the nation. This
unit tries to cover the extent and scope of the public enterprises at both, the
central level as well as state level. The growth of public enterprises in different
sectors have been discussed in brief to give a fair idea of the progress of the
public enterprises. It also highlights the role of different departments to monitor
the activities of public enterprises. In short, this unit covers the nature and scope
of public enterprises.

3.5 SELF ASSESSMENT QUESTIONS

1. 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 public
enterprises.
3. What are the main objectives, which are to be achieved through MOU with
reference to the performance contracting.

3.6 REFERENCES AND FURTHER READINGS

Administrative Reforms Commission Report of public sector undertakings,
(October 1967), p.26.
Appleby Paul, Re-examination of Indias Administrative System with special
reference to Administration of Governments Industrial & Commercial Enterprises,
1956, Government of India, p 4, Cabinet Secretariat, O&M Division.
Seminar on Profitability, Accountability and Social Responsibility of Public
Enterprises, (August, 1979).

14
Table 3.1 : Growth of Central Public Enterprises Forms of Public Enterprises

Periods Enterprises Total Investment

No. Rs. bn
At the start of

First Plan 1950-51 5 0.29

Second Plan 1955-56 21 0.81
Third Plan 1960-61 47 9.48

Fourth Plan 1969-70 84 38.97

Fifth Plan 1974-75 122 62.37

Sixth Plan 1980-81 179 181.50

Seventh Plan 1985-86 215 426.73

Eighth Plan 1992-93 246 1354.45

Ninth Plan 1997-98 240 2310.24

Tenth Plan 2002-03 240 3246.32

Source: Public Enterprises Survey 2001-02, Department of Public Enterprises, Ministry of

Heavy Industries And Public Enterprises, Govt. of India.

Table 3.2: Investment and Turnover of Central Public Enterprises

Enterprises Investment (b) Turnover
No. 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

15
Public organisations
Enterprise: An 81
Overview
Trading & Marketing 27 447

Transportation Services 69 160

Contracts & Construction Services 66 23

Industrial Dev. & Consultancy

Services 148 49

Tourist Services 2 3

Financial Services 578 84

Telecommunications & IT Services 265 304

Section 25 Companies 14 2

1169 1072

a
Total 240 3246 4787

* Includes 10 enterprises under construction b) 2001-02

Source : 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 national
production 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
16
 Forms of Public Enterprises
Aluminium 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 Employment
Rs. 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
17
Public Enterprise: An
Source : ibid
Overview
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

18