PUBLIC SECTOR

Public sector units in India are wholly or partly owned controlled by the government. In a public sector enterprise, the majority of equity shares is owned by the government directly or indirectly or indirectly through government institutions and the government has desision making control. Public sector enterprise normally has the following forms of organisational structure
departmental undertakings
statutor corporations
companies registered uner the Companies Act 1956
control boards
cooperative society
Department undertakings are not formed by or with the consent of the legislative authority. these are set up the executive actions of government bodies and are charged with the duty of carrying out specially defined functions. These undertakings are not independent entities. They are subject to budgetary, audit and other controls of the government and are managed by civil servants. they are financed by annual budgets which also receives their revenues (CFI). A departmental undertaking is best suited where the main purpose of the enterprise is to collect revenue for the state and to provide public utilities and services at fair prices in larger public interest. Some examples of departmental undertakings are the Railway. Postal Department etc.
Statutory corporations are enterprises normally engaged in economic or manufacturing activities and are set up by act of legislature. These corporations are legal entities separte from the government and also the persons who conduct their affairs. ONGC, LIC are some examples. Shares of and controlled by the government. Statutory corporations enjoy extensivelegal autonomy, and their rules, objectives, functions and duties are defined and specified in the act. Financing statutory corporations is not part of the Budget and therefore, they can retain their revenues, and also spend as per the rules laid down by the statute.
Control Boards are set up to manage goverment projects-for example, the river valley projects. Bhakra Management Board.
PSE can be in the form of cooperative society to support cooperative movement-Indian Farmers Cooperative Ltd (IFFCO), Krishi Bharti Cooperative Ltd (KRIBHCO) etc. They are registered under Multi State Cooperative Societies Act. Over 65% of the capital of the units is held by the Central Government
Government company is one where the government own 51% or more of the paid up capital, according to Section 617 of the Campanies Act 1956.
Since the beginning of socio-economic planning after the Independence, public sector played a preeminent role in India. Commanding heights of the economy were to be in the hands of the public sector-basically infrastructure and basic industries like heavy engineering, power, metals etc. PSEs dominated the Industrial Policy Statment 1948 and IP Resolution 1956. They were opted for by the Government partly as the Government wanted to steer the economy towards planning goals rapidly and also because of pragmatic compulsions like the presence of the private sector in manufacturing was neglible and they were not willing to take up the unprofitable work of investing in infrastructure.
The objectives of the PSUs are
To build a self reliant economy
To prevent / reduce concentration of private economic power
Establish sound economic infrastructure
Set up industries in the backward regions and thus help bring about balanced regional development
Assist in ancillarization and thus spread the benefits of industrialization
Create sufficient levels of employment and set standards in labour welfare
Selling goods and services at reasonable prices so as to serve consumer, keep prices affordable and help non inflationary growth process.
Invest in areas where the private sector would not invest like in roads, transport and so on.
In the last about 55 years of planned economic development, the public sector lived upto the expectations as can be seen below
There are about 244 Central PSUs today (excluding insurance, finance and other companies) providing the country with infrastructure in steel, cement , transport, communication, power and so on.
The record of the PSUs in supplying many goods and services like coal, transport, power, irrigation and so on is commendable
the PSUs are a model employer providing various facilities like education, housing and so on.
Establishing industries in MP, Rajasthan, Bihar and so on, the efforts of the PSUs to reduce regional economic imbalances are not insignificant
Non-inflationary growth process is facilitated because of the PSEs as prices of their goods and services can be administered.
(See last page for the summary of the CPSE performance as given in the Economic Survey 2008-09)
While considering the performance of the PSUs it must be recognised that most of them had locational disadvantage; sold the product at administered prices; did not have access to the best of technology; had excess of manpower; operted in areas not meant for profit making like FCI: were subject to multiple controls and excess of accountability and so on. Even while sick PSEs are reducing in number, the problems are compounded by: resorce crunch; reosion of net-worth due to continous losses incurred by the PSUs, reluctance of financial institutions to provide funds for revival of PSUs, heavy interest burden, old and obsolete plant and machinery, outdated technology, low capacity utilisation, excess manpower, weak marketing sstrategy, etc. inadequate autonomy is one reason. Populism and the absence of rational pricing of goods and services is another reason for the low levels of efficiency in PSUs.
Public Sector and Economic reforms
Economic reforms were, made necessary to post higher growth rates for poverty alleviation on a war footing. Public sector was in need of competion to unlock its value. Therfore, domestic and foreign capital was invited to force the PSEs to compete and perform. Government recognized the need for PSE reform during the 7th FYP (1985 - 1990).
Definitions are important.
Disinvestment is the sale of shares of the Government to the retail public or employees or mutual funds or the FIIs. In other words, in disinvestment (divestment), there is no change in the management from public to private hands because either the government holds majority equit (51%) or even if the government holds less than 51% of equity, rest of it is sold to various individuals and institutions none of whom holds enough to take over management. It is essentially money-raising exercise with some accompanying benefits.
If the Government sells chunk of equity to a single buyer - 51% or more to whom the management is also handed over, it is called strategic sale and the buyer is called strategic partner. it is case of privatization. The buyer is one who has presence in the sector and can add value to the unit. For example, IPCl being sold to Reliance Industries Ltd (RIL)
Government may also sell off a unit to a strategic buyer - entire equity.
Strategic buyer is one who not only buys the chunk of entire equity-in one tranche or more-but also takes over management. That is the strategic part of the sale. It is unlike disinvestment where sale of shares is unaccompanied by management control transfer. The strategic partner gives higher price for the shares as he gets mangement control along with it (management premium). Also, running of the unit improves.
Privatization and strategic sale are the same.
As mentioned above, disinvestment can be for less than 50% stake sale in which case the company remains a Government company.
The advantages with strategic sale (privatization) are that it gets investment: the strategic partnet with management control will invest further for diversification and technological improvement; market perception will improve as it is no longer a government company; and shareholder value will increase. With the improvement of the functioning of the company, workers protection will also be guaranteed.
Corporatization is a related term: It means: government units are reorganized along business lines. Typically they are required to pay taxes, raise capital from the market (with no government backing, explicit or implicit). and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favorable return on investment. They have to operate in a level playing field along with the private sector without any special advantages, more or less.
Advantages of Disinvestment / Privatization
it raises finances for the government that can be spent on restructuring the PSEs
makes additional finances available for the social sector priorities
exposes the enterprises to market discipline, thereby forcing them to become more efficient and survive on their own financial and economic strength
when units become more professionalized and profitable. budgetary support for them can be minimized freeing resources for social and infrastructural needs
results in wider distribution of wealth through offering of shares to small investors and employees.
beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity and facilitate raising of funds by the PSEs for their projects or expansion, in future.
Opening up the public sector to appropriate private investment would increase economic activity and benefits the economy, employment and tax revenues in the medium to long term.
Reducing the public debt than is threatening to assume unmanageable proportions
Releasing other tangible and intangible resources, such as, large government manpower currently locked up in managing the PSEs, and their time and energy, for redeployment in high priority social sectors that are short of such resources.
In many areas, e.g., the telecom sector, the end the public sector monopoly brought relief to consumers by way of more choices, and cheaper and better quality of products and services. Competition made them perform better as outlined above.
Criticism of Divestment
While the advantages are convincing, the criticism is not to be dismissed wither.
They constitute family silver and should not be liquidated
PSEs check the private sector in th wider market place and so are crucial to economy. For example, if PSEs are not there, private enterprises may cartelise etc
PSEs contribute by way of dividends and frofits and thus are important sources of public finance
The exercise is essentially meant to garner resources for filling the revenue deficit
A prudent middle path needs to be adopted by way of extent of divestment: unit choses; pace of the process method adopted - IPO, strategic sale etc: valuation debate etc.
So far (2008), about Rs. 53,000 crores are raised through disinvestment and privatization.
The Economic Survey 2008-2009 says that Rs. 25,000 crores can be raised through disinvestment annually.
Economic Survey 2008-2009 and Divestment
The Economic Survey the government presented in parliament in July 2009 called for revitalising the divestment policy so as to generate at least Rs.25,000 crore (Rs.250 billion/$5.22 billion) annually. It further recommended:
List all unlisted public sector enterprises and sell a minimum of 10% of equity to the public, the survey stated.
It also called for completing the process of offloading 5-10% equity in previously identified profit making non-Navratna companies.
According to the survey, the targeted revenue generation from divestment should be Rs.25,000 crore annually.
Auction all loss making PSUs that cannot be revived, it added
Valuation of shares
Fixing the price of shares for PSEs is done on the basis of the discounted cash flow (DCF) model. The DCF model is a method of valuing a business today based on the stream of its future frofits or cash flows. It is said to be the best of the given methods.
Net asset valuation is not adopted as it applies only to the units that are being wound up and not for running businesses.
Government policy on Disinvestment / Privatization
As a part of reforming the PSEs, Government's policy on disinvestment and privatization is evolving since the beginning of the reforms in 1991.
Its main elements are:-
Divest to raise money and other advantages
Profit-making PSUs will not be privatized
List the unlisted companies
making shares available to the public
Restructure and revive potentially viable PSUs;
Close down PSUs which cannot be revived;
Fully protect the interests of workers.
Strategic & Non-strategic Classification
Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment. It was decided that the Strategic Public Sector Enterprises would be those in the areas of:
Arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships;
Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
Railway transport.
All other Public Sector Enterprises were to be considered non-strategic.
Board for Reconstruction of Public Sector Enterprises (BRPSE)
Government is committed to a strong and effective public sector; undertake measures for strengthening, modernizing reviving, and restructuring of public sector enterprises; and in pursuit of the above, decided to establish a Board for Reconstruction of Public Sector Enterprises (BRPSE) to address the above mentioned tasks and advise the Government on strategies. measures and schemes related to them. The Board was set up in 2004
Following are the terms of reference to the Board:
To advise the Government on ways and means for strengthening public sector enterprises in general and making them more autonomous and professional;
To consider retructuring - financial, organizational and business (including diversification, joint ventures, seeking strategic partners, merger and acquisition) - of CPSEs and suggest ways and means for funding such schemes;
To advise the Government on disinvestment / closure / sale, in full on part, in respect of chronically sick / loss making companies which cannot be revived. In respect of such unviable companies the Board would also advise the Government about sources of fund including sale of surplus
assets of the enterprise for the payment of all legitimate dues and compensation to workers and other costs of closure;
To monitor incipient sickness (incurring loss for two consecutive years) in CPSEs; and
To make recommendations and advise the Government on such other matters as may be assigned to it from time to time.
All sick CPSEs will be referred to the Board for revival / restructuring.
The recommendations of the Board are advisory in nature.
BRPSE which is an advisory body to advise the Government on the strategies, measures and schemes related to strengthening, modernizing, reviving and restructuring of public sector enterprises, comprises of a Chairman, three Non-official Members, three Official Members and three Permanent Invitees. Dr. Nitish Sengupta has been appointed as Chairman in the rank of Minister of State.
Navaratna and miniratna companies
Navaratnas
Economic reforms subject PSEs to market competition. Gloablization makes the competition more intense. To perform in such conditions. PSEs need a level playing field with the private players. Hence, the Navaratna package that gives autonomy to PSEs.
Government introduced the navaratna concet in 1977. It granted enhanced autonomy to nine selected PSEs referred to as "Navaratnas". These were IOC. IPCL, ONGC, BPCL, NTPC, SAIL, VSNL and BHEl, IPCI, and VSNL were strategically sold to Reliance and Tatas respectively. Many more CPSEs were made navaratnas since then. Totally, there are 18 today (2000
Bharat Electronics Limited.
Bharat Heavy Electricals Limited
Bharat Petroleum Corporation Limited
Coal India Limited
GAIL (India) Limited
Hindustan Aeronautics Limited
Hinsustan Petroleum Corporation Limited
Indian Oil Corporation Limited
Mahanagar Telephone Nigam Limited
National Aluminium Company Limited
NMDC Limited
NTPC Limited
Oil and Natural Gas Corporation Limited
Power Finance Corporation LimiteHd
Power Grid Corporation of India Limited
Rural Electrification Corporation Limited
Shipping Corporation of India Limited
Steel Authority of India Limited
The government has a quantitative system to confer the status of "Navarathna" on PSE. According to the system, every PSE is rated on the following 6 parameters:
Net Profit to Net Worth
Total Manpower Cost as a Percentage of Total cost of Production
Profit before Depreciation, Interest and Taxes (PBDIT) on Capital Employed
PBDIT on turnover
Earning per Share &
Inter-Sectoral performance
To gain Navarathna status, a PSE must score atlest 60 out of 100 based on these 6 paraameters.
Additionally, a company must first be a miniratna and must have four independent directors on its board before it can be made a navaratna
These navaratnas, subject to certain guidelines, now have freedom to
incur capital expenditure
decide upon joint ventures
set up subsidiaries / offices abroad
enter into technological and strategic alliances
raise funds from capital markets (international and domestic)
enjoy substantial operational and managerial autonomy
Boards of these PSEs have been broad-based with induction of nonofficial part-time professional directors..
For example, 'Navaratna' status empowers it to invest up to Rs. 100 cr or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr.
Miniratna companies
There are two types of miniratna companies: Type 1 and 2.
Miniratnas can also enter into joint ventures, set subsidiary companies and overseas offices but with certain conditions.
Category I Miniratna
they are PSEs that have made profits continuouslly for the last three years and earned a net profit of Rs 30 crores or more in one of the three year. These miniratnas are granted certain autonomy like incurring capital expenditure without government approval up to Rs. 500 crores or equal to their net worth. whichever is lower. There are 42 miniratnas like BEML Limited, Chennai Petroleum Corporation Limited, Cochin Shipyard Limited, Hindustan Copper etc. The 42nd one was added in December 2008, is Airports Authrity of India (AAI).
Category II Miniratna
This category include those PSEs which have made profits for the last three years continuously and should have a positive net worth. Category II miniratns have autonomy to incurring the capital expenditure without government approval up to Rs. 300 crores or up to 50% of their net worth whichever is lower. There are 13 such miniratnas: Educational Consultants (I) Limited, India Trade Promotion Organization, Water & Power Consultancy (India) Limited, National Film Development Corporation Limited etc.
Ad-hoc Group of Experts (AGE) Report
The Report on Empowerment of Central Public Sector Enterprises, prepared by a group of experts headed by Arjun Sengupta, recommended
greater autonomy for Public Sector Units
central PSUs to have truly independent boards. It has recommended empowering the PSU boards to take decisions about mergers, joint ventures,. pricing, exports, appointments, selection of dealers, promotion and transfer of employees, and so on. The ministry concerned should not review the PSU more than twice a year. Supervision should be done by sector specific supervisory boards.
ministries should not interfere with the functioning of the PSUs under them. Their managements should be accountable to the board and not to the ministry
government should be given flexibility to divest its stake in PSUs. As long as the government's stake remains above 51%, it should not require Parliament's permission to divest its shares-even in navratnas, mininavatnas, and consistently profit-making PSUs. This can be done through a board decision.
supplementary audit by the Comptroller and Auditor General of India of the PSEs should be an exception rather than rule, as it delays the publishing of audited accounts as required by SEBI.
reworking of the accountability of the PSEs to parliament so that the questions raised on their functioning do not compromise sensitive trade data and work as an impediment in functioning as commercial enterprises.
The Government accepted some of the recommendations of AGE relating to enhancement of financial powers of Navratna, Miniratna and other profit-making CPSEs. The remaining recommendations relating to ownership issues, audit of Government companies, Article 12 of the Constitution. Parliamentary accountability, vigilance, management in CPSEs, etc. are under examination.
MOU
The beginning of the policy of Memorandum of Understanding can be traced to the report of the Arjun Sengupta Committee in mid eighties. One of the recommendations of this committee in mid eighties. One of the recommendations of this committee was for the introduction of the system of MOU for measurement of performance of public enterprises. The MOU system was introduced on an experimental basis in 1987-88. It was based on the French system. From 1989-90 the signaling system was adopted and it remains in vogue till the present.
One of the most important differences between the French system and the signaling system relates to the possibility of making an overall judgement on the enterprise's performance in the latter system. In performance contracts belonging to the French system, it was possible to only point out whether a particular target was met or not. This created great difficulty for making an overall judgement regarding enterprise's performance. the signalling system overcomes this problem by adopting the system of "five point scale" and "criteria weight" which ultimately result in calculation of 'composite score" or an index of the performance of the enterprise
The MOU system has been adopted as it was felt the PSEs are unable to perform at efficient levels because of multi-point accountability. Also, there was no clarity of objectives. Absence of functional autonomy also hampered their performance
MOU is freely negotiated agreement between the public enterprise and the administrative ministry. Under the agreement, the enterprises undertake to achieve th targets set in the agreement at the beginning of the year. the MOU covers both financial performance as well as non-financial performance. Under this system performance of the company is categorized into five categories namely: excellent, very good, good, fair, and poor.
The objectives of the MOU system are to improve the performance of public enterprises by increasing autonomy and accountability of the management; remove the fuzziness in the goals and objectives the enterprise is to pursue through clearly laid down performance targets at the beginning of the year; enable the evaluation of managerial performance through objective criteria and provide a mechanism to reward good performance through performance incentives to stimulate improved performance.
Some recent initiatives in restructuring the PSEs
BRPSE is set up as an advisory body
National Investment Fund is set up
More companies given navaratna and mini ratna status to improve their performance in the globle competitive environment
infusion of equity and debt capital in PSEs to turn them arount and strengthen them
Autonomy for PSEs
Managerial and financial autonomy is important for the PSEs to function well in a market economy where there is severe competition and the companies are also listed on the stock exchanges. Steps for rendering autonomy to the PSEs are essentially two
Navaratna and miniratna status
MOU
(Given above in detail)
Professionalisation of PSU Boards
Following are the steps taken
MOU
outside professionals should be inducted in the boards of PSU in the form of non-official Directors whose number should be at least 1/3 of the Actual strength of the Board
Under the Navratna/Miniratna package, the board of select PSUs have been professionalised by inducting a minimum of 4 non-official Directors in case of navratnas and 3 in case of Miniratnas.
number of Government Directors on the Board should not be more than two
Problems and Prospects of PSU restructuring
Tenure of the CEO and Board of Directors
The managerial problems in the PSU begin with the tenure of CEO and the Board of Directors. The selection, service conditions and the tenure of the Board of Directors is subject to the Government rules and regulations . Unlike the private sector where CEO have almost a decade to nurture the company, in PSU the rules with respect to superannuation tends of focus attention on short term strategies-co-terminus with CEO's tenure. There is, hence a need to provide continuity in the management by appointing CEO and other members in the Board of Directors for longer tenure with representation of shareholders other than GoI shareholdrs.
Multiple -Audit
the business decision in PSUs gets influenced by presence of a number of controlling agencies, such as the Ministry, parliamentary committees, CAG, CVC etc. The end result of this is recourse to risk-averse approach to business. For example, there is a decision related purchase of second hand equipment where on the spot decision is required and transparent processes such as global did are not available. It helps the company to save if it can take quick decisions. In some cases there could be loss which needs to be out of the purview of CVC as otherwise it will dampen the decision making process in commercial matters.
Role of administrative Ministry
It needs to change. Like a shareholder of any other company, the Ministry's role should be limited to contributing as shareholder in AGM/EGM of the companies, and providing it the requisite support. The role of Ministry in day-to-day management through correspondence should be avoided.
Non Commercial Activities
PSUs are expected to function on commercial consideration but are burdened with takeover of some sick/potentially sick unit.
Investment in newer units is based on socio-political consideration. This results in ono-flexibility of to thw company to reorganise its own business. Regularisation of contract labour under article 12 of the Constitution forces PSUs to absorb extra labour without any consideration to the existing manpower strength. PSUs are unable to spin -of loss making units or close operations in those units, which have become operationally unviable.
NIF
In 2005, it was decided that National Investment Fund would be set up. It was set up in 2007 with a corpus of 994.82 crores garnered through the Power Grid Corporation of India Ltd (*PGCIL) divestment. Three asset management companies (AMCs)-the UTI Asset Management Company Pvt.Ltd., the SBI Funds Management Pvt. Ltd. and the LIC Mutual fund Asset Management Company Ltd were set up to manage the NIF
Objectives of NIF are
The proceeds from disinvestment of CPSUs will be channelised into NIF, which is to be maintained outside the Consolidated Fund of India.
The corpus of NIF will be of a permanent nature.
NIF will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of NIF.
75% of the annual income of NIF will be used to finance selected social sector schemes, which promote education, health and employment. The redisual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.
NIF Chif Executive Officer (CEO), who is administratively attached to the Department of Disinvestment under the Finance Ministry, would formulate the investment strategy.
Purchase Preference Policy
Government gives purchase preference in supply of goods and services to the Government Department, Autonomous bodies and other PSEs if the price. quoted by the supplying CPSE is within 10% of the lowest valid bid price, other things being equal. It helps support the PSEs.
Maharatnas
A select list of profitable public sector undertakings (PSUs) are to be given more autonomy under a new government plan.
The Department of Public Enterprises (DPE) proposed the according of a "Maharatna" status to six of its top PSUs, taking the PSE reform forward from the "Navaratnas".
These firms include the Oil and Natural Gas Corporation, Indian Oil corporation, Bharat Heavy Electricals Ltd, NTPC Ltd and Steel Authority of India Ltd.
The proposed " Maharatnas" will be free to form joint ventures, while their boards can approve without government nod investments of up to Rs. 5,000 crore-up from the current Rs. 1,000 crore. they will also enjoy more powers to decide on floating overseas firms and on mergers and acquisitions up to a certain size.
Selection is based on a strict qualifying criteria of turnover, net worth, profitability and overseas presence.
DPE sources said the department is under immense pressure from various ministries to include more PSUs in this list. The Petroleum Ministry wants special status for the smaller oil refiners as well.