Forms of Public Enterprises

UNIT 1 PUBLIC ENTERPRISE: CONCEPT

AND POLICY
Objectives
After going through this unit you should be able to:
• Understand the concept of public enterprise;
• Understand the rationale of the public enterprises;
• Differentiate between the dimensions of the public sector policies.
Structure
1.1 Public Enterprise in Economic Development
1.2 Models of Economic Growth
1.3 The Rationale of Public Sector
1.4 Public Sector Enterprise: Concept and Form
1.5 Summary
1.6 Self Assessment Questions
1.7 References
1.8 Further Readings

1.1 PUBLIC ENTERPRISE IN ECONOMIC

DEVELOPMENT
The role of the state in the lives of the people of a country has been a matter of
intense debate ever since the institution emerged centuries ago. The functions and
systems of the state have oscillated between an autocratic or a mercantilist state
(with deep penetration into the socio-economic fabrics of society) to total
unbridled laissez faire. Whenever it was found that the freedom of the weaker
sections of the community was threatened, the state made heavy inroads in
curbing the freedom of the people who wielded dominant and disproportionate
economic power. It generated, over a period of time, an antithesis leading to an
upsurge against the overbearing power of the state.
th
The emergence and decline of the public sector during the 20 Century is only a
part of this societal difference. The concentration of economic power in a few
hands, the marked economic inequalities and intense poverty among the millions in
the world compelled the state to intervene. The intervention was either regulatory
or participatory (or both).

The latter process took the forms of socialism, command economies and
centralised planning. The public sector is a product of this process and
consequent initiatives. The first half of the 20th Century saw the prevalence and
growth of the public sector in a large number of economies, industrialised as well
as developing. Towards the end of the 1970s, it was discovered that the state
organs became the instruments of uncontrolled power. The resources were
inefficiency utilized leading to low productivity and less effectiveness in most
cases. This was the experience in a number of countries necessitating a close
scrutiny and examination of the public sector. The scrutiny has become much
more imperative due to globalization and global changes in the social, political and
economic evironments which has been a trigger - indeed a powerful one.
th th
Looking back historically, the industrial revolution in the 18 and 19 centuries in
the West and the colonial rule in a number of countries left a part of the world 1
Public Enterprise: An undeveloped and consequently poor. As people became conscious of the stark
Overview realities of existing economic disparities, the need for development was felt.

Economic development was sought to be achieved in different countries at

different stages of development through divergent economic models. Though the
need for and methods and models used, have varied from period to period and
from one country to another. The ills and aberrations of the prevailing systems
led the policiy makers and the administrators to spell out strategies for changing
the economic and social order. Two distinct economic and political ideologies
th
capitalism and socialism, emerged since the second half of the 19 Century.
Their configurations demonstrated wide variations, subject to divergent cultures,
ethos and contemporary problems of development.

1.2 MODELS OF ECONOMIC GROWTH

Capitalism

Capitalism emerged when feudalism with its medieval system of land tenure lost
its relevance due to the invention of steam and new energy sources for a host of
industrial applications.

Capitalism (Burns etal, 1948) has been defined broadly as a system based on
private ownership of means of production regulated by market forces, in which
each producer seeks to maximise profit. The capital is privately owned and the
owners have the freedom to allocate and dispose of resources and to employ
workers to serve the owner interests. The system seeks to meet the economic
needs of the society through entrepreneurial efforts of individuals (or groups of
individuals) who own the resources and hire the workers. Workers, like land and
machinery are just another tool of production. The basic motivation, is to make
profit the bottomline of share holder value.

Mercantilism began to dominate the economic thinking by the end of the 17th
Century (ibid p,35) and, towards the end of the next it witnessed the decline.
In its economic dimension, mercantilism sought the growth of capital to create
industry and trade which would provide the nation-state with powerful economic
band. In effect, the activities of mercantile class were helped by the State.

Growth of trade was basic to the philosophy of mercantilism. The strength of a

nation was measured largely by its merchant fleet and the gold and silver earned
from trading. A favourable balance of trade for a country meant that its gold
and silver coffers were growing. East India Company is a classic example of
the mercantilist government in which the United Kingdom (UK) fostered export
trade by granting monopoly privileges to the trading company. The aim of
mercantilism was to strengthen the nation-state.

Most of the countries in Europe were ruled during the period by monarchs,
whose dominant interest was to strengthen their kingdom through policies of state
intervention to produce goods, both for domestic consumption and for exports,
such as woollen textiles in the U.K. or iron in France. Production of machines
and inputs for manufacturing was encouraged by all mercantilist governments,
either through subsidies or by compulsion. State regulation became the order of
the day.

It is thus interesting that the state intervention is not a new phenomenon of the
20th Century. Encouragement to and protection of domestic industry was a
deliberate state policy. Gradually, the allocation of economic resources and the
composition of national output became matters of governmental responsibility.
The systems imposed by the mercantilist states weakened during the 19th
2
Century, mainly in the face of rising demand of the colonies for independence, Forms of Public Enterprises
starting from America, where the traditions of British and European mercantilism
did not take firm roots.

Laissez Faire

The decline of mercantalism led to economic liberalism. Under this dispensation,

the individual was accorded the freedom to buy and sell, to produce and
consume, as he liked. Individualism was motivated by self-interest. The
government’s role in people’s economic activities receded in importance with
laissez faire or ‘let alone’ style of administration. The philosophy was to allow
trade to move freely and to remove governmental restrictions on production,
employment, prices, wages, and consumption. Free market economy became the
guiding force. It was assumed that it would result in furthering the common
wealth (Smith Wealth of Nations). The underlying assumption was that the sum
total of individual interests constituted the public interest. A growing segment of
the business community saw in the economic freedom an abundant scope for
profitable ventures.

Laissez faire was dominant in Britain during the Nineteenth and early Twentieth
Centuries. Even in the United States, it remained dominant as a social
philosophy, though, it waned overtime.

The theory of laissez faire, in sum, represents the maximum degree of freedom
for the individual in economic activities (investment, production, trade, distribution,
consumption), perhaps regulated only when serious concerns of national security
arose. Free enterprise system, there, is therefore the quintessence of capitalism.

This system, however, led to concentration of economic power in the hands of a

few and exploitation of the labour – The workers were subject to long working
hours and harsh working conditions, with little or minimal concern for their
welfare. Only those with advantage of wealth and concomitant social connections
succeeded. This led to wide disparities in income and wealth among people in the
society.

It was discovered that self interest could not be trusted to guide the processes of
production, income distribution and consumption. Private interest needed to be
modified, regulated and supplemented by government interventions. In Europe,
two World Wars and the widespread depression led to restoration of considerable
authoritarian control over the economic processes. While North America
remained largely wedded to free enterprise, Europe, especially, the UK, turned to
socialism.

Socialism

The ground conditions which helped sowing the seeds of socialism were the
appalling living conditions imposed by industrialisation in the early 19th Century.
The towns became overcrowded as people were forced out of rural
occupations and ways of life. Profits earned by the industrialist class were high
but wages to the workers were low and the living conditions of the wage
earners were miserable. Some reformist measures were set in motion in England
after 1832 with a slant towards humanitarianism – movements to protect child
and female labour. Several social thinkers and activists, however, developed the
belief that those conditions cannot be made better under the prevailing capitalist
order. They felt the need for creation of a new social system to undo the evils
caused by the capitalistic system.

3
Public Enterprise: An As the capitalist model of economic development was associated with the
Overview exploitation of both workers and consumers from the very inception of the
Industrial Revolution in the 18th Century, the consequent economic and political
pressures led to a new philosophy of social organisation. It took the form of
socialism. It was an alternative economic social order in which a major part, if
not all, of the economic resources came to be directly controlled by government
through ownership of means of production, and meeting the needs of the society
through regulated production and distribution.

The rationale of the socialist doctrine rests on three premises: (a) capitalism as a
system builds itself through monopolistic activities; (b) it generates glaring
inequalities of income and wealth; and (c) it perpetuates poverty among a large
segment of the population. These could be ameliorated through the Government
ownership of the means of production and distribution.

The trigger for the socialist movement was provided by the French Revolution
(18th) century revolution) which dismantled a political and social order dominated
by the French Catholic Church and nobility. A dominant variety of socialism,
however, took shape only with the October Revolution in Russia inspired by the
Marxian philosophy propounded in Marx’s The Communist Manifesto and Das
Kapital.

The adoption of the socialist doctrine by the Union of Soviet Socialist Republics,
Eastern Europe and subsequently by China and some of the newly independent
countries of Asia, Africa and Latin America, gave fillip to the public sector
assuring greater importance and role in development..

There are a number of schools and practitioners of socialism with varying

configurations. The concept translated and operationalised into practice led to
further divergencies. According to Bertrand Russell, a British philosopher,
“Socialism like everything else that is vital, is rather a tendency than a strictly
definable body of doctrines”. The essence of socialism in his view is the
advocacy of community’s ownership of land and capital by a democratic state. A
concern for the hitherto denied or deprived section of the community is a marked
feature of socialism.

Fabian Socialism

A moderate variant of socialism is the Fabian variety. In the 1880s, a group

styled themselves as Fabian Socialists, as opposed to Marxists following a
philosophy of overthrowing governments by violent means, emerged in the U.K.
The fabians as they, came to be known, which included distinguished social
thinkers like Bernard Shaw, H.G. Wells and Sidney and Beatrice Webb. The
writings and essays of the Fabian Society led to the formation of the Labour
Party in the U.K., many of whose intellectual elite were either members of the
society or closely associated with it. The Fabians believed in the inevitability of
socialism sweeping the world because of the injustices of capitalism. The Fabian
Socialists opted for a peaceful political change sharply different from the
Marxists. This evolutionary Fabian Socialism, which emerged in Britain, got
extended to Germany and some other countries of the continent (Dutt). The first
Prime Minister of independent India, Jawaharlal Nehru, broadly subscribed to the
Fabian philosophy and was committed to the non-violent form of socialism
through a democratic process.
Marxism
The radical school of socialism was propounded by Karl Marx (1818 – 1893).
The Europe’s movements of socialism in the late Nineteenth and early Twentieth
4 Centuries drew inspiration from the Marxist thesis.
Marx called his socialist doctrine as communism and scientific socialism. In their Forms of Public Enterprises
monumental work, The Communist Manifesto, Marx and Eagels (Mars &
Engles, 1948) established that capitalism was inherently a system of exploitation
and it was doomed to collapse. Labour theory of value is a marked contribution
to the literature on socialism which, in essence, means that value is created only
by human labour. Since it is only the labour-power which produces value, the
capitalist, who owns the means of production (land, buildings, machinery and raw
materials), extracts surpluses from labour and claims these as his profit.

As an ideology, therefore, communism is based on the premise that there would

always be conflict of class interests between the ‘haves’ and ‘have nots’ and a
change must occur - or be forced - if an equitable society has to be established.

The Communist Manifesto maintained unequivocally and forcefully that a new

social and economic order “can be attained only by forcible overthrow of all
existing social conditions. Let the ruling classes tremble at a communist
revolution. The proletariat, that is, the wage earners, have nothing to lose but
their chains. They have a world to win. Let the working men of all countries
unite” (Das Kapital 1867). The Manifesto states that “the history of all hitherto
existing society is the history of class struggles, implying thereby that the
capitalists and workers are opposed to each other in an adversorial position. The
cherished - but the initial phase of the communist movement was the dictatorship
of the proletariat which was anticipated eventually to lead to a classless society.
The concept questions the very basis of democracy. The Soviet State symbolised
the essence of Marxism to the world.
Other types of socialism which flourished at that time were syndicalism of
France or guild socialism or Fabian Socialism of Britain.
The state ownership of the means of production translates itself into the concept
of the public sector. The public sector is that segment of production and
distribution system in a country which is owned and controlled by the community
through the state or its organs.
The World Wars I and II ravaged a number of countries, both on the European
and Asian continents. Great depression was witnessed in 1930s. Employment
became scarce and destitution was witnessed everywhere. Thinkers of the time,
like John Maynard Keynes (propounded the General Theory of Unemployment,
Interest and Money) advocated a greater role for the government to address the
issues of unemployment, economic disequilibria and misery of the common man.
The General Theory of Keynes was published in 1936, the seventh year of the
Great Depression, when the older policy of laissez faire (minimum intervention of
the state and the operation of free markets) had failed. Unlike the traditional
policy-makers who expressed the view that depression and unemployment are
caused by supplies drying up, Keynes felt that infusion of demand for goods,
services, manpower and capital would lead to growth - demand-led growth - in
the economy. The General Theory was also supported by the market collapse of
1929 that wiped out a lot of savings and incomes of people. The only way to
arrest the downturn in the economy, the theory envisaged, was to increase
spending. It would be unrealistic to expect individuals to open their wallets during
a downturn and the only agency which could boost demand is government. The
centrality of government making massive investments to trigger growth is the
core of the Keynesian economics of state-funded job creation - “dig trenches and
fill them up”.
Mixed Economy Model
The Indian brand of socialism chose a middle path – avoiding the fundamental
doctrines of both capitalism and communism. Violent or revolutionary path was
5
Public Enterprise: An not acceptable to the Indian ethos and culture. Peace and tolerance are deeply
Overview embedded in the Indian philosophy (of different denominations).
India’s approach to economic development was a compromise between a
centrally planned economy and market economy. While the public sector
emerged in the West, particularly in the U.K. and France, through nationalisation
of existing industries, the approach of the Indian experiment was different. The
country, when it became independent in 1947, was miserably underdeveloped. It
was considered counter-productive to destroy something that was existing and
accordingly, the country decided to focus on the creation of new production
capacities and to accelerate development at minimal cost.

Although the Indian National Congress, as early as 1931, adopted a resolution at

its Karachi session which advocated nationalisation of key industries, Jawaharlal
Nehru, the first Prime Minister, who dominated the political scene, held the view
that the interest of development would be best served by utilising the resources,
the state could spare in setting up new units of production in the public sector.

The economic policy and programmes of the Congress, the ruling party, for
decades after independence, envisaged that the new undertakings in defence,
key and public utility industries and those which were in the nature of monopolies
or served the country as a whole, be publicly-owned. The Economic Policy
Report also recommended that private industry be subject to state control and
regulation and that banking and insurance be nationalised while financial
cooperatives be set up. The Report envisaged the establishment of a planning
body “to plan integrated development of the country’s economy in order to
establish a just social order eliminating exploitation in production”.

The undercurrent in the thinking was that while the existence of private sector
was transitional in nature, a transformation of the social order should be brought
about without upsetting the existing economic pattern. It observed that the private
units in the transitional period should not only be allowed to exist but, in fact,
should be given the opportunities for growth within their own spheres of activity.

The mixed economy model presupposes the existence and growth of private
enterprises along with public enterprises. It, however, envisioned that the public
sector would occupy the commanding heights of the economy. The concept of
the commanding heights was articulated further. Under the model, the role of
the private sector would be limited and controlled through a planning system. The
first Industrial Policy Resolution in 1948 implicitly spelt out the mixed economy
concept combining the essentials of the American model of market economy and
the Russian model of centrally planned economy.

It was recognised that barring a few large scale industrial undertakings in steel,
textile and sugar sectors which belonged to the industrial houses of the Birlas,
the Tatas and a few others, India possessed hardly any industrial base or
infrastructure, which could enable the country to achieve the required rate of
economic development.

The private sector had neither the financial resources of the magnitude needed
nor the capacity or experience to manage giant projects. The government had,
therefore, no option but to make investments in various socio-economic sectors
like infrastructure, industry, education, health, and other essential services. The
country needed massive investments in almost all sectors - agriculture, industry
and other tertiary sectors, in infrastructure (power, roads and road transport,
communications, railways, aviation, shipping). The development of backward and
inaccessible regions was equally urgent to bring about balanced social and
economic development of the people.
6
It was found later that, because of outdated technologies and bad managements, Forms of Public Enterprises
a large number of private sector industrial undertakings had fallen sick. To
protect the employment of these units, it was felt that it was imperative for the
government to step in the absence of any other viable alternative.

1.3 THE RATIONALE OF PUBLIC SECTOR

In this way, ideological, strategic, economic and social considerations provided,
the genesis, growth and development of the public sector in several countries like
India. A structural shift from the agrarian economy to the industrial economy
created the base for the socio-economic structural changes. In order to
accelerate industrialisation and address other economic and social problems of
the day, active involvement of the state in the processes of development became
an economic necessity for many countries, especially the developing countries.
The historical developments of the last two centuries thus provide the backdrop
of how the public sector emerged as a problem-solver to the fallouts and
ramifications of the prevailing economic systems.

The recourse to the instrument of the public sector thus emerges from at least
two strategies of economic dynamics: first, to undo what the private enterprises
do or are not able to do for the people’s welfare; and second, to accelerate the
industrial and economic development of the country in the desired direction, at the
least social and economic cost to community. The first is achieved through
takeover (or nationalisation of the existing activity); and the second by the
creation of new production or related facilities with fresh investments.

The growth of the public sector had been a global phenomenon since the 1950s
and India was no exception. By design and policy, the public sector expanded
and occupied a vital position in different economies, such as Great Britain,
France, Italy. Only the state, it was believed, could mobilise massive means to
invest in infrastructure and public utilities like railways, telecommunications and
power generation and distribution. The public sector became a major instrument
of planned economic development (Mohnot, 2003) and was viewed as its prime
mover in several countries. The state intervention was considered necessary also
to regulate the use of scarce resources depleted by war efforts and undo or
prevent the distortions arising from undiluted profit motive of private
entrepreneurs. The public sector and planned economic development became
inseparable. Bereft of ideological considerations, a practical approach adopted in
many countries through the instrumentality of state was to fill the gaps left
uncovered by private endeavours. Strategic considerations and control over
natural monopolies were other objectives.

Some important strategies adopted in India include the following:

• the state to take the initiative to set up industries or other activities

(industrial, trading infrastructural or service-related) in which the scale of
investment, gestation period and risk factors are such as to make them
unattractive to private investors;

• the industrial or other enterprises made sick by private promoters be

rehabilitated to ensure continued employment and production (Rolls-Royce in
the United Kingdom and textile mills in India are good examples);

• the state to take initiatives to accelerate the growth rate of the economy and
to change the direction of development as required by the welfare of the
populace at large;

7
Public Enterprise: An • the state to control the entity and activities of the multinationals as these
Overview were found to affect domestic economic interests;

• the state to take on the task of achieving some urgent social and socio-
economic objectives such as creating new employment opportunities, securing
balanced regional or segmental development, reducing economic inequalities
and mobilising scarce resources, such as capital and foreign exchange.

The Indian case provides a good illustration of the rationale or the raison d’etre
of the public sector. More so, with the private sector not having the wherewithal
and the will to build infrastructure – roads, railways, ports, capital intensive
industry with long gestation period involving massive investments and generating
poor returns at least in the initial stages. Massive investments could therefore,
come only through state intervention, indeed, participation.

In this context, the public ownership and control (leading to ‘commanding heights
of the economy’ with planned investments, creation of large scale capital-
intensive basic goods sector, establishment of infrastructural facilities and
prevention of the outflow of foreign exchange), was considered necessary and
desirable on economic and social considerations. It led to the establishment of
public enterprises in steel, heavy engineering, basic chemicals, oil and gas
exploration and oil refining, fertilizers and petrochemicals, energy generation and
transport and communications. These sectors were to forge strong interlinkages
with the development of other sectors of the economy including the small scale
sector.

The rationale of public enterprise thus assumed a wide spectrum of activity. It

became a powerful instrument of economic development. Social services like
health and education were also promoted by the state although not distinctly in
the form of the public sector.
The public sector in India, evolved itself through three basic modes :
• the government initiative in setting up new industries and other undertakings;
• support to existing enterprises in the domain of private initiative as
supplementary or complementary efforts;
• limited nationalisation with a focused objective - such as protection of
employment.
Nonetheless, the main thrust of the public sector was to accelerate the core,
basic and strategic industries, such as coal, power, steel, oil exploration and
refining, fertilizers, minerals. Economic security and national self-reliance were
the other underlying principles. Greater socio-economic equality and the building
up of a countervailing power against the power of private individuals and groups
were the other considerations for government to be in business.

Infact, the rationale for the establishment of public enterprises are many and
varied. A catalogue compiled by an Expert Group of United Nations Industrial
Development Organisation (UNIDO) (UNIDO, 1979) provides a comprehensive -
although not an exhaustive - inventory of developmental objectives of the public
sector:

• to adopt a socialistic model of development;

• to control strategic sectors of the economy;
• to evolve the balanced economic structure;
• to control and manage natural monopolies;
8
• to undertake tasks beyond the capability of private enterprise; Forms of Public Enterprises

• to provide a competitive element to private industry;

• to develop backward areas;
• to stimulate the advancement of weaker sections of the society;
• to increase the availability of essential consumer goods;
• to generate employment;
• to acquire, assimilate and develop technology;
• to generate foreign exchange earnings;
• to stimulate agricultural development;
• to commercialise activities traditionally run as government departments;
• to discourage the wrong use of economic power;
• to utilise economic resources optimally;
• to control the exploitation of unused natural resources;
• to help stabilise prices;
• to take over the management of ailing private sector firms;
• to develop self-reliance;
• to improve income distribution;
• to favour or accomplish structural changes in the economy.
To this tally may be added:
• to prevent or to minimise environment pollution;
• to utilise available skills;
• to forge international agreements and to facilitate international cooperation.
• to promote national brands in international markets.
In promoting the public sector, the government had also got other objectives to
attend to, such as preventing the emergence of private monopolies – as distinct
from natural monopolies, promoting import substitution, enhancing exports to save
and earn foreign exchange so vital for import of capital goods, intermediates, raw
materials and essential goods.

Some of the major objectives in setting up public enterprises, as envisaged

originally in India, could be broadly summed up in the following set:
• to help in rapid industrialization and economic growth of the country;
• to create the necessary infrastructure for economic development;
• to promote balanced regional development;
• to ensure equitable distribution of income and wealth.
• to ensure adequate supplies of essential goods and their equitable distribution;
• to assist the development of small scale and ancillary industries;
• to promote import substitution, and to save and earn foreign exchange;
• to generate resources for development.

9
Public Enterprise: An
Overview 1.4 PUBLIC SECTOR ENTERPRISE: CONCEPT AND
FORM
The term public sector (sampat, 2002) has been used in different contexts by
people of different backgrounds. It has come to mean different things in
different countries. In its widest connotation, the public sector encompasses all
economic activities of a government. It has been used to mean public enterprise
(PE), government controlled enterprise (GCE) (Mazzolini), state-owned enterprise
(SOE) (Working paper, WB), public undertaking (PU) or public sector undertaking
(PSU) or simply state enterprise or undertaking (SE or SU).

Public sector in the Indian context includes, for purposes of planning, all activities
funded out of the government budget. In this sense of the term, the size of
public sector is, indeed, very large. It includes not only the government
companies but also government departments, whether in the central or state
sector, irrigation and power projects, railways, posts and telegraphs, ordnance
factories, and other departmental undertakings, banking, insurance, financial and
other services, especially social services (like education, health and medicare,
social insurance and social security). Accordingly, public sector is a very
comprehensive term encompassing a vast array of activities undertaken through
public funding from resources raised mainly through fiscal efforts. In that sense,
it does not have a “personality” of its own. On the other hand, public
enterprises which are set up by allocation of state’s resources with a corporate
face or in any other distinctive organisational form, have their own distinct
identity. These, strictly speaking, constitute the public sector.

In many countries, economists, administrators and analysts use the terms ‘public
sector’ and ‘public enterprise’ interchangeably. Useful guidance is provided by
the International Centre of Public Enterprise. It identifies public sector by “any
commercial, financial, agricultural or promotional undertaking owned by public
authority, either wholly or through majority shareholding engaged in sale of goods
and services”.

Public enterprise, obviously, has two facets – public and enterprise. The
ownership and control of government follow public funding and the
entrepreneurial effort. The government investment is through allocated resources
in the nature of (i) equity, that is, shareholding or just capital investment; and (ii)
debt, that is, long term loans secured for the entrepreneurial activity. Ownership
is exercised through majority holding of equity shares (or investment) by the
government. The debt is also often provided by the government.

The public sector takes a number of organisational forms: departmental

enterprises, statutory public corporations, limited liability joint stock companies,
autonomous organisations and non-profit organisations.

To start with, a clear distinction needs to be recognised between a public sector

enterprise which is owned by government, on the one hand, and a public
company registered under the Companies Act, but privately owned (which also
has both equity and debt components), on the other. A public company -
privately owned - also has a corporate form, with both cost and profit centres,
set up under the provisions of corporate law, which is applicable both to public
sector enterprises and public companies in the private sector. A primary
distinction is that a private company owes its origin to the efforts of individual
promoters with the ownership of a sizable chunk of shares to exercise both
ownership and management control. Shareholding may, however, be widely
dispersed in a private sector company through public offerings. On the other
10
hand, a public sector enterprise is owned dominantly by the state and comes Forms of Public Enterprises
under the control of government as a major shareholder. Both, however, prepare
for purposes of accounting, a profit and loss or income and expenditure account
and a balance sheet, which reflect their financial operations and position, to be
presented annually. The accounts are subject to statutory audit and need to be
placed before the general body of the shareholders, who have the power to
approve and adopt them.

Ownership and Management

The patterns of ownership and management of public enterprises vary from

country to country. In several countries, the forms of ownership and management
have evolved over time. These varied also with the sector of activities in which
these were located.

Management is an extension of the ownership pattern. With the involvement of

the resources of the state, the public sector represents the extension of state
power. It imposes certain discipline on the management of these enterprises.

Generally, the public ownership implies that at least 50 per cent of capital is held
by the state itself or by any national, regional or local authority. The management
ownership then falls within the domain of the state. In the Indian context, larger
than 50 per cent shareholding in an enterprise by the state determines the
characteristic of public ownership, (Article 12 of the Constitution of India).

However, the state ownership does not mean that the subject enterprise has to
be run by government on day-to-day basis. Since it is created by the
investments from the funds provided by the public exchequer, the enterprises are,
subjected to public accountability. In a democratic state, legislative supervision is
the essential ingredient of accountability. At the same time, operational autonomy
of public enterprises is also needed as the enterprise functions, especially in a
mixed economy, competing with private enterprises and operating in the same
environment.

In the management of public enterprises, the crucial aspect is of coordination and

control. It needs striking a balance between accountability to public and business
principles. Also there is a continuous conflict and quest to strike a balance
between autonomy and accountability. Given a corporate form, public enterprise is
managed by a board of directors. Ownership provides the authority to the
government to decide who should constitute the board and, as a corollary, the
board is answerable to the government. Some of the important issues confronted
are: what are the powers which should be vested with the owners? How much
authority should be delegated by the owners to the management of enterprises
(such as in regard to capital expenditure, or in branching out to new activities or
diversification)?

While spelling out the characteristics of the corporate form of public enterprise or
public company, it is interesting to comprehend the Trusteeship concept
propounded by Mahatma Gandhi. It relies on the innate goodness of human
beings and gives a call to all possessors of wealth to regard themselves as
trustees of the people. Gandhian Trusteeship does not contemplate any change in
the structure of the society as does Socialism. It is recognised that the very
nature of acquisitiveness (and possessiveness) inherent in capitalism cannot
transform the system into benevolence or trusteeship. A lofty moral value is
attached to the theory of Trusteeship which is almost impossible to translate into
practice. While, private profit is an anathema to the socialist philosophy, the
emerging rules of corporate governance is a pointer to Gandhiji’s concept of
Trusteeship and, if followed in letter and spirit, it can achieve a great deal of the
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Public Enterprise: An desired goal. This will, in fact, reduce substantially the cleavage between a
Overview public enterprise and a private public company.

Germany provides examples of a variant of public trust, in major enterprises such

as Salzgitter, VEBA, VW, which are integrated with market economy and
operated on commercial principles. Federal government’s participation is of a
varying kind. Public – private partnership in the trust is a noteworthy feature.
These trusts promote research and development in the field of technology in
order to meet competition, both national and international, while building on
strengths for the future.

Policy Dimension

Governments, in general, adopt different policies whether to take over existing

enterprises or to establish new enterprises. Policies are determined by socio-
economic and political factors which trigger the policies, which could be grouped
as:
• Socio-political;
• Natural resource exploitation;
• Self-reliance;
• Employment generation;
• Income distribution;
• Mobilisation or saving of foreign exchange;
• Acceleration of industrial growth;
• Control of private sector, domestic and foreign;
• Removal of regional desparties.
All these motivations get translated into national policies. One or more of these -
usually more - dominated the policy thrusts in different countries such as
Botswana, Brazil, China, India, Malaysia, Mexico, Nigeria, Pakistan, Sri Lanka,
Zambia and others.

Public sector policies basically have two dimensions – exogenous and

endogenous. Each one is significant. In economic sense, market structure and
supply constraints determine macro level public policies. The other aspects are
socio-political imperatives.
Public policy determinants cover issues such as :
• What are the economic objectives to be subserved by public enterprises?
• What should be the role of social objectives?
• What are the industries or activities which need to be developed exclusively
in the public sector?
• What are the areas in which both can exist together?
• What are new areas to be explored?
• What are the new technologies needed? And what shall be their sources?
• How much of self-reliance can be achieved?
• What shall be the form or forms of organisation?
• What shall be the precise role of the government (and the legislature) in their
control?

12 • What shall be the mechanism for making policy decisions?

These are all exogenous or macro-level questions of public enterprise policies. Forms of Public Enterprises

Endogenous policies at micro level fall within the jurisdiction of enterprise

management. These reflect the day-to-day operating level. Most of these are
common with private enterprise with the distinction that the public enterprises
have to follow the policies and procedures laid down by the government and
accountable for promoting public interest. With the operationalisation of corporate
governance, much of the distinction between public and private enterprises will
diminish. Real value creation – as distinct from the value creation for the
shareholder – will be the rendezvous of both sectors.

Activity
a) List some of the major objectives in setting up public enterprises.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
b) Think of more such objectives and list them.
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................

1.5 SUMMARY
Societal differences have created a large economic disparity resulting in economic
inequalities. Public sector emerged in the 20th century as a formal concept but
soon declined due to non-proportionate economic power. Since then the role of
public sector in economic development has not found a proper place. This unit
specifically touches upon this aspect and also takes a short tour to the different
models of economic growth. The rationale of public sector has also been
discussed in brief alongwith the developmental objectives of the public sector. It
has been tried to cover the major aspects of concept and form of public sector
enterprises as a whole.

1.6 SELF ASSESSMENT QUESTIONS

1. Discuss the two facets - public and enterprises of a public enterprise.
2. Briefly discuss the role of public enterprise in economic development.
3. Discuss the concept of socialism with reference to public enterprise.
4. ‘India's approach to economic development was compromise between a
centrally planed economy and a market economy’, discuss.

1.7 REFERENCES
Burns Edward Arthur, Neal C. Aflred and Watson, D.S. (1948). Modern
Economics.
ibid p,35
Smith Adam, Wealth of Nations, Cannon edition, p.508,
13
Public Enterprise: An
th
18 Century Revolution in France led to elimination of aristrocracy by public
Overview guillotine.
Dutt, R.C., Socialism of Jawaharlal Nehru, p.4
Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto.
Das Kapital. (1867), Vol. I.
Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research.
UNIDO Meeting of Role of Public Sector in Industrialisation, (1979). Vienna.
Public Sector, Legal & Regulatory Framework & Interfaces – Sampat, R.
(March 2002). World Bank paper, CPAR Study Phase-II CPSUS.
Mazzolini Ronalto, Government Controlled Enterprises – International Strategic
and Policy Decisions, John Wiley & Sons.
Managing State-owned Enterprises, World Bank Staff Working Paper No.577

1.8 FURTHER READINGS

Smith Adam, Wealth of Nations, Cannon edition, p.508,
Marx, Karl and Eagels, Friedrich (1848). The Communist Manifesto.
Das Kapital. (1867), Vol. I.
Mohnot S.R. (2003), Reinventing the Public Sector, Centre for Industrial and
Economic Research.
Mazzolini Ronalto, Government Controlled Enterprises – International Strategic
and Policy Decisions, John Wiley & Sons.

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