Chapter Notes: Private, Public and Global Enterprises

Introduction

Business organisations exist in various forms, such as private, public, and global enterprises. Private organisations include local shops and service providers, while public enterprises like the Railways and Post Office are government-owned. Global enterprises operate internationally, and joint ventures enable companies to share resources and enter new markets. The evolving public sector requires greater efficiency and modernisation.

Private Sector and Public Sector

The 1948 Industrial Policy Resolution

Forms of Organising Public Sector Enterprises

Public Sector

• Departmental Undertakings
• Statutory Corporations
• Government Companies

1. Departmental Undertakings

• Departmental undertakings are parts of ministries without separate legal status.
• They operate as ministry departments with government employees.
• Operations follow government rules, managed by IAS officers and civil servants.
• Examples include Railways and the Post and Telegraph Department.

Features

• Funded by the Government Treasury through annual budgets; revenue returns to the treasury.
• Follow government accounting and audit standards.
• Employees have recruitment and working conditions similar to other government servants.
• Supervised directly by ministries with some operational independence.
• Accountable to the ministry.

Merits

• Parliament maintains effective oversight.
• Ensure public accountability.
• Revenue contributes directly to government income.

Limitations

• Lack flexibility for smooth operations.
• Decision-making requires ministry approval, causing delays.
• Bureaucratic caution limits innovation and risk-taking.
• Poor responsiveness to consumer needs.

2. Statutory Corporations

• Created by a Special Act of Parliament defining their powers, functions, and staff rules.
• Have government authority and flexibility similar to private companies.
• Fully state-owned and regulated by the Act's provisions.
• The government holds final financial responsibility and utilises profits.
• They are legal entities able to sue, be sued, enter into contracts, and own property.
• Funds are raised by borrowing from the government or the public.
• Staff employment terms are specified by the Act.

Merits

• Enjoy independence and operational flexibility.
• The government does not interfere in financial matters.
• Create policies and procedures within legislative powers.
• Valuable instrument for economic development.

Limitations

• Operations are governed by strict rules, limiting flexibility.
• Government and political intervention are common in major decisions.
• Corruption risks due to public interaction.
• Advisors on boards may limit decision-making powers.

3. Government Company

• Defined under Section 2(45) of the Companies Act 2013 with at least 51% government ownership.
• Restrictions on the appointment and retirement of directors and key management.
• Shares held in the name of the President of India.
• Functions as a separate legal entity distinct from the government.
• Established under the Companies Act or earlier laws.
• Can sue and be sued, enter into contracts, and acquire property in its name.
• Management follows the Companies Act; employees are appointed per the Memorandum and Articles of Association.
• Exempt from some accounting and audit rules; an auditor appointed by the Central Government; Annual Report presented to Parliament or State Legislature.
• Funding from government shareholdings, private investors, and capital markets.

Merits

• Legal entity distinct from the government.
• Autonomy in management decisions.
• It can regulate markets and discourage unhealthy practices through pricing.

Limitations

• The government's sole stakeholding can limit the Companies Act's effectiveness.
• May neglect constitutional duties of government-funded enterprises.
• Government control can undermine autonomy and defeat the company's purpose.

Changing Role of the Public Sector

1. Development of Infrastructure

• Infrastructure development is essential for industrialisation.
• Requires transport, communication, fuel, energy, and basic and heavy industries.
• The government mobilises large capital, coordinates projects, and trains the workforce.
• Public sector enterprises built heavy engineering capabilities, reducing imports during the second and third Five-Year Plans.

2. Regional Balance

• The government promotes balanced regional development and reduces inequalities.
• Public sector industries in less developed areas stimulate growth, create jobs, and support ancillary industries.
• Four major steel plants were established in underdeveloped regions to boost economic progress.

3. Economies of Scale

• Large-scale industries require substantial capital investment, leading to government involvement for economies of scale.
• Industries like electricity, petroleum, and telecommunications need mass production supported by government resources.

4. Check Over-Concentration of Economic Power

• New private-sector groups should invest in heavy industries to avoid wealth concentration.
• The public sector can establish large industries requiring substantial investment.
• This prevents the accumulation of wealth and economic power in private hands.

In summary, the public sector has evolved, adapting to India's economic landscape and addressing challenges of industrialisation, regional balance, and economic power distribution.

5. Import Substitution

• During the second and third Five-Year Plans, India aimed for self-reliance, facing foreign exchange shortages that limited imports of heavy machinery.
• The government set up public sector companies in heavy engineering to support import substitution.
• Public sector enterprises such as STC and MMTC significantly boosted exports.

6. Government Policy Towards Public Sector Since 1991

• In 1991, four major reforms were introduced: restructure viable PSUs, close non-viable ones, reduce government share in non-strategic PSUs to 26% or less, and protect workers' interests.
• The 1956 Industrial Policy reserved 17 industries for the public sector; by 2001, only atomic energy, arms, and rail transport remained exclusively reserved.
• Disinvestment involves selling shares to the private sector and the public to raise funds and increase ownership participation.
• PSUs were referred to the Board of Industrial and Financial Reconstruction (BIFR) for revival or closure decisions.

Global Enterprises

• Global enterprises are large industrial groups operating across countries through subsidiaries.
• Also called Majority Owned Foreign Affiliates (MOFA).
• They focus on a broad global presence rather than few products.
• With financial resources, advanced technology, and reputation, they significantly influence the global economy.

Features

1. Huge Capital Resources

• They have significant financial resources and can raise funds globally through equity, debentures, bonds, or borrowing.

2. Foreign Collaboration

• Form agreements with local companies for technology transfer, manufacturing, and branding.
• Agreements may include restrictions on technology, pricing, dividends, and foreign control.
• Collaborate with government and private sector entities.

3. Advanced Technology

• Benefit from technological advancements in production.
• Comply with international quality standards.
• Maximise use of local resources, promoting industrial growth in host countries.

4. Product Innovation

• Have R&D teams focused on new products and improvements.
• Require large investments manageable by global companies.
• Use superior technology to meet international standards.

5. Marketing Strategies

• Use aggressive marketing to increase sales rapidly.
• Maintain reliable market information systems.
• Established global brands ease sales across markets.

6. Expansion of Market Territory

• Operate beyond home countries via subsidiaries and affiliates.
• Grow international reputation and establish global brands.

7. Centralised Control

• Headquarters exercise full control over branches and subsidiaries.
• Control aligns with parent company policies.

Joint Ventures

• Two or more businesses combine resources and expertise to share risks and rewards.
• Joint venture agreements ensure timely government approvals and licenses.
• Based on a memorandum of understanding (MoU) detailing terms.
• Formed for business growth, new products, or entering new markets, especially abroad.
• In India, treated as domestic companies without separate laws.

Joint Venture - Types

A. Equity-Based Joint Venture

• Involves creating a separate co-owned business entity.
• Forms of entities vary.

B. Contractual Joint Venture

• No new entity formed; collaboration based on agreement.
• No shared ownership; parties maintain some control and share management.

Features of Joint Ventures

• Include significant capital, foreign collaboration, advanced technology, product innovation, marketing strategies, market expansion, and centralised control.

Benefits

• Shared risks and costs.
• Access to new markets and technologies.
• Enhanced expertise and improved project efficiency.

Public Private Partnership

A public-private partnership (PPP) is a cooperative arrangement between public and private organisations for infrastructure and services.

Features

• Public partners include government bodies and state-owned companies.
• Private partners include domestic or international businesses providing technical or financial expertise.
• Government contributes social responsibility, sustainability, financial support, and asset transfer.
• Private sector provides expertise in operations, management, and innovation.
• NGOs and communities act as stakeholders.

PPPs operate globally in sectors like power, water, waste management, hospitals, schools, roads, IT, and housing.

Merits

• Shift risk of design and construction.
• Speed up project completion.

Weaknesses

• Environmental conflicts may arise.
• Attracting private investment can be challenging.

HOTS

1. Can the public sector companies compete with the private sector in terms of profit & loss efficiency? Give reasons for your answer.

Ans. No, public sector companies cannot compete with private sector efficiency due to:

• Their focus on social services over profit, aiming to develop backward areas and create jobs.
• Influence of government policies limiting autonomy and flexibility.
• Bureaucratic management often leads to inefficiency.

2. Public sector enterprises have played a vital role in India's economic development. Why is the Government pursuing disinvestment now?

Ans. Despite contributions like filling industrial gaps and creating jobs, PSUs face:

• High overhead costs.
• Low production capacity utilisation.
• Inefficient management.
• Low returns or losses.

Disinvestment aims to reduce government ownership by selling shares to private sector and public.

3. State three situations where a Government Company is most suitable.

Ans. Ideal when:

• Government wants to control a private company without nationalisation during crises.
• Promoting an economic activity area.
• Starting ventures involving private local or international interests.

4. What motivates a company to go global?

Ans. To expand business by accessing larger markets for increased profits and reduced costs through large-scale production.

5. Why are global enterprises considered superior to other business organisations?

Ans. They benefit from economies of scale, access bigger markets, enhance competitiveness, optimise resources, innovate effectively, and ensure better profitability and sustainability.

6. What are the benefits of joint ventures and public-private partnerships?

Ans. Benefits include shared risks and costs, access to new markets and technologies, enhanced expertise, and improved project efficiency, leading to better services and innovation.