Public Sector
Category : UPSC
Public Sector
Contents of the Chapter
Q.1. What do you mean by Public Sector? (Give your answer in Indian context).
Ans. In a public sector enterprise, the majority of equity shares is owned by the government directly or indirectly through governmental institutions and the government has decision making control .Public sector enterprise normally has the following forms of organisational structure
Departmental undertakings are not formed by or with the consent of the legislative authority. These are set up by 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. 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 separate from the government and also the persons who conduct their affairs. ONGC, LIC are some examples. Shares of such corporations are in the name of the government and these are thus owned and controlled by the government. Statutory corporations enjoy extensive legal autonomy, and their rules, objectives, functions and duties are define 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 state.
Control Boards are set up to manage government 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 Fertilizer Cooperative Ltd (IFFCO), Krishi Bharati 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 owns 51% or more of the paid up capital, according to Section 617 of the Companies Act 1956. Since the beginning of socio-economic planning after the Independence, public sector played a prominent 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 Statement 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 negligible and they were not willing to take up the unprofitable work of investing in infrastructure.
The Objectives of the PSUs are
FAO Food Price Index
The FAO Food-Price Index is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices (representing 55 quotations), weighted with the average export shares of each of the groups for 2002-2004. The five groups are given below.
The FAO Food Price Index (FFPI) averaged 214 points in January 2012. The FFPI hit its all time high of 238 points in 2011 February. A strong rise in international sugar prices was behind much of the increase in the June value of the index. International dairy prices rose slightly in June, while meat prices were stable. Of all the major cereals, prices of wheat fell most and rice increased. Among the oils and fats, prices of soybean oil were steady but palm oil weakened.
Q.2. What are the advantages & disadvantages of Public Sector?
Ans. In the last about 55 years of planned economic development, the public sector lived upto the expectations as can be seen below:
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; operated 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 resource crunch, erosion of net-worth due to Continuous 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 strategy, 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 competition to unlock its value. Therefore, 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).
The New Industrial Policy 1991 made significant changes like dereserving many areas with only 3 areas being reserved today; equity disinvestment; managerial revamp with greater autonomy; referring a sick PSU to the Board of Industrial and Financial Reconstruction (BIFR) and so on.
List of industries reserved for the public sector
The period since 1991 when reforms were launched saw many reforms in the way PSEs should function.
As mentioned above, the reforms have paid off and the performance is improved.
The New Industrial Policy 1991, as mentioned above, talked of disinvestment and the Finance Minister's Budget Speech in 1999-2000 talked of privatization for the first time.
Q.3. What do you understand by Disinvestment / Privatization. Whats the Pros & Cons of Disinvestment?
Ans. Disinvestment is the sale of shares of the Government to the retail public or employees or mutual funds or the Fits. In other words, in disinvestment (divestment), there is no change in the management from public to private hands because either the government holds majority equity (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- 26% or 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 a 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 management 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 partner with management control will invest further for diversification and techno-logical 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 and Disinvestment / Privatization
In many areas, e.g., the telecom sector, the end of 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 Disinvestment
While the advantages are Convincing, the criticism is not to be dismissed wither.
A prudent middle path needs to be adopted by way of extent of divestment; unit chosen; pace of the process; method adopted — IPO, strategic sale etc; valuation debate etc.
By 2011, Rs. 82,000 cores were raised totally since 1992. In 2010-11, government raised Rs.22,400 crores.
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 profits 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:-
Approach for Disinvestment
In 2009, UPA 2 Government approved the following action plan for disinvestment in profit making government companies:
Q.4. Define Strategic & Non-strategic Classification of Public Sector.
Ans. 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:
Q.5. Give an account of Navaratna and Miniratna companies.
Ans. Government introduced the navaratna concept in 1997. It granted enhanced autonomy to nine selected. PSV Economic reforms subject PSEs to market competition. Globalization 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.
PSEs referred to as “Navaratnas”. These were IOC, IPCL, ONGC, BPCL, HPCL, NTPC, SAIL, VSNL and BHEL. IPCL and VSNL were strategically sold to Reliance and Tatas respectively. Many more CPSEs were made navaratnas since then. Totally, there are 16 (2011).
Rashtriya Ispat Nigam Limited- Visakhapatnam Steel Plant (VSP), has been conferred ‘Navratna’ status In November 2010.
A new company Rashtriya Ispat Nigam Limited (RINL) in Visakhapatnanm was formed in 1982:
Visakhapatnam Steel Plant was separated from SAIL and RSNL was made the corporate entity of Visakhapatnam Steel Plant in April 1982. 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:
To gain Navarathna status, a PSE must score atleast 60 out of 100 based on these 6 parameters.
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
For example, ‘Navaratna’ status empowers it to invest up to Rs. 1000 crore or 1.5% of their net worth on a single project without seeking government approval. The overall ceiling on such investment in all projects put together is 30% of the net worth of the company.
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 that have made profits continuously for the last three years and earned a net profit of Rs 30 crores or more in one of the three years. 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 48 miniratnas. Bridge & Roof Company (India) Limited was added late in 2010.
Category II Miniratna
This category include those which have made profits for the last three years continuously and should have a positive networth. Category II miniratnas 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 14 such miniratnas Bharat Pumps & Compressors Limited was added late in 2010.
Category I
Category II
Q.6. Define Maharatna Companies?
Ans. Five companies have been granted the status providing them greater financial and operational autonomy.
The five state-owned units which were accorded the status were ONGC, NTPC and BHEL, IOC and SAIL.
To be eligible for the grant of the Maharatna status, the company should have an average turnover of over Rs 25,000 crore, average annual net worth of more than Rs 15,000 crore and average annual net profit of over Rs 5,000 crore during the last three years.
Besides, it should be a Navratna firm, should be listed on the Indian Stock Exchange with minimum prescribed public shareholding under the SEBI regulations and have global presence.
Once a company gets the Maharatna status, its board would not be required to take the government's permission for investments up to. Rs 5,000 crore in a joint venture project or wholly-owned subsidiary. For the Navratna companies, the limit is Rs 1,000 crore.
The main objective of the Maharatna scheme is to empower mega-Central public sector enterprises to expand their operations and emerge as global giants.
Q.7. Write a short notes on Board Reconstruction of Public Sector Enterprises (BRPSE)?
Ans. 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:
All sick CPSEs will be referred to the Board for revival / restructuring.
The recommendations of the Board are advisory in nature.
B1SE 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.
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
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.
Q.8. What do you understand by MOU (Memorandum of Understanding)?
Ans. 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 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 judgment 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 signaling 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 that 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 a freely negotiated agreement between the public enterprise and the administrative ministry. Under the agreement, the enterprises undertake to achieve the 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 goods performance through performance incentives to stimulate improved performance.
Some Recent Initiatives in Restructuring the PSEs
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
Professionalisation of PSU Boards
Following are the steps taken
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 to focus attention on short term strategies-coterminous with CEOs tenure. There is, hence a need to provide continuity in the manage-ment by appointing CEO and other members in the Board of Directors for longer tenure with representation of shareholders other than Gol Shareholders.
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 a 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 bid 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 non- flexibility of to the company to reorganise its own business. Regularization 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.
Q.9. Give an account of National Investment Fund?
Ans. In 2005, it was decided that National Investment Fund would be set up. It was set up in 2007.
Objectives of NIF are
Use of Disinvestment Proceeds
The income from the Fund is to be used for the following broad investment objectives:
However in view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan growth performance Government in November 2009 decided to give a one-time exemption to utilization of proceeds from disinvestment of CPSEs for a period of three years — from April 2009 to March 2012 -— i.e. disinvestment proceeds during this period would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. The status quo ante will be restored from April 2012.
Accordingly disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the following social sector programmes of the Government:-
NIF Chief Executive Officer (CEO), who is administratively attached to the Department of Disinvestment under the Finance Ministry, would formulate the investment strategy.
Disinvestment in 2011
The highlights of the Achievements of the initiatives undertaken by the Department of Disinvestment in the current Fiscal year are as follows:
Pre 2014-15: In the pre 2014-15 periods, the approach to disinvestment was based on identification of stocks on an annual plan basis. This often resulted in problems like delay in approaching the market, hammering of stocks, overhang, lack of flexibility in divestment of stocks, etc.
2014-15: With a view to address these Problems, during last two quarter of 2014-15 a rolling plan approach was adopted with advance preparation/planning, fast tracking the approval process, maintaining secrecy so as to avoid hammering of stocks and concluding disinvestment of Government of India (Gol) shareholdings in CPSEs in a time bound and focused manner. As a result, the Government could achieved the highest ever disinvestment receipts of Rs. 24,349 crore in a single FY 2014-15, that too only in last 6 months period of the financial year. This is even higher than the annual average of Rs. 9,593 crore between 2000-2014,
Disinvestment Target 2015-16
The budget estimate (BE) for disinvestment during the year 2015-16 is Rs. 69,500 crore. This comprises Rs. 41,000 crore from disinvestment of Central Public Sector Enterprises (CPSEs) and Rs. 28,500 crore from “strategic disinvestment”.
Measures to accelerate the disinvestment Process
Keeping in view the budgeted target of disinvestment for 2015-16, the Department of Disinvestment (DoD) has taken further measures to accelerate the disinvestment process by taking the following measures:
2015-16 Performance
Department of Expenditure
The highlights of the Achievements of the initiatives undertaken by the Department of Disinvestment in the current Fiscal year are as follows:
Cooperative Federalism
In accordance with the formulation prescribed by Fourteenth (14th) Finance Commission (FFC), the Annual Borrowing ceiling for States was fixed for the year 2015-16 at Rs. 3,78,903 crore as against the Annual Borrowing celling of Rs.3,34,989 crore fixed for the States in 2014-15.
Restricting the States to remain within Net Borrowing Celling (NBC) fixed by Ministry of Finance by allowing them to raise borrowings to the tune of Rs. 2,99,931 crore has resulted in net lower borrowings of Rs. 35,058 crore and consequently kept outstanding Debt/GSDP ratio of States at 24.9 % of GSDP, wed within the FC XIII projection of 30.3% of GSDP.
During the year 2015-16 (Up to 15.12.2015), the States have been permitted to raise Rs. 3,12,861 crore (Gross) as compared to permission granted to raise borrowing to the tune of Rs.2,17,488 crore during the corresponding period in 2014-15.
The States have been allowed borrowing permissions to States on quarterly basis in order to spread out the borrowings evenly over the 2015-16 to avoid bunching at last movement. This will help the State to borrow at competitive interest rates from Market.
Prior concurrence of D/o Expenditure by States for seeking external loan by multi- lateral agencies, have been dispensed with for improving ease of doing business.
The States are required to remain within the borrowings ceiling fixed by the Ministry of Finance each year and also the fiscal deficits limits & debt to GSDP norms prescribed by Finance Commissions as incorporated in the FRBMA of States. In order to streamline the process of accessing external loans, it has now been decided that there may not be any need to examine the proposals of State Governments for external loan assistance from the debt sustainability angle. However, loans under EAPs would be considered by Department of Economic Affairs (DEA) subject to States confirming / self certifying on the aspects given in the guidelines for examining proposals of States availing Structural Adjustment Loan and other external loan for clearance from debt sustainability angle.
Finance Commission Award
In order to rationalize public spending leading to improvement in fiscal performance of the States, Fourteenth Finance Commission (FFC) has continued the thrust given the earlier Commissions, worked out a fiscal roadmap for the States as follows:
Some of the major initiatives under FFC are-
Substantial increase in tax devolution and grant-in-aid recommended by FFC are expected to add substantial spending capacity through States’ budgets and give fiscal autonomy to the States. A major step in the process has been achieved by transferring more resources to the States in the nature of untied funds so that States may make and Implement schemes or programmes which are best suited to the local needs, requirements and aspirations of people. This will afford required flexibility to the States to address meaningfully the contextual needs and to develop as per their genius.
Releases of Finance Commission recommended grants
Total transfers to States under award of FFC, Special Assistance and Externally Aided Projects (EAPs) during 2015-16 (Up to 10.12.2015)
Resulting in biggest ever increase in devolution on account of State's share in sharable pool of Union taxes recommended by FFC from 201S-16, allows the States greater autonomy in designing and financing of schemes/projects.
However, having considered considerable amount of committed spill over liabilities for projects sanctioned prior to implementation of 14th FFC award, assistance required in areas of critical nature, support for States covered under Re-organization Act, support to states to deal with post FFC related issues etc., an allocation of Rs.20,000 crore has been made in the Union Budget (2015-16-BE) to provide assistance to the States in the name of Special Assistance under Central Plan.
An amount of Rs. 3,98,013 crore (Tax devolution of Rs.3,36,830 cr. and grants-in-aid of Rs.61,183 cr.) has been released towards Finance Commission transfers as against Rs.2,76,952 crore (Tax devolution of Rs.2,46,498 cr. And grants-in-aid of Rs.30,454 cr.) under this head during corresponding period in the last year. Total transfers (including loan) of Rs. 11,228 crore has been made to the States for EAPs in comparison to corresponding releases of Rs.11,130 crore made during the last year.
Other works (Packages announced for Bihar and Jammu and Kashmir)
On 18th August, 2015, the Prime Minister has announced Special package for Bihar called ‘Bihar package 2015’ for sectoral development in the State. An amount of Rs. 1,25,003 crore has to be provided for implementation of infrastructure projects in the areas of Farmer’s Welfare, Education, Skill Development, Health, Electricity, Rural Roads, Highways, Railways, Airports, Digital Bihar, Petroleum & Gas, Tourism. The projects approved under the package would be implemented by the respective line Ministry(s) in phased manner over a period of 2 to 5 years depending upon commencement of work. Taking into account financial and physical progress of the projects sanctioned under the package, necessary budget provisions for funding of the projects are to be made by the respective administrative Ministry(s). Besides, an amount of Rs. 40,657 crore has also been agreed for other investments in the State. Taking into account post flood relief & restoration and long term rehabilitation development of the State of J&K was announced by the Prime Minister on 07.11.2015 for Rs. 80,068 crore including support for Flood relief, reconstruction, flood management, assistance for small trade & business, development projects under Road and Highway, Power, New and Renewable Energy, Health, Human Resource DEVELOPMENT, Skill Development, Sports, Agriculture and Food Processing, Tourism, Urban Development, Security and Welfare of displaced people, Pashmina Promotion Project, etc.
Development Expenditure
During the period from 1st January, 2015 to 30th November, 2015, the Expenditure Finance Committee (EEC) chaired by Secretary (Expenditure) recommended 53 Plan Investment proposals/Schemes of various Ministries/ Departments costing Rs 4,71,121.96 crore.
Plan Finance-11 Division also deals with financial restructuring of Central PSUs on the recommendations of Bureau for Restructuring of Public Sector Enterprises (BRPSE). It is also actively involved in working out modalities for financial assistance to CPSEs, quantification of I&EBR generation for preparation of budget, finalizing modernization of Plants & Equipment’s to ensure more efficiency in production. It is also the Secretariat of National Clean Energy Fund, in respect of which, guidelines for appraisal/approval of the project have been issued.
Issues relating to Food, Fertilizers and Petroleum subsidies, including their quantification and extension of assistance to the Stake holders are also dealt with in Plan Finance-11 Division. This Division is actively involved along with the concerned Department/Ministry, in shaping subsidy policy of the Government so as to ensure effective targeting coupled with minimum burden on the Government.
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