Unit - 3 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

PRIVATE SECTOR AND PUBLIC SECTOR ENTERPRISES

The private sector enterprises consist of business owned by individuals or a group of

individuals. The various forms of private sector enterprises are Sole proprietorship,
partnership business, Joint Hindu Family business, Cooperative organizations and
companies.
The public sector enterprises consist of various organizations owned and managed by
the government. The government through these enterprises participates in the economic
activities of the country.

FORMS OF PUBLIC SECTOR ENTERPRISES

The form forms of organization which a public enterprise may take are:
(1) Departmental undertaking
(2) Statutory corporation
(3) Government Company.

DEPARTMENTAL UNDERTAKING
This is the most popular form of managing the public enterprise. Under this type of
organization, business activities of the undertaking are conducted under the overall
control of one of the departments of the Government. It may be run either by the Central
government or by a State government. The Secretary of the Department is its Chief
Executive Officer who works under the guidance and control of the Ministry. Every year
budget is prepared and government approval is obtained. A report regarding the
activities of these enterprises is prepared and sent to the Parliament / State assembly.
The minister concerned with the departmental organization is accountable for the
success or failure of the department.
Some of the important enterprises which are departmentally managed are:
 Indian Railways
 Indian Posts and Telegraph Department
 The integral Coach Factory.
 The U.P Government Cement Factory etc.
Features of Departmental Undertaking
 The funding of these enterprises comes directly from the government treasury
through general budget. They have no right to borrow from the public. They draw
money from the government treasury for their daily expenses. Their income is
also deposited in the government treasury.
 It is subject to accounting and audit controls applicable to other government
activities.
 It is formed as government department by the government. Each government
department is associated with a special ministry.
 It enjoys the sovereign immunity of the state. That is, nobody can sue it. It can be
sued only through the procedure by which suits against the Government can be
 filed.
 The employees of the Departmental undertakings are the government employees.
 It is managed by the concerned ministry and hence subject to the direct control of
the ministry.
MERITS
 Departmental undertaking ensures maximum degree of parliamentary control on
the enterprise.
 A departmental undertaking is under the direct control of the Government and
thus, it is more effective in achieving the objectives laid down by the government.
 Departmental undertakings have relatively high degree of monopoly power. They
are suitable for industries which are of strategic importance and where utmost
secrecy is desired.
 The revenue earned the enterprise goes directly to the treasury and hence is a
source of income for the government.
 The risk of misuse of public money is minimized because of strict budget,
accounting and audit controls.
LIMITATIONS
 There is lack of flexibility due to strict government rules whereas it is essential for
the successful operation of the business.
 The employees of Departmental undertaking are not allowed to take independent
decisions without the approval of the ministry concerned. Consequently no quick
decision can be taken.
 The bureaucrat’s overcautious and conservative approval practice does not allow
Departmental undertakings to take the advantage of business opportunities.
 There is lot of political interference in the working of departmental undertaking
through the ministry.
 Excessive paperwork and the habit of not finishing the work give rise to red-
tapism in the day-to-day operations of Departmental undertakings. Consequently,
t here is heap of files tied I n red tape and no work comes to an end.

STATUTORY CORPORATION/ PUBLIC CORPORATION

They are created by Special Acts of the Parliament which contains their powers and
functions, rules and regulations regarding their employees and its relationship with
government departments. These have separate legal existence and have to act in their
own name. The entire capital is financed by Government and these also have right to
borrow from public.
Examples:

 Life Insurance corporation of India

 Oil and Natural Gas Commission
 Food Corporation of India
 Reserve Bank of India
 Unit Trust of India etc.

Features
  Statutory Corporation is fully owned by the Government.
 It is having a separate legal entity.
 Its employees are not government employees.
 Board of Directors are appointed by the government
 It prepares its own budget and can retain its earnings which can be used for
its business0.
 Profit is not the main motive.
 It has public accountability.
 Usually it is free from all types of interference.
Merits
 Free from undesirable government regulation and control
 The government does not interfere in their financial matters.
 It is relatively free from red tapes and can take quick decisions.
 Its policies are subject to parliamentary control which ensures protection of public
interest.
Limitations
 A statutory corporation’s actions are subject to many rules and regulations.
 Government and political interference have always been there where huge
funds are involved or in major decisions.
 Where there is dealing with public, corruption exists at a larger level.
 The Board of Directors may misuse their powers and indulge in undesirable
practices.

GOVERNMENT COMPANY
According to The Indian Companies Act, 1956, a government company is a company in
which not less than 51% of the paid up capital is held by the central or state government
or both. Subsidiary of a government company is also considered as a government
company.
Examples:
1) Hindustan Machine Tools Ltd. (HMT)
2) Bharat Heavy Electricals Ltd (BHEL)
3) Steel Authority of India Ltd.

Features
 It is created by the Indian Companies Act, 1956.
 It is having a separate legal identity.
 Its employees are appointed according to the rules contained in the
Memorandum and Articles of Association of the company.
 It is exempted from the accounting and audit rules and procedures.
 It obtains funds from government shareholdings, private shareholders and
capital market.

Merits
 It can be easily established. It can be established by following the provisions of
the Companies Act. No separate Act of parliament is needed.
  It has a separate legal entity.
 There is no undue departmental interference in the working of the company. So
they can take prompt decisions according to business needs as and when
required.
 It can curb unhealthy business practices by providing goods and services at
reasonable prices.

Limitations
1. It suffers from interference from govt. officials, ministers and politicians.
2. It evades constitutional responsibility, which a company financed by the govt.
should have, as it is not directly answerable to parliament.
3. The board usually consists of the politicians and civil servants who are interested
more in pleasing their political bosses than in efficient operation of the company.

ROLE OF PUBLIC SECTOR

Public sector in India was created to achieve two types of objective - (1) to speed
up the economic growth of the country and (2) to achieve a more equitable distribution of
income and wealth among people.
The role and importance of public sector changed with time. Its role over a period
of time can be summarised as following :-

1. Development of Infrastructure :- At the time of independence, India suffered

from acute shortage of heavy industries such as engineering, iron and steel, oil
refineries, heavy machinery etc. Because of huge investment requirement and
long gestation period, private sector was not willing to enter these areas. The duty
of development of basic infrastructure was assigned to public sector which it
discharged quite efficiently

2. Regional balance :-Earlier, most of the development was limited to few areas like
port towns. For providing employment to the people and for accelerating the
economic development of backward areas many industries were set up by public
sector in those areas.

3. Economies of scale - In certain industries (like Electric power plants, natural gas,
petroleum etc) huge capital and large base are required to function economically.
Such areas were taken up by public sector.

4. Control of Monopoly and Restrictive trade Practices - These enterprises were

also established to provide competition to private. sector and to check their
monopolies and restrictive trade practices.

5. Import Substitution - Public enterprises were also engaged in production of

capital equipments which were earlier imported from other countries. At the same
time public sector Companies like STC and MMTC have played an important role
in expandng exports of the country. Very important role was assigned to public
sector but its performance was far from satisfactory which forced govt. to do
 rethinking on public enterprises.

CHANGING ROLE OF PUBLIC SECTOR

Public sector played an important role in economic development of country till 1991.
Despite the important role played by public sector units, these were not free from
drawbacks and faced the following problems:
 Under-utilisation of production capacity
 Over-staffing
 Low rate of return and
 Inefficient management
As a result many public sector undertakings became a liability rather than being an
asset to the government. Thus, Government of India introduced the following four major
reforms in New industrial Policy 1991 to open up the economy to private sector nigga

1. Reduction in no. of industries reserved for public sector - This no. is reduced
from 17 to 8 and to 3 industries only in 2001. These three industries are atomic
energy, arms and rail transport.

2. Memorandum of Understanding (MOU) – In order to improve upon the

performance of Public sector undertakings the government entered into
Memorandum of Understanding.(MOU) Under this govt. lays down performance
targets for the management and gives greater autonomy to hold the
management accountable for the results.

3. Disinvestment - Equity shares of public sector enterprises were sold to private

sector and the public. It was expected that this would lead to improved
managerial performance and better financial discipline.
4. Restructure and Revival :-All public sector sick units were referred to Board of
Industrial and financial Reconstruction (BIFR). Units which were potentially viable
were restructured and which could not be revived were closed down by the board.

MULTI NATIONAL COMPANIES/GLOBAL ENTERPRISES

Multinational Company may be defined as a company that has business operations
in several countries by having its factories, branches or offices in those Countries. But it
has its headquarter in one country in which it is incorporated.
Some of the important multi-national companies are:
 Samsung
 Coca Cola
 Pepsi
 Nestle
 Sony
 Cad\bury’s
FEATURES
1. Huge Capital Resources :- MNCs possess huge capital resources and they are
able to raise lot of funds from various sources.
2. International Operations :- A MNC has production, marketing and other facilities
in several countries.
3. Centralized control : MNCs have headquarters in their home countries from
where they exercise control over all branches and subsidiaries. It provides only
broad policy framework to them and there is no interference in their day to day
operations.
4. Foreign Collaboration :- Usually they enter into agreements relating to sale of
technology, production of goods, use of brand name etc. with local firms in the
host country.
5. Advanced technology - These orgs possess advanced and superior technology
which enable them to provide world class products & services.
6. Product Innovations :- MNCs have highly sophisticated research and
developent departments. These are engaged in developing new products and
superior design of existing products.
7. Marketing Strategies - MNCs use aggressive marketing strategies. Their brands
are well known and spend huge amounts on advertising and sale promotion.

JOINT VENTURES
Joint venture means the pooling of resources and expertise by two or more business
enterprises to achieve a particular goal like expansion, development of new products,
targeting new markets etc. The risks and rewards of business are also shared. Joint
ventures can be among private entrepreneurs, government owned companies or a
foreign company. These intend to take advantage of the competence of other
companies, technology and human resources.
Example :Hero Cycle of India and Honda Motors Co. of Japan jointly established Hero
Honda. Similarly Suzuki Motors of Japan and Govt. of India come together to form
MarutiUdyog.
FEATURES
1. Capital is provided jointly by the Government and Private Sector Entrepreneurs.
2. Management may be entrusted to the private entrepreneurs.
3. It combines both social and profit objectives.
4. It is responsible to the Government and the private investors.
BENEFITS
1. Greater resources and Capacity - In a joint venture the resources and capacity
of two or more firms are combined which enables it to grow quickly and efficiently.

2. Access to advanced technology - It provides access to advanced techniques of

production which increases efficiency and then helps in reduction in cost and
improvement in quality of product.

3. Access to New Markets and distribution network - A foreign co. gain access to
the vast Indian market by e ntering into a joint venture with Indian Co. It can also
 take advantage of the well established distribution system of local firms.

4. Innovation - Foreign partners in joint ventures have the ideas and technology to
develop innovative products and services. They have an advantage in highly
competitive and demanding markets.

5. Low Cost of production - Raw material and labour are comparatively cheap in
developing countries so if one partner is from developing country they can be
benefitted by the low cost of production.

6. Well known Brand Names :- When one party has well established brands &
goodwill, the other party gets its benefits. Products of such brand names can be
easily launched in the market.

PUBLIC –PRIVATE PARTNERSHIP (PPP)

Public Private Partnership works on the principle of joint operation of the business by
public and private sector units. The private sector and the government cooperate with
each other. If the government has the funds for investment and the private parties have
the talent and expertise, then both of them can join hand for better service. It may be
other way round that the government has the expertise and the private sector has the
funds for investment.
Features
 Agreement between government and private party: It is based on an
agreement between government and the private party. The terms are binding on
both. The private party provide the service to the people, bears the financial and
technical burden.
 The cost of service: The beneficiaries of the service pay for the service. The
benefit is that the government keeps an eye on the charged levied for the users.
The service charge remains reasonable.
 Provision of capital for infrastructure: If the cost of infrastructure is very high it
may be shared by the government in the form of capital subsidy to help the
private party. The private party may not be required to pay any tax on revenue
forthe first few years to help it stand on its own feet.
 Revenue sharing: The revenue from the project is shared between the two
parties in the ratio as per the terms of agreement.
 Public welfare projects: The model is most suitable for welfare projects where
public gets quality service at reasonable cost like maintenance of play grounds
and parks.