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Overview of Central Public Sector Enterprises

The government-owned corporations play a pivotal role in the economic development of emerging economies because their participation is higher in the industrial and commercial activities of these economies. Resource constraints and limited scope of the private sector in the early stages of development and planning have set the stage for predominance of the public enterprises in these economies. Thus, public sectors in the leading developing countries of the world (including the countries in the BRIC region) play a very important role.

Investments in public sector enterprises have also been greater and have continued to accelerate growth in core sectors of a developing economy (such as railways, telecommunications, nuclear power, defence etc). Many a times, public enterprises were created to operate in areas of national and international trade, consultancy, inland, and overseas communication and construction services; as a result, overall profits of the public sector have not been restricted to certain sectors. In other words, the public sector is a heterogeneous combination of basic infrastructure industries, industries engaged in providing trade services, consumer goods industries, et al.

Rapid industrialisation and infrastructure creation for economic development were the basic rationale behind setting up public enterprises. Governed by this rationale, the public enterprises were set up by the government to ensure easy availability of important articles of mass consumption, and to promote even distribution of income while keeping tabs on prices of vital products. Protection of workers’ interests was also one of the objectives as large number of enterprises was created from sick private sector enterprises (PSE) that were taken over. Promoting and ensuring that regions were developed in a balanced manner and earning foreign exchange by promoting import substitutions were some additional reasons for encouraging public enterprises.

In India and China, PSEs were key catalysts in capital formation in the early stages of industrial development. PSEs hold sizeable share in economic activity of a number of developed and developing economies - France, Japan, Germany, Italy, Australia, South Korea, China, Malaysia, Philippines, Indonesia, Sri Lanka, and India.

Policies governing the Indian public sector

• The Indian government passed the Industrial Policy Resolution 1948 that outlined the importance of the economy and its continuous growth in production and equitable distribution. In this process, the policy envisaged active engagement of the State in development of industries. The resolution stipulated that in addition to arms and ammunition, atomic energy and railway transport, which continued to be government monopoly, the State would exclusively be responsible for establishment of new enterprises in six basic industries - except the industries where in the national interest, private sector participation and cooperation could be allowed.
• The public sector in India assumed a strategic role in the Indian economy after the introduction of the Industrial Policy Resolution 1956. The public sector was built over massive investments over the past five decades. Enterprises that came into existence under this regime expanded their production successfully, explored newer areas of technology and build reserves of technological competence in number of areas. Moreover, after the initial investments by the government in important infrastructure areas, public enterprises expanded to all areas of the economy, which included non-infrastructure areas and non-core areas.
• The Industrial Resolution Policy 1956 also classified industries into three categories with respect to the role played by the State; the first category (Schedule A) included industries whose future development would be the exclusive responsibility of the State; the second (Schedule B) category included enterprises whose initiative of development would principally be driven by the State, but private participation would be allowed to supplement the efforts of the State, and the third category included the remaining industries, which would be left to the private sector. In 1969, the government nationalised 14 major banks.
• The Industrial Licensing Policy 1970 placed certain restrictions on undertakings belonging to large industrial houses defined on the basis of assets exceeding Rs 350 mn. In 1973, the definition of large industrial houses was adopted in conformity with that of the Monopolies and Restrictive Trade Practices Act (MRTPA) 1969 and included companies whose assets exceeded Rs 200 mn. This move intended to provide the government more effective control on concentration of economic power.
• The Industrial Policy 1977 provided greater interaction between agriculture and industrial sectors. The Industrial Policy Statement of July 1980 spelt out major policy initiatives such as XVIII optimum utilisation of installed capacity, correction of regional imbalances, high employment generation, promotion of economic federalism, and more importantly, focused on reviving efficiency of public sector enterprises through a time-bound programme of corrective action on a unit-by-unit basis.
• The next major policy initiated by the government was the announcement of the Statement on Industrial Policy in July 1991. This statement consisted of the following strategic decisions:
  
  
1. The entire portfolio of investments made in the public sector was to be reviewed with an aim to focus on sectors of strategic importance, sectors that were technologicallyadvanced and essential infrastructure sectors.
2. Reservations were retained for the public sector to a certain extent, albeit, without any restraint on area of exclusivity to be opened up selectively to the private sector.
3. The public sector was allowed entry into areas in which no reservations were made for it.
4. Sick public enterprises that are unlikely to be turned around were referred to the Board for Industrial and Financial Reconstruction (BIFR) and other such institutions that were created for the same purpose.
5. Interest of workers likely to be affected by rehabilitation packages were kept in mind through social security mechanisms created for this purpose alone.
6. Greater thrust was laid on performance improvement through MoUs signed between the government and enterprises.
7. The boards of these enterprises were given wider powers.

The above statement of Industrial Policy brought in fundamental changes in the MRTP Act as well. From 17 industries exclusively reserved for the State in 1956, the statement in 1991 revised the priority of the public sector to four major areas - essential infrastructure goods and services, exploration and exploitation of oil and mineral resources, technology development and building of manufacturing capabilities in areas that are crucial for long-term development of the economy and where private sector investment is inadequate, and manufacturing products where strategic considerations predominate, such as defence equipment.

At the commencement of the First 5-year plan (April 1951), there were five public sector enterprises with an investment of Rs 290 mn that rose to 246 with an investment of Rs 1,354 bn by the end of the Eighth 5-year plan (April 1992) period.

Post-reform performance of state-owned enterprises in India

In the background of economic reforms and a competitive business environment, the Indian public sector has been recording sustained growth in business along with a significant improvement in performance.

A study conducted by the World Bank in 2005 to assess the post-reform competitive performance of state-owned enterprises in India has drawn certain interesting results. The sample included 25 state-owned enterprises and 582 private companies operating in the manufacturing sector. The comparisons were drawn over the period 1992-2005.

1. Return on assets (ROA) of private sector firms remained more than that of their state counterparts. The ROA of state enterprises started becoming negative after 1995 and remained negative till 2005.
2. Efficiency of state enterprises calculated as value of output over production costs, although positive, remained below that of private companies during this period.
3. Indirect taxes were the single-largest business costs for private companies followed by expenses on salary during the above period. On the other hand, for state-owned enterprises, marketing costs were the highest costs during the earlier years and these costs declined during the latter part of the period.
4. The performance of all companies deteriorated over time with respect to efficiency, ROA, and return on sales. However, they performed their best on all three measures during 1993-1996, with their performance worsening during 1997-2000 and 2001-2005. Central PSEs (CPSEs) on the whole registered a strong performance during the Tenth 5-year plan (2002-2007). The numbers of profit-making CPSEs went up while the number of loss-making ones reduced. Granting complete autonomy to CPSEs remains an unfinished agenda before the government.

BRPSE revives CPSEs

The Board for Reconstruction of Public Sector Enterprises (BRPSE) was constituted to address problems relating to strengthening, modernising, reviving, and restructuring PSEs. A company is referred to the BRPSE if it is considered sick and has accumulated losses in any financial XX year up to 50% or more of its average net worth during the four years immediately preceding such financial year /or a company that is a sick company as per the meaning of Sick Industrial Companies (Special Provisions) Act, 1985.

The BRPSE has made recommendations in 47 cases including two for closure till Oct 31, 2007. The proposals for revival of 26 CPSEs and closure of two have been approved. The total assistance approved by the government up to Dec 2007 in this regard is Rs 82.8 bn including Rs 19.5 bn cash assistance and Rs 63.3 bn non-cash assistance.

Public investment declines in subsequent 5-year plans

The administrative machinery through which public sector plans are implemented has been continuously changing over the years. Performance-related incentives, establishment of special purpose societies and agencies, and establishment of companies mandated to perform special functions, are all elements of the plan implementation machinery that did not exist earlier. At the same time, some organisations that were earlier part of the public sector may have moved out of the public sector on account of privatisation as in the case with a few enterprises, both at the Centre and in the states.

The share of public investment in the country’s total investments declined over successive Plan periods - from almost 35% in the Eighth Plan to 29% in the Ninth Plan, to 22% in the 10th Plan. As per the Planning Commission, the share is expected to stabilise in the 11th Plan at the 10th Plan level; however, these rates of investments require to be supported by a buoyant domestic savings rate of around 35%. The 11th plan also envisages a dominant role of public policy across various sectors. These sectors include agriculture and rural development; education and skill development; health and nutrition; infrastructure development and the energy sector. Public sector enterprises at the Central government level have been allocated resources worth Rs 21,565.7 bn with state governments and Union territories have been allocated Rs 14,881.5 bn of resources for the 11th Plan period.

Per capita emoluments skyrocket in 3 decades

The Department of Public Enterprises (DPE) advises the administrative ministries/departments and CPSEs in matters relating to the wage policy and revision in pay scales of executives. CPSEs follow the Industrial Dearness Allowance (IDA) pattern pay scales with the Central Dearness Allowance (CDA) pattern in certain cases. The government policy relating to pay scales and pay pattern is that all employees of the CPSEs should be on IDA pattern and related scales of pay.

Gross emoluments of CPSE employees increased from Rs 4,150 mn in FY72 to an impressive Rs 123.11 bn in FY92, and further rose to Rs 525.8 bn in FY07. Per capita emoluments of such employees grew at a CAGR of 12% between FY72 and FY92. Again between FY93 and FY07, such emoluments registered a CAGR of 13.3%. A rise in the emoluments indicates the massive increase in employment and income generated by CPSEs over three decades.

Capital expenditure increases in public sector

The importance of the public sector is reflective of the capital expenditure expended for various growth and developmental activities. In India, the public sector has witnessed a healthy and robust increase in capital expenditure across various sectors, primarily energy. Sectors that saw substantial expenditure included agriculture and allied service; rural development and special area programmes; irrigation and flood control; energy; industry and minerals; transport; education, including medical education and health.

Planned outlay in the public sector almost doubled from Rs 2,102,030 mn in FY03 to Rs 4,412,850 in FY07. Investment in infrastructure in the public sector, at both the Centre and state levels, was 4.2% of the country’s GDP. As per Planning Commission estimates, the same is expected to be 6.4% of the GDP by FY12.

Public sector savings surge

Public sector savings, which consist of savings of government departments/enterprises (both Centre and state) contributed substantially to the country’s overall savings. In FY07, total Gross Domestic Savings (GDS) of the country stood at 34.8% of GDP up from 23.6% in FY03. While, PSU savings to the GDP rose up to 4% from 3.3% during the same period.

However, if government administrative departments are considered, public sector saving indicators reported a negative figure till FY03. Furthermore, post FY03, these indicators turned positive largely due to several policy initiatives undertaken by the government to improve the performance of PSUs.

MoU rating for CPSEs dwindle

The MoU, which is a negotiated document between the government and the enterprise that specifies objectives of the agreement and obligations of both parties, was designed to grant greater autonomy to CPSEs. Under the MoU system, performance evaluations are based on the annual targets agreed upon between the government and the CPSE. The performance of CPSEs, who have signed the respective MoUs, is evaluated at the end of the year based on achievements of the mutually-agreed targets. During FY07, 94 CPSEs signed MoUs with the government, while 19 could not submit MoU performance evaluation reports for the above period. Additionally, 143 CPSEs signed MoUs with the government for FY08.

Based on the performance, the companies are graded on a five-point scale, namely excellent, very good, good, fair and poor. The performance evaluation is broken into financial and non-financial parameters and both carry equal weights. Non-financial parameters are further sub-divided into dynamic parameters, enterprise-specific parameters and sector-specific parameters. The financial parameters generally relate to profit, size and productivity, the dynamic parameters refer to project implementation, investment in R&D and extent of globalisation.

Similarly, while the sector-specific parameters refer to macroeconomic factors like change in demand and supply, price fluctuations, variation in interest rates, etc, which are beyond the control of the management, the enterprise-specific parameters relate to issues such as safety and pollution, etc.

The number of CPSEs that were awarded excellent ratings reduced from 54 in FY04 to 45 in FY07. The organisations that were awarded poor ratings increased from two in FY03 to 94 in FY07.

Key highlights of the public sector in India

1. In FY07, the public sector, comprising administrative departments, departmental enterprises and non-departmental enterprises, constituted 21.4% of the GDP and 22.3% of the gross domestic capital formation. In domestic savings, on the other hand, the public sector had a share of 9.3%.
2. The share of the public sector in India’s GDS was -3.2% in FY00 and 9.3% in FY07.
3. The Gross Savings Rate of the public sector was 3.2% in FY07.
4. CPSEs account for more than 1/3rd of total revenue receipts of the Central government.
5. The net worth of all enterprises stood at Rs 4,530 bn (FY07)
6. CPSEs paid a dividend of Rs 268 bn in FY07.
7. The public sector accounted for 11% of the total merchandise exports and export earnings grew by 33% during FY04-FY06.
8. CPSEs reported a 53% growth in turnover during FY04 and FY07.
9. Net profits rose from Rs 695 bn in FY06 to Rs 816 bn in FY07.
10. Number of loss-making institutions decreased from 89 in FY04 to 59 in FY07.
11. Internal resource generation of CPSEs grew by 21.7% in FY07.

Issues and challenges being faced by CPSEs

Public sector enterprises in India have responded admirably post-economic reforms and liberalisation. Not only did they expand production and profit levels but also became an important choice of investment for global and domestic investors. Market capitalisation of the public sector enterprises in India constitutes a major portion of the total market capitalisation and several PSEs attract huge investor interest. These enterprises are growing in size and stature, XXV competing with the major competitors in domestic and international markets, by focusing on business growth and diversification as also profitability and productivity.

In future, the CPSEs will garner enough opportunities and will enhance their scope of strategy, apart from building their competitiveness through strong and proactive leadership, effective management, and efficient processes that govern business planning and development, and management of resources.

In recent years, the implications of corporate governance seem to have increased to significant proportions. Corporate governance includes policies and procedures adopted by a corporate entity in achieving its objectives with relation to its stakeholders, both internal and external. In the Indian context also, corporate governance is a major challenge for CPSEs, especially in terms of the number of independent directors that are required as per listing agreement norms. The Securities Exchange Board of India, for instance, in its review of compliance of the listing guidelines, named a few leading public sector enterprises for not fulfilling requirements about the number of independent directors.

Growing competition from the private sector within India and outside will pose new challenges, as existence of a level-playing-field will decrease the public sector’s opportunities for special privileges and concessions that some of them enjoy.