Problems of State Enterprises: 3 Problems | Business Management

This article throws light upon the three main problems of state enterprises. The problems are: 1. Autonomy for State Enterprises 2. Accountability of State Enterprises 3. Price Policy of Public Enterprises.

Problem # 1. Autonomy for State Enterprises:

The very object of constituting State enterprise as separate units in the form of Statutory Corporation or Joint-Stock Company is to preserve their autonomy in administration of their affairs. Departmental undertakings have to conduct their activities as per the usual government procedures. But the State enterprises are expected to display their operational efficiency and carry on their business as per the economic criteria.

Flexibility in policy making or compliance with official procedures and adherence to principle of commercial viability will be essential to the conditional and orderly progress of the public sector. Public sector undertakings cannot make worthy contribution to national income if they are subject to regimentation of Government control. Government interference in the working of State undertakings will certainly curb the spirit of initiative along the administrative authorities and executive personnel of enterprises.

The efficiency standard will be lowered if the State enterprises succumb to the pressures of the Government itching for interference in their affairs to gain some political ends. The administration of State enterprises should be guided by motives of efficiency and socio-economic justice to be carried out within the broad framework of public policy consistent with the canons of sound business management. The commercial aspect should not be lost sight of in an attempt to extend the area of Government ownership and control over business enterprises.

The viability and efficiency of any business undertaking will depend on the initiative and drive of the management. This can be ensured only if the Government owned enterprises are immune from interference by the Government.

“The greatest disadvantage in Government ownership of business is the tendency for political considerations to impair the securing of economic results”. Hence autonomy should be guaranteed by the Government to its industrial, commercial and service undertakings, as a condition conducive to their successful working.

Although autonomy is implied in the very concept of public corporation, in practice there creeps in a tendency on the part of the Government and the Parliament to limit the powers of the Board of Management of the Public Corporation and Government Companies. Ministerial instructions on minor or routine issue, political pressures in respect of appointment of the staff, demoralising criticism of the enterprises by Parliament, comments in the Press etc. have made autonomy a mere farce.

There seems to be little of much professed autonomy of the corporation and companies. This is obviously regarded as an unhealthy trend. Government control should be confined to matters of general policy. State enterprises, according to an FCAFE report, function more successfully when control by the Government over them is restricted to only issues of vital policy.

In the words of Herbert Morisson “a large degree of independence for the Board of Directors (of State enterprises) in matters of current administration is vital to their efficiency as commercial undertakings”.

Autonomy for Public enterprises means that the State should safeguard national interest without encroaching upon the administrative independence of the Boards and usurping their managerial responsibility. Once the undertaking is set up either under a Statute or under Companies Act and its Board of Management has been nominated the Government should desist from undue inquiry into its affairs or exerting pressure on its decision making function.

Autonomy to Public Sector undertakings implies the following:

1. Freedom to take decisions in respect of the business or allied activities in order to promote growth, enhance efficiency and maintain economic viability.

2. Authority to make appointment of the staff at different levels and to regulate their service conditions.

3. Independence from financial dependence on allocation in Government budget and immunity from the control of the Treasury over its financial operations.

4. To provide suitable scope to the management for showing its initiative and enterprise and recognition of the independent status of the officers.

5. Direction and control by political officers should be avoided except on occasions when public interests underline the inevitable need for such interference by the Minister and Government agencies.

6. Ministerial directives should be confined to broad aspects of policy, the sanction of additional issues of capital, undertaking of extensively costly capital construction projects, etc.

7. Maintenance of secrecy of transactions carried out with bona fide objectives of serving public interest and insulation of officers against undue criticism by Parliament, Press and the public so as to keep their morale and enterprising spirit.

Autonomy in the sense indicated above has been accepted as one of the basic principles of public sector organisation in India. But it has proved difficult to maintain autonomy in practice because of bureaucratic traditions dominating our administrative set-up.

Firstly most of the State enterprises, though technically created by parliamentary statute, have been nurtured right from their inception by the bureaucratic groups in the concerned Ministries. Thus these enterprises are looked upon by the officers of the Ministry. They are apt to exert control over the management of these concerns by informal and formal methods.

Secondly, due to dearth of managerial talent in India, the affairs of an undertaking wherein the Government has invested large capital cannot be safely left to autonomous bodies. Autonomy would have been effective if an undertaking is assigned to the charge of competent managerial personnel. But due to absence of technical-know how and practical aspects of business experience, the Boards of Management of many public corporations and Government companies obviously dominated by senior officers of civil service.

Such Boards cannot function independently, but are often obliged to toe the official line, i.e. the whims of the concerned Minister. These officers are described by former Author General as birds of passage, who look forward with hopeful expectations to the lams of office which the central secretariat alone can offer.

Even the Government companies registered under the Companies Act, supposed to be free from routine administrative procedures have not been able to retain their autonomy because of the nomination of permanent officials to the top positions in such companies.

The non-officers on the Boards are minority and those of them drawn from industry or trade are riot interested in the success of the policy of nationalisation; they have no financial interest and hence are least concerned about their efficiency. Thus the officers included in the Board are prone to consult the Ministers on all the matters of decision and direction. Autonomy thus has become a fiction in the government enterprises.

Managing Directors or similar Chief Executives appointed to administer the state enterprises are not endowed with adequate authority appropriate to the responsibilities expected of them. These trends in effect lower the efficiency of the enterprise. Hence autonomy in administration should be one of the important norms of organising public sector enterprises.

The Objectives of Autonomy:

The objectives of ensuring autonomy are as under:

1. To avoid red tapism and bureaucratic methods in the management of industrial and commercial enterprises.

2. Enabling the management to show initiative and drive essential for intrinsic progress of state ventures in industry and trade.

3. Conducting the internal administration of the enterprises according to commercial principles through quick decisions and prompt follow-up actions.

4. Prevention of malevolent effects of favouritism, political pressures and ensuring that management is carried on without fear or favour of any department or Ministry in the Government.

5. Rendering standard services to the users or customers by elastic policies suited to their convenience and adjustable to the trends in the market, changes in technology etc.

Shri A.D. Gorwala in report on Efficient Conduct of Public Enterprises has emphasised that autonomous authority should be the ideal method or remedy for solving the problems of all State undertakings except a few activities like defence industries, railways etc. which can be entrusted to departments. Parliamentary and Government control should be confined to what is absolutely necessary for the public aims.

Dr. Paul Appley pleaded for quick adaptability in the functioning of Government enterprises. The Government regulations should be changed in order to enable these enterprises to take quick decisions and timely action.

The Chagla Commission appointed to inquire into the dealings of Life Insurance Corporation in 1957 has made useful suggestions for ensuring autonomy in the working of Public corporations. The One-Man Commission held that Government should not interfere with the working of the corporation except by means of statutory directions to be given under the provisions of a particular Act.

Public corporations should be given complete independence to manage their day-to-day administration. They should be left free to execute the programme in the interest of the public. Government can control them by means of directions wherever a policy of public interest is involved.

Important suggestions of Chagla Commission regarding autonomy are summed up as follows:

(1) Government should not interfere with the working of autonomous Public corporations. If they wish to do so they should not shirk the responsibility of giving directions in writing.

(2) Executive officers of the corporations appointed from amongst the civil servants should be impressed that they owe a duty to the corporations and they are not to be influenced by Government departments and they should not surrender their judgement to them.

(3) Parliament should be informed whenever the Government desires to issue special directions to the corporations.

Latest Attempts regarding Autonomy. Various committees and experts have opined that autonomy should be the golden rule of Government policy towards state enterprises.

Non-interference in day-to-day affairs, greater delegation of decision-making authority in critical areas, and appointment of more professionals on management boards have been stressed by them to ensure flexibility, faster initiative and enforce performance standards.

Commercial viability of state enterprises would depend on meaningful autonomy and decentralisation of authority in respect of capital expenditure, resource mobilisation, personnel selection and development. Recently the Sen Gupta Committee has pleaded for effective autonomy.

It has suggested that greater powers to be given to management boards to incur capital expenditures, core sector enterprises (coal, petroleum, gas, steel aluminum, etc.) should have close interaction with the Governmental agencies and their plans be integrated with national economic plans.

Limit of discretionary capital expenditure should be raised and proposals involving Rs. 25 crores and above should be brought before Public Investment Board and between Rs. 5 crores and Rs. 25 crores before Expenditure Finance Committee and below Rs. 5 crores left to the management.

Tenure of managerial executives appointed by the Government should be increased to 5 years. Holding company should be adopted to recognise one sector units. Many of these measures are being implemented by the Government.

The Administrative Reforms Committee suggested radical changes in the organisational set-up of State enterprises. It called constitution of Sector Corporations under which certain industrial enterprises should be grouped.

Sector Corporations were to be given authority to plan and coordinate the activities of the constituent units. The Government did not accept the recommendation for setting up Sector Corporations but has generally agreed to the idea of autonomous powers to be granted to state enterprises in general.

Main Functions of Sector Corporations:

Main functions of the Sector Corporations as recommended by the committee were as follows:

(a) Training of Personnel.

(b) Research of Consultancy.

(c) Sales Promotion.

(d) Common service necessary for individual units in case multi-unit enterprises are setup.

(e) To secure largest degree of decentralisation of authority consistent with the proper discharge of their duties by the Corporation.

(f) To make appointments to posts below the Board level and appointment of Chief Executive.

For the above discussion, it can be said that autonomy to the maximum possible extent should be granted to public enterprises subject to overall control by Government and Parliament, so that economic efficiency and social equity can be achieved.

Problem # 2. Accountability of State Enterprises:

State Enterprises are constituted and operated to render economic and social services to the people. They are expected to be reasonable and equitable in their administrative, financial or price policies so that the consumers, workers and the general tax-payers in the country are given a fair deal.

Commercial freedom granted to the State Enterprises as autonomous units is subject to checks and balances imposed by the Statute to subserve common good and ensure justice to all the classes in the socio-economic organism of the country.

According to Robson, “efficient Public Corporation must conduct its affairs with a true sense of account ability to Government, to Parliament, to its staff, labour and to consumers.”

Though the State enterprises are independent entities, they have to shape their affairs consistent with the objectives of the state policy and the functions expected of them under the statutes that created them.

Thus public accountability of State enterprises is essential to bring about social democracy where a balance has to be struck between strict managerial efficiency and socio-economic justice. Public accountability is an imperative necessity because there is divorce between ownership and management.

While the enormous capital belonging to the tax-payers is invested in them, their management lies in the hands of a band of officers who have no commercial or pecuniary interest in the efficient working of the enterprises under their charge.

Public interest is likely to be ignored by the bureaucracy and the entire economy may turn into a system of State capitalism rather than that of socialist democracy. The Parliament representing the people with all shades of interests—consumers, labour, tax-payers, subscribers to Government funds, etc.—should have authority to exercise control over the working of the Government-owned undertaking.

It should be the responsibility of the Government and the concern of the Parliament to see that the funds committed to the use to the State undertakings are productively utilised, the services they render to the public are satisfactory, the prices they charge are reasonable and their general policies are conducive to further growth. Hence State enterprises are answerable to the Parliament, the Government and the society for their efficiency, performance and equitable policies.

Meaning of Accountability:

By Accountability we mean the procedure of answering for one’s conduct of performance to the appropriate authority. Literally speaking, it means rendering of accounts, statistics and reports. But the basic idea underlying the formality of accountability is exercise of control over the enterprises with a view to judge their performance as per the prescribed standards of expectation.

“It comprises the control of the State enterprises directly by the Parliament and indirectly through the Minister concerned and also making the management responsible and answerable to the Minister and through him to the Parliament.”

Maintenance of accounts, compliance with the audit procedures and submission of reports to Parliament constitute an important aspect of public accountability. Restrictions on capital expenditure, prescribing rules regarding raising and utilising finances, regulations relating to, appointments of top officials issuing of directives to the management to follow or change particular policies or programme are also the facets of accountability of State enterprises.

Another important aspect of accountability is to give opportunity to the Parliament, the Press and the public to discuss, criticise and evaluate the working of the undertakings. Accountability is an administrative method of assuring responsible performance on the part of undertakings.

Public Accountability involves the following formalities:

1. Appointment of Board of Management and the Chief Executive.

2. Approval of the budget and financial estimates.

3. Prior consent of the Government for capital expenditure.

4. Instituting inquiries into their working.

5. Right to frame rules and regulations regarding the activities of the enterprises and procedures to be adopted in keeping accounts, preparing financial statements, disposal of surplus, maintenance of reserves etc.

6. Issuing directives to guide the functioning of the enterprises on matters involving policies of the state.

7. Discussion about their working in Parliament through general debate, specific questions, etc.

Objectives of Public Accountability:

1. To bring about consistency in the implementation of policies by the Government.

2. To facilitate coordination of their activities with the related programmers.

3. To ensure that the enterprises conduct their affairs efficiently in accordance with law.

4. To make available sufficient informative data to the Parliament and the public so as to enable them to evaluate the effectiveness of their working.

5. To impose rules and sanctions on them to secure accomplishment of the objectives expected of them.

6. To prevent the misuse of public money by the management of the undertaking through audit and administrative checks.

7. To protect the interests of consumers and to assure a fair deal to the personnel.

Views of Expert Committees on Public Accountability:

The Gorawala Committee makes it clear that the autonomous authority should be constantly watched by the Government through the relevant department. The Parliament should have scope for full-length debate on the working of the Public Corporations whose accounts and reports are submitted annually.

Shri Gorawala also suggested that the Minister in-charge should have powers to appoint the Chairman and members of the Board. The Minister should have authority to issue directions of general character in matters of public importance.

The Krishan Menon Committee opined that the structure, management and policy of the public undertakings should be such as to arouse patriotic fervor and a sense of national ownership and pride.

The Minister concerned should have special powers of sending instructions to the boards of management of the undertakings in order to secure their action consistent to tender guidance on any specific issues with correct appreciation of the constitutional obligation.

The most important suggestion of this committee was to constitute a special committee of Parliament to examine the working of the Government undertakings.

The FCAFE Seminar also concluded that Government control over public enterprises was essential but it should take the form of board directives in matters like development programmes, capital outlay and basic issues policy.

The Administrative Reforms Commission made far-reaching recommendations regarding accountability of public undertakings, in order to make them powerful instruments for achieving social and economic objectives announced by the Government from time to time.

The Commission, while undertaking the need for guaranteeing autonomy to the undertakings, opined that some powers should be reserved to the Government for exercising effective control over their working.

Following powers were recommended to be exclusively vested in the Government:

1. To appoint the Chairman of the corporation and the Government representatives on the Board of the corporation.

2. To appoint in consultation with the chairman other members of the Board.

3. To give direction to the corporation as to the exercise and performance of its functions in matters involving national security or substantial public interest and to ensure that corporation gives effect to such directions.

4. To call for such returns, accounts and other information with respect to the property and activities of the corporations as may be required from time to time.

5. To authorise the amount of capital to be raised and the terms and conditions on which it may be raised.

6. To approve the capital budget of the Corporation and annual plans of development.

7. To approve the revenue budget if there is an element of deficit to be covered out of Government funds.

8. To approve agreements involving foreign collaboration proposed to be entered into by the Corporation and to approve purchases and contracts of a major nature involving substantial capital outlay.

To make the parliamentary control more effective the Commission suggested that a specified number of days should be earmarked for discussion of the working of public sector undertakings.

It has also been suggested that the Annual Reports of the undertakings should contain explicit information relating to quantity and quality of the output, utilisation of labour, materials, installed capacity, etc. and refer to future plans of expansion of business, steps planned to reduce costs and give out a comparative account of their performance during previous and current years.

Problem # 3. Price Policy of Public Enterprises:

Price-fixation has been a critical issue in the management of public enterprises. Pricing in a private undertaking is not riddle with any ideological considerations. Because private enterprises aim at maximisation of profits and as such they charge competitive rate for their goods or services and would bring them bigger margin of profit after covering the operational and overhead costs.

But public undertakings are not expected to pursue a policy of profit- maximisation, since the very ideology underlying the evolution of public sector is maximisation of economic welfare. They are to be run on commercial principles and be in a secure position to furnish the necessary quantity of goods or services demanded by the community, at price that would have prevailed in a perfectly competitive market.

Public enterprises operating essential utility services like water supply, electricity, railways, etc. have to be sensitive to their social obligations and at the same time they have to exhibit the same degree of efficiency in their working as the competitive private enterprises would have shown in catering to the public conveniences.

Most of the public enterprises are in a monopolistic position and hence they have to pursue a price policy consistent with the welfare of the community without indulging in monopoly gains at the cost of the consumers or of the tax-payers.

In capitalistic economies, it has been argued that public enterprises have to maintain a justifiable level of profitability on the basis of the efficiency attained and the maximum satisfaction meted out to the consumers. It is therefore, suggested that ideal allocation of resources will not be disturbed if public enterprises in competitive spheres aim at a normal margin of profit by charging prices reflecting real costs. If they can economies costs, enhance their efficiency and thus proportionately reduce their prices, then it would lead to maximisation of economic welfare.

Charging prices less than competitive market prices without corresponding reduction in costs or increase in efficiency is bad economics whatever be the social or political advantages. But in case of public utilities which even in capitalistic economies function as monopolies, profitability may not be the sound criterion of pricing. Because profit does not necessarily indicate the competitive efficiency.

Therefore, public utilities should base their price policy on the principle of “No profit no loss”. Prices should cover all costs including capital charges but should not contain an element of profit while losses should be avoided.

In socialist countries like U. S. S. R., pricing policy is regarded as subservient to fulfilment of planned objectives and profit as is understood in capitalistic sense is secondary. Of course the office-bearers of every state enterprise in U. S. S. R. are expected to generate scheduled surpluses which go to swell the state revenues utilisable for providing goods, services, housing, educational and similar facilities to the people.

Prices are arbitrarily fixed in manifold schedules ordinarily based on average costs in respective industries. As such, there may occur losses in some enterprises. But, by and large, with due regard to economy, enterprises are ordained to manoeuvre their operations in such a manner as to fulfil the planned targets with minimum losses, if unavoidable.

In underdeveloped economies, pricing cannot be either based on competitive profit-making or completely free from market considerations. Public enterprises in underdeveloped countries are mostly free from competition as state starts new ventures. Even private enterprises are assisted by the state through subsidies, tax rebates, low-interest loans, protective tariffs, technical guidance, etc.

Public enterprises are motivated by considerations of initiating process of economic growth, utilisation of idle resources, supplementing the efforts of existing private enterprises or filling in the gaps in the economy.

Accordingly the concepts of market and competitive pricing cannot be totally applied to price policy of public enterprises. Pricing is to be based on unit costs. Unit-wise prices are fixed as to cover the corresponding costs. Utilisation of full capacity and consistent supply of goods or services would be the prime objectives in pursuing pricing policies.

Even in case of public utility services prices are charged according to the principle of what the traffic will bear. If prices are less and no profits are earned the consumers are benefited. But money required for expansion of the undertaking has to be met by taxes public loans etc. which certainly impose indirect burden on the consumers. Hence, public enterprises in underdeveloped countries, it is felt, may be used as a means of increasing non-tax revenues of the state through prices that would bring some profits.

These profits can be utilised for expansion of the same enterprise or invested in other desirable developmental activities. The method of price-fixing as followed in U.S.S.R. is also not workable in underdeveloped countries because the planning authority has no comprehensive control or grip over the entire economy to undertake such statistical process of evolving varied price schedules.

In a mixed economy, as is found in underdeveloped countries, market cannot be totally ignored. Trends in the market are used by the planners as a part of the data in price-fixing process. Financial requirements of the plan, market demand, ideal of social justice, administrative burden are among many factors reckoned in pricing apart from operational and capital costs.

As Hanson puts it, “pricing (in underdeveloped countries) is conditioned by the unplanned or imperfectly regulated behaviour in other parts of the economy”.