Forms of Public Enterprises with their Merits and Demerits

Forms of Public Enterprises with their Merits and Demerits!

Public enterprise stands for a concern owned and managed by the State or any other public authority. It also broadly refers to nationalized industries and institutions, which are engaged in production or supply of services.

In recent years, the Central and State Governments in India have established many public enterprises conforming to the Industrial Policy Resolutions of 1948 and 1956. The trend also has been in the direction of expanding the public sector. In view of this, the public enterprises are expected to play a much greater role in the coming years.

The public enterprises are organized by the following one or the other of the three important forms:

1. Government Department

2. Public Corporation

3. Government Company

1. Government Department:

This is the oldest and a traditional form of running any activity by the government and is freely extended to the State or Central enterprises such as railways, posts and telegraphs, and defense.

The principal features of this form of organization are as follows:

i. The enterprise is managed by one of the departments of the government.

ii. The minister in charge of that department has direct control on the enterprise.

iii. It is financed by the annual budget appropriations passed by the legislatures and its revenue or its major portion of income are paid into the treasury.

iv. Being treated as a government department, it is subject to the same rules and regulations as applied to any other government department with regard to budgetary, audit, and accounting controls.

v. The enterprise like any other government department is managed by the full-fledged government employees.

Merits:

Some of the merits of this form of organization are as follows:

i. It enables the government to produce some commodity or render some service without losing control over the enterprise.

ii. It provides service without losing control over the enterprise.

iii. It functions as government’s economic and social objective.

iv. It may also help the government to earn maximum revenue or maintain a service to society at the minimum possible cost.

v. Further, if the public is dissatisfied with the working of an enterprise the matter can be immediately raised in the Parliament and thus it is an advantage from the point of view of the public.

Drawbacks:

As against the above-mentioned merits of departmental form of organization, there are certain drawbacks from which it suffers.

They are as follows:

i. There is lack of initiative and flexibility, which are quite essential for the efficient running of the business.

ii. There is unusual delay in arriving at a decision, which has to be passed by many officials at different levels. The bureaucratic formalities are not conductive to speedy action.

iii. The enterprises that are run by the department are at the mercy of the political parties and ministers who do not possess knowledge of the enterprise and of its problems.

iv. Very often, the business undertakings are run on the basis of political and other considerations rather than on business considerations.

v. The management of the enterprise is left in the hands of the civil servants that do not possess technical knowledge and hence the enterprise may not be managed efficiently.

vi. Frequent transfer of officers is not conducive to formulating long-term policy and the efficient management of the public enterprise.

vii. There is generally a tendency not to take losses seriously. If there were losses, no attempt would be made to improve the efficiency or liquidate the unit as would be done if the enterprise was privately owned.

viii. Another drawback is that generally this form of organization is extended to monopoly fields only. When there is monopoly the interests of consumers are not protected.

However, with all its drawbacks, this form of organization is considered suitable for such industries which require secrecy and strict government control, e.g., defense industry. It is also considered suitable if full control on economic activity is considered necessary whether as a normal feature or during the period of emergency.

2. Public Corporation:

Public or statutory corporation became very popular as an organization immediately after the First World War.

The principal characteristics of this form of organization are as follows:

i. It is a corporate body created by a special law of the country, defining its objects, powers, functions, privileges, its relationship to other government departments and so on.

ii. It has separate legal entity and can sue and be sued and can enter into contract in its own name.

iii. All its capital is subscribed by the State and it has shareholders in the ordinary sense of the term.

iv. The employees of public corporation are employed and remunerated independently by each public corporation. The employees are not government servants, and civil service rules are not applicable to them.

v. It is ordinarily subjected to the budget, accounting, and audit procedures applicable to government departments.

vi. It is managed by a board of directors or a single executive. The chief executive or members of the board are nominated by the government.

vii. It is usually independently financed. It is set up with a capital of its own, use and re-use the revenue derived from the sale of its goods and services.

viii. It is generally free from most regulatory and prohibitory statutes applicable to expenditure of public funds.

ix. One more important feature is that unlike a private undertaking, public corporation works primarily for service, and profit is only a secondary consideration.

Examples of this type of organization in India are the Life Insurance Corporation of India, Indian Airlines Corporation, Air India International, Damodar Valley Corporation, and Tourist Corporation of India.

Some of the merits of public corporation are that it follows a middle course between the departmental organization with its rigidity on one side and privately owned companies on the other side. It attempts to create initiative in planning and execution, autonomy in finance and freedom from the rigid and persistent control and regulation by the government.

In the words of President Roosevelt, “Public Corporation is clothed with the power of the government but possesses the flexibility and initiative of private enterprise.” Herbert Morrison described it as a combination of public accountability and business management.

Further, as it is free from the restrictive laws of the government, it is in a position to follow the best commercial practice in carrying on its business. Again its autonomy lends a great deal of flexibility to its operation leading to greater efficiency of management.

While the public corporation has eliminated many weaknesses of the departmental organization, certain problems have been encountered in its management. According to ECAFE Seminar Report, autonomy and flexibility may be secured at the cost of public accountability. The same report also observes that the tendency of some public corporations is to disregard statutory or constitutional limitations on the government’s borrowing authority and budget laws.

Further, the constitution of corporation is rigid and any change in its power and function requires amendment to the statute. Despite these weaknesses, the public corporation “is destined to play an important part in the field of nationalized industries in the realm of capitalist organization in the nineteenth century. In fact, all political parties now accept the public corporation as being the appropriate instrument for operating nationally owned undertakings of commercial or industrial character.”

3. Government Company:

The Companies Act of 1956 defines a government company as any company in which not less than 51 per cent of the share capital is held by the Central Government or by any State Government(s) or partly by Central Government and partly by one or more State Governments. Government Company may be registered under Companies Act as a limited company, but it is not bound by the same provisions of the law.

The capital of Government Company may be either subscribed entirely by the government or partly by the government and partly by the public. When the public also subscribes to the share capital of the company in which the government holds not less than 51 per cent of the share capital, such a company is called mixed ownership corporation.

The chief characteristics of a government company organization are as follows:

i. Government Company has most of the features of limited company organized in private sector.

ii. All the directors or majority of them are nominated by the government depending upon the extent of participation of private capital.

iii. The entire capital or 51 per cent or more of is held by the government. With the latest amendment to Companies Act, 1956 the share capital of the government is reduced to 26 per cent in government companies.

iv. Generally, it is free from the budget, audit, and accounting laws that are applicable to other departments.

v. It can sue and be sued in a court of law. It can also enter into contracts and hold property in its own name.

vi. Generally its employees are not civil servants of the government and they are recruited independently by the government company.

vii. Funds of the government company comprise the contribution from the government and in some cases private share-holders and revenues derived from the sale of its goods and services.

The company form is usually adopted for any one of the following reasons:

i. Government may have to take over the existing enterprise in an emergency created by a financial or an employment crisis.

ii. The State may wish to launch an enterprise in association with private capital.

iii. The government may wish to start an enterprise entirely as a public venture or to run a concern as public enterprise.

Advantages:

i. Flexibility is the greatest advantage of this form of organization. Articles can be drawn up and altered without a lengthy procedure that is prevalent in the case of public corporation.

ii. When compared to public corporation, it is easier to form a government company, and the time involved in its formation also is very little.

iii. The autonomy of management is greater in Government Company when compared to public corporation.

iv. If foreign capital and know-how are required for starting an enterprise, this form of organization is subjected.

The principal defects from which the company form of organization suffers are as follows:

i. It evades constitutional responsibilities of a State enterprise.

ii. The separate entity and autonomy of management exist only in name. In reality, most of the functions normally vested in the shareholders and the management are reserved to government.

iii. As it is governed by the rules laid down in the Articles of Association, it is free from government audit. Hence it is criticized that to constitute a State-owned enterprise in the form of Government Company, is to commit a “Fraud on the Companies Act and on the Constitution.”

iv. As the directors are salaried persons they do not take much interest in the management of the concern.

v. Due to official domination, the incentive to efficiency and inclination to economy to economy may suffer a lot.

In spite of the many drawbacks of the company form of organization in India, most of the State enterprises are organized as government companies. Of the 76 Central Government undertaking at the end of the Third Plan period, 70 have been organized as government companies and 6 in the form of public corporation. Similarly, State Governments have shown preference for company form of organization.

Some prominent State enterprises that are managed in this form – the Hindustan Machine Tools Ltd., the Bharat Electronics Limited, the Hindustan Steel Limited, etc. The company form of organization is considered suitable for running commercial and industrial undertakings, or where the concern is financed by more than one government or where the capital has been subscribed both by the State and the public.