Performance of the Public Sector Enterprises (With Suggestions) | Economics

It is usual to judge the performance of private sector units by the yardstick of net profit or loss since in their case, maximization of profit is the sole aim. This yardstick fails miserably in the case of public sector undertakings.

Such units are frequently started in those sectors where profitability is low and gestation period long. For instance, investment in infrastructure and basic industries is not likely to yield early returns and, accordingly, profits in the beginning are likely to be very low and in some instances, may even be negative.

Yet these investments serve important ends since they create the basis for expansion of industrial activities in the future. Investments made by the public sector in the steel industry, fertilizers, power projects, mining, etc., come under this category.

Then, in some cases, public sector provides inputs to the private sector (for example, iron and steel to machine building, tools, automobile industry, etc.) It is very easy for it to earn huge profits by merely hiking the prices of its output.

However, this is likely to have an adverse impact on the industrial activity in the private sector on the one hand, and push up prices on the other. Accordingly, prices are intentionally kept low even though this cuts into the profits of the public sector seriously. Also, as noted by Hazari and Oza, private sector has invested mostly in consumer and lighter goods which have been granted far greater protection against external competition as compared to capital goods which were mostly produced by the public sector and which faced stiff competition from imports financed by aid and foreign private investment.

Another point that needs specific mention is that the public sector is not merely capital-intensive and characterised by longer gestation periods; in steel, which accounts for the bulk of investment, it is also material intensive, and that extent its value added component is smaller than in items like, say, chemicals.

Because of considerations such as these, it is often maintained that the performance of the public sector units should not be judged by what they earn in the form of profits but by the total additions they make to the flow of goods and services in the economy.

Thus, instead of profits, the yardstick should be the total value of the sales of an enterprise. For instance, if an iron and steel plant produces steel worth Rs. 500 crores in a certain specified period but makes no profit because it aim is to provide steel at low prices to the industries using steel as an input, it would be wrong to say that its performance is disappointing on this count alone.

What is important from the point of view the industrial development of the country is the fact that this plant has added steel worth Rs. 500 crores to the social pool of goods and services obtaining in the country.

Expansion of the Public Sector and its Share in National Production:

Public enterprises in India constitute a major National capability in terms of their scale of operations, coverage of the national economy, technological capabilities, and stock of human capital. There are over a thousand public enterprises, about 700 of which are owned by the States. The rest are in the Central Sector.

These include departmental undertakings (e.g. railways, post and telecommunications, financial institutions, and non-departmental enterprises or government companies or corporations which are either incorporated under the Company Law (e.g. the Steel Authority of India and the Indian Petrochemical Corporation Ltd.) or statutorily created by Acts of Parliament (e.g., Coal India, Air India, Indian Airlines and the National Thermal Power Corporation).

There were only 5 central public sector enterprises at the commencement of the first Plan with investment amounting to only Rs. 29 crores. As on March 31, 1994, the number had risen to 240. Total capital employed in these enterprises, amounted to staggering Rs. 1,59,307 crores. Gross sales of public enterprises rose from Rs. 1,17,623 crores in 1990-91 to Rs. 1,33,268 crores in 1991-92. Value added rose from Rs. 31,922 crores to Rs. 35,312 crores over the same period.

As far as the share in national production is concerned, public sector enterprises play a pivotal role in the production of fuels, basic metal industries, non-ferrous metal industries, fertilisers and communication equipment. They contribute the entire output in the case of petroleum, lignite, copper and primary lead; about 98 per cent of zinc; well over 90 per cent of coal; more than half of steel and aluminium and about one-third of fertilisers.

The Question of Profitability:

Though we have pointed out earlier that profits are not the criterion for examining the performance of public sector enterprises, their financial performance is of wide interest and concern as they are set up at a huge cost to the national exchequer. Gross profit of these enterprises rose from Rs. 2,654 crores in 1980-81 to Rs. 18,438 crores in 1993-94. In the same period, net profits increased from Rs. 445 crores to Rs. 4,435 crores.

This shows that the profitability of public sector enterprises is not all that bad as many critics seem to suggest. However, the Economic Survey, 1994-95 notes that the profitability of public sector enterprises in terms of ratios of gross margins and gross profits to capital employed has not improved over the last ten years.

For instance, the ratio of gross margin to capital employed declined from 18.29 per cent in 1980-81 to 17.33 per cent in 1993-94 while gross profit as a proportion of capital employed declined from 12.10 per cent to 11.5 per cent over the same period. However, the ratio of net profit to capital employed which was 2.03 per cent in 1980- 81 rose to 2.78 per cent in 1993-94.

In a study published recently, R. Nagaraj has calculated self-financing ratios for the public sector and the private sector for the period 1960-61 to 1988-89. Self-financing ratio has been defined as gross saving as a proportion of gross capital formation and thus indicates the share of internal resource generation in financing investment.

This ratio for the public sector enterprises shows generally an upward trend, especially in the 1980s while that for the private sector shows a downward trend, with the two ratios converging to more or less similar levels of around 40 per cent towards the end of 1980s.

Employment and Labour Welfare:

As far as this criterion of the performance is concerned, the public sector seems to have done exceedingly well. It has contributed to a significant extent in improving the overall employment situation in the country and has acted as a model employer by providing the worker with better wages and other facilities as compared to the private sector.

The number of persons employed in the public sector enterprises stood at 23.05 lakhs as on March 31, 1991. The industrial sectors which have a sizable number of employees in the public sector include coal, steel, textiles, heavy engineering, and medium and light engineering.

The public sector enterprises have also spent a considerable amount on the development of townships around them. These townships were provided with facilities like schools, hospitals, shopping complexes, etc. A substantial sum of money is spent annually on the maintenance and administration of these townships and social overheads. The employees of the public sector enterprises also enjoy medical amenities, subsidized canteen facilities, transport and educational facilities, etc.

Performance of Public Sector Enterprises:

The economic and social responsibility of the State has led to the progressive enlargement of the public sector in India. The number of Centre’s public enterprises has increased from 5 in 1951 to 246 as at the end of 1995-96. The investment during the same period has increased from Rs. 29 crores to Rs. 1,75,000 crores.

The share of public enterprises in national income has increased from 10.66 per cent in 1960-61 to 26.0 per cent in 1995-96. Similarly, the employment in the public enterprises has gone up to 30.0 -lakhs in March, 1995. In brief; the public enterprises occupy an important place in the Indian economy.

As on March 31, 1996, there were 246 Central public Sector Enterprises (PSEs) owned by the Government of India. Out of these, 237 were operational enterprises with an employed capital of Rs. 1, 56,000 Crores and employed strength of 22.0 lakhs. Of these, 13 enterprises earned an overall net profit of Rs. 7,346 crores during 1995-96, 104 enterprises suffered net loss of Rs. 3,951 crores, and the remaining one enterprise making neither profit nor loss.

The performance of the operational PSEs could be assessed by considering their achievements in respect of the following:

1. Gross Margin:

Gross margin of PSEs which was only Rs. 2401 crores in 1980-81 went are Rs. 26,137 crores in 1993-94.

2. Percentage of Gross Margin to Capital Employed:

The percentage of gross margin to capital employed which stood at 13.19 per cent in 1980-81 went up to 17.3 per cent in 1993-94.

3. Depreciation and Deferred Revenue Expenditure:

The depreciation and deferred revenue expenditure went up from Rs. 903 crores in 1980-81 to over Rs. 9,000 crores in 1993-94.

4. Gross Profit:

The gross profit of the PSEs went up from Rs. 4,418 crores in 1980-81 to Rs. 19,000 crores in 1993-94.

5. Percentage of Gross Profit to Capital Employed:

PSEs have not been able to achieve high percentage of gross profit to capital employed. In 1980-81, this percentage stood at 7.79 and went up marginally to 11.82 per cent in 1993-94.

6. Net Profit:

In 1993-94, net profit of 240 PSEs are estimated at Rs. 3,396 crores as against net profit of Rs. 3,396 crores in the preceding year.

7. Non-Monetary Performance:

Public sector enterprises are not guided purely by monetary considerations. Their objective is to promote public welfare at large.

It is, therefore, suggested that the performance of the public enterprises should be assessed in terms of welfare criteria which involves the following considerations:

(i) Whether public enterprises have promoted welfare by providing essential goods and services at reasonable prices;

(ii) Whether public enterprises have generated additional employment opportunities;

(iii) Whether public enterprises have helped in the development of small-scale and ancillary industries;

(iv) Whether public enterprises have promoted balanced regional development; and

(v) Whether public enterprises have created the necessary infrastructure for the speedy growth of industries.

Non-monetary performance of the public enterprises has been very encouraging. The enterprises have created a base for industrialisation, regional development and promotion of public welfare. However, the rate of growth and the performance could have been better.

Reasons for the Poor Performance of Public Enterprises:

The following reasons account for the poor performance of the public enterprises:

(1) Underutilisation of Capacity:

A large number of public enterprises function at a capacity far below the rated capacity. Because of the underutilization of the plant capacity, there is wastage of material and manpower resources which leads to escalation of the cost of production. According to the 1994-95 Public Enterprises Survey conducted by the Bureau of Public Enterprises, capacity utilisation in 20 per cent units was between 50 and 75 per cent, and 20 per cent units showing capacity utilisation less than 50 per cent.

(2) Over-Capitalisation:

Input-output ratio obtaining in many public enterprises is unfavorable. Factors like bad location of project, inadequate planning, delays in the completion of project, surplus plant capacity, expensive turnkey projects, etc., lead to over-capitalisation of the public enterprises.

(3) Administrative Inefficiency:

Public enterprises lack the strong cadre of professional managers. In most of the public enterprises the common practice is to use bureaucrats as chairman, managing directors and managers, no matter how much inefficient or incompetent they may be to manage these enterprises.

(4) Price Policy:

The pricing policy of the public enterprises is not guided solely by profit motive but social consideration as well. Public enterprises have to keep the prices of their products low even when costs and prices have been rising. Now, it is being gradually realised that profit should be recognised as an index of efficiency.

(5) Takeover of Sick Units:

Public sector has taken over the management and control of several units declared sick in the private sector. Most of the loss making units in the public sector are the sick enterprises taken over by the government from the private sector.

(6) Less Remunerative Enterprises:

Most of the public sector enterprises are set up in those areas of production which have a very low rate of return on investment. These enterprises employ large capital and the gestation period is also too large. These enterprises are generally established in relatively backward areas, and this adversely affects their profitability.

(7) Higher Social Cost:

Public enterprises have to incur huge expenditure on social overheads like construction of labour colonies, development of townships, construction of roads, bridges, etc. Excessive expenditure on social overheads causes increase in total cost.

(8) Ministerial Interference:

The Parliamentary Committees and the Government do not allow the public enterprises to function independently. Purely political considerations have sometimes led to overstaffing, mismanagement and other inefficiencies, political interference also leads to unbalanced regional development of industries.

Suggestions for Improving the Performance of Public Sector Enterprises:

The following measures can be suggested for improving the performance of public sector undertakings in India:

(1) Managing of these undertakings should be entrusted to the trained and skillful personnel.

(2) The price policy of the public sector undertakings should aim at improving the profitability of the public undertakings. These profits can later on be used for the establishment of new enterprises, expansion and modernisation of the existing units.

(3) All-out efforts should be made to make fuller utilisation of the capacity in different enterprises. Possibilities of export promotion should also be explored.

(4) Public sector units should be allowed to raise larger deposits from the public. In fact, they have been allowed to raise public deposits up to 35 per cent of their share capital.

(5) Establishment of public enterprises be based purely on economic and social welfare consideration rather than political pressures.

(6) Disinvestment of a part of Government holdings in the share capital of selected public sector enterprises in order to provide market discipline and to improve the performance of the public enterprises.

(7) Sick public sector units should be merged together to make them economically viable units. There should also be restructuring of loss-making enterprises.

(8) Before the installation of these enterprises, pre-investment surveys should be conducted thoroughly. Delays in the installation of units should be avoided.

(9) The Sick Industrial Companies Act (SICA) has been amended to bring PSUs under its purview.

Strategy in the Eighth Plan:

In the framework of the New Economic policy, public sector enterprises have to play an important role as autonomous, competitive and efficient units to provide essential infrastructure, goods and services, development of natural resources and areas of strategic concern.

The initiative will consist of the following integrated strategies:

(1) Restructuring involving modernisation, rationalisation of capacity, product-mix changes, selective exit and privatisation to make PSEs viable, efficient and competitive.

(2) Introduction of new technology to improve competitiveness and efficiency.

(3) Establishment of new institutional set-up that is responsive to environmental change.

(4) Increase in autonomy and performance accountability of public enterprises.

(5) Changes in management practices of specific enterprises level to promote efficiency and resourcefulness.

In order to improve the performance of the PSEs, the following measures have been suggested:

(i) The public sector should make investment in those areas where investment is of an infrastructural nature which is necessary for the facilitating growth and development;

(ii) The public sector may withdraw from the areas where no public purpose is served by its presence;

(iii) The products of the PSEs, unless these satisfy the needs of the poorest in the society, should be priced as per cost and costing with full efficiency in operations;

(iv) Policy for sick public enterprises to be same as that for the private sector;

(v) Improving performance through the performance contract or Memorandum of Understanding (MoU) system by which management are to be granted greater autonomy and held accountable for results.

(vi) Disinvestment of shares in PSEs to raise resources and encourage wider participation of general public and workers in the ownership of the PSEs.