1. UNIT-III: PUBLIC SECTOR
AND PRIVATISATION

2. PUBLIC SECTOR ENTERPRISE
 A Public sector enterprise is an industrial,
commercial or other economic activity owned and
managed by the central or state Government or
jointly by both.
 International centre for public Enterprise(ICPE),
Yugoslavia defines a public sector as “ A public
enterprise is an organization which is
 1. owned by public authorities including central,
state or local authorities , to the extent of 50% or
more;

3.  2. is under the top managerial control of the owning

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


public authorities, such public control including the
right to appoint top management and to formulate
critical policy decisions;
3.is established for the achievement of a definite set
of public purpose, which may be multidimensional in
character;
4. is consequently placed under a system of public
accountability;
5.Is engaged in activities of a business character;
6.Involves the basic idea of investment and returns;
7. and which markets its outputs in the shape of
goods and services.

4. OBJECTIVES OF PUBLIC ENTERPRISES
 Help in the rapid economic growth and industrialization
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of the country and necessary infrastructure for economic
development.
Earn returns on investments and thus generate resources
for development.
Promote redistribution of income and wealth.
Create employment opportunities.
Promote balanced regional development.
Assist the development of small scale and ancillary
industries.
Promote import substitution, save and earn foreign
exchange for the economy.

5.  Act as a countervailing force and put up an effective
competition to undertakings in the private sector and
 Gain control over the commanding heights of the
economy.

6. Rationale for state owned/public enterprises
 At cheaper rates/control monopoly
 Capital formation
 Investment in infrastructure
 Lack of private incentive to engage in promising
economic activities
 To gain national control over strategic sectors.

7. Growth and role of public sector
Period
Total Investment
No. of Enterprises
I Plan
29
5
II Plan
81
21
III Plan
948
47
III ANNUAL PLANS
2410
73
IV Plan
3897
84
V Plan
6237
122
VI Plan
18150
179
VII Plan
42673
215
VIII Plan
135445
246
IX Plan
193121
242

8. ROLE PLAYED BY PSU’S IN THE
DEVELOPMENT OF OUR ECONOMY
 Share in National Income:
during 42 years (1960-61 to 2001-02) 1/4th of GDP
Doubled their share in GDP
 Commanding heights of the economy:
Command in all almost all strategic sectors of the
economy coal, oil, refining electricity, tele communications, iron and steel, paper, newsprint
and the like.
Where it controls more than 80% of total installed
capacity.

9.  Share in capital formulation:
Share of public sector in total investment(%)

10. SHARE OF PUBLIC AND PRIVATE IN TOTAL
INVESTMENT(%)
PLAN
PUBLIC SECTOR
PRIVATE SECTOR
I
46.40
53.60
II
54.60
45.40
III
63.70
36.30
IV
60.30
39.70
V
57.60
32.40
VI
52.90
47.10
VII
47.80
52.20
VIII
36.50
63.50
IX
34.70
65.30

11.  PSE’S AND EMPLOYMENT:
Minimizing unemployment 10% of the total
employment is in organized sector.
And90% is accounted for by the organized sector
 Export earnings:
Export earnings of PSU’s have favorable impact on
India's balance of payments condition.
 Balanced Regional Development
By locating themselves in backward areas, help remove
regional imbalances in development.

12.  Industrialization and Economic Development
 Encouragement to ancillary industries
 Resource mobilization
 Performance

13. Reasons for poor performance of public sector
enterprises
 Political interference
 High cost of Delay
 Fear of scams
 Head less plants
 Ineffective Management
 Huge Inventories
 Trade Unionism
 Unimaginative production and unfavorable pricing
policies
 Unutilized Capacities

14.  Other reasons are
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Wrong choice of locations
Uncertainty of financial allocations
Poor quality of products
High cost
Higher social costs
corruption

15. PUBLIC SECTOR REFORMS
 Reforms: The 1991 industrial policy brought the public sector
units on par with private units. Upto September 30, 2006,
296 cases of public sector units were referred to BIFR.
 Reforms: One of the major initiatives towards public sector
was to bring all public sector enterprises under the system of
Memorandum of Understanding (MoU), it gives clear targets
to PSUs and ensures operational autonomy to them for
achieving those targets.
 In 1997, the government identified 11 public sector enterprises
as Navaratnas and decided to give enhanced powers to board
of directors of these enterprises to facilitate their becoming
global players. IPCL & VSNL have since been privatized and
presently there are only 9 Navaratnas.

16. PRIVATISATION
 Privatization may be understood as the process
where by activities or enterprises that were once
performed or operated by the Government and its
employees are now performed, managed or owned
by private business and individuals, often with much
better results in terms of cost and quality of service.
Privatisation achieves these results by replacing
government monopolies with the competitive
pressures of the market place to encourage
efficiency, quality and innovation in the delivery of
goods and services.

17. OBJECTIVES OF PRIVATISATION
 To improve the performance of PSU’s so as to lessen
the financial burden on tax payers.
 Increasing size and dynamism of the private sector
 Distributing ownership more widely in the
population at large.
 Encouraging and facilitating private sector
investments, from both domestic and foreign
sources.
 Generating revenues for the state.
 Reducing the administrative burden on the state.

18. FORMS OF PRIVATISATION
 The first major programme of Privatisation was
adopted in UK, followed by France and many other
OCED Countries, former communist countries and
developing nations. These countries used one or a
combination of the following methods of
privatization.

19. FORMS OF PRIVATISATION
 Initial Public Offer: Under this method, the shares of public sector
undertakings are sold to the retail investors and institutions.
 Strategic role: In this method, government sells its shares in the PSU to a
strategic partner. As a result, the management passes over to the buyer.
 Sale to Foreigners: This is a variant of the strategic sale method, where the
buyer is not a domestic company but a foreign company
 Equal access voucher programme: This form of privatization involves
distribution of vouchers across the population and attempts to allocates
assets approximately evenly among voucher holders
 Management-
Employee buyouts- in this method of privatisation,
managements and employees themselves buy major stakes in their firms.

20.  Disinvestment:
The New Industrial Policy 1991,
advocated privatisation of public sector enterprises. For
privatisation, the government has adopted the route of
disinvestment, which involves the sale of public sector
equity to the private sector and the public at large.
 The government of India enunciated a policy to divest up
to 20 percent of its equity in select public sector
undertakings to mutual funds and investment
institutions in the public sectors as well as workers of
these firms.

21.  In his address to the joint session of Parliament in Feb 2001,
the President stated that “The governments approach to PSUs
has threefold objective: the revival of potentially viable
enterprises; closing down of those PSUs that can be revived;
and bringing down government equity in non-strategic PSUs
to 26 percent or lower. Interests of workers will be fully
protected through attractive Voluntary Retirement Schemes
(VRS) and other measures”
 The government has adopted two methods of disinvestment:
 i. selling of shares in select PSU’s and
 ii. Strategic sale of a PSU to a private sector company.

22. DISINVESTMENT OF EQUITY IN PSE’S
YEAR
TARGET
PROCEEDS
1997-98
4800
902
1998-99
5000
5371
1999-2000
10000
1860
2000-2001
10000
1871
2001-2002
12000
5632
2002-2003
12000
3348
2003-2004
14500
15547

23. PROBLEMS OF PRIVATE SECTOR
 Profit generation is the main motive
 Focus on consumer durables sector
 Monopoly and concentration
 Declining share of net value added in total output
 Infrastructure bottle necks
 Contribution to trade deficit
 Industrial disputes
 Industrial sickness
 Problems relating to finance and credit
 Threat from foreign competition

24. Regulatory Framework with Reference to
Insurance, Power & Telecom Sector:
 On the recommendations of the committee on
reforms in the insurance sector, popularly known as
Malhotra Committee, The Insurance Regulatory &
Development Authority (IRDA) was constituted as
an autonomous body reporting to Central
Government, to regulate and develop the business of
insurance and re-insurance in the country in terms
of the Insurance Regulatory & Development
Authority Act 1999.

25.  IRDA was formed with a mission, “To protect the
interests of the policy holders, to regulate, promote
and to ensure orderly growth of the insurance
industry and or matters connected there with or
incidental there to”.

26.  As on date there are 15 life insurance companies
including one public sector company and 14 general
insurance companies including 5 public sector
companies are regulatory by the authority.

27.  Regulatory Methodology: The authority has always
believed in openness and transparency, it has
followed the practice of prior consultation with
various interests. It has issued draft regulations and
guidelines, generated discussions on the various
issues and finalized its regulations in an open
manner. Many of the regulations have been looked
into by international bodies and found to match up
to world standards.

28.  ISSUES UNDER CONSIDERATION:
 General Insurance sector is heading towards de-tariff
regime by January 2007. Existence of tariff was
considered contrary to free market principles and
insurance products need to be priced based on
market forces.
 Health insurance in India is the thrust area for
providing insurance to one billion population of
India

29. Regulatory Framework for Power & Telecom
Sector:
 In mid 1990’s, reforms were introduced in two
important
infrastructure
areas
i.e.,
Telecommunication and power. Prior to 1990,
telecom sector was entirely Government owned. In
1991, ordinary telephone, which is considered as
basic service accounted for only 9.5 million for a
population of 846.3 million.

30.  The policy changes in the Telecom sector have come
in through two major policy reforms initiatives i.e.,
NPT 1994 and NPT 1999. Prior to this, the
telecommunication industry was regulated on the
basis of guidelines and regulations formulated under
the Indian Telegraph Act 1885, The NPT 1994
allowed limited opening for the private sector for
cellular services in metro areas.

31.  The major policy shift came when the government
set up in 1997 the Telecom Regulatory Authority of
India (TRAI) for the sector. The next major
development for the reforms was the New Telecom
Policy called NPT 1999. Under this policy the
government allowed more private sector investment
and competition with a view to provide most modern
telecom services to the people.

32.  The powers enjoyed by the TRAI were challenged
and the government issued an ordinance in 2000
and reconstituted the TRAI and also set up Telecom
Dispute settlement Appellate Tribunal (TDSAT).
This reduced the role and functions of the TRAI as
compared to 1997 Act.

33. POWER SECTOR:
 A shift in the power sector policies came during
1990’s with liberalization and opening of generation
for
private
participation,
concessions
for
independent power producers and undertaking of
reforms in the SEB’s In mid 1990s reforms of SEBs
were taken up with the liberalizing the SEBs and
setting up State Regulatory Commissions.

34.  To speed up the reforms & to provide for distancing
of Government from determination of tariffs, the
Electricity Regulatory Commission Act was enacted
in 1998. It created the Central Electricity Regulatory
Commission, The 1998 Act made uniform
organizational framework and scope for powers for
the state commissions to be set up by the state
Governments.

35.  The progress of reform was not uniform and some
states delayed in creating regulatory bodies and
restructuring of SEBs. Hence, the new Electricity Act
2003 was enacted by the Parliament replacing the
existing laws. It provides the roadmap for the
transformation of the electricity industry by taking
measures conclusive to its developments, promoting
competition, protecting interest of consumers and
supply of electricity to all areas and rationalization of
electricity tariffs.

36.  Establishment
of Regulatory commissions and
Appellate Tribunal as mandatory and transparent
regulatory framework are considered important
features of the Act.

37.  State
Commissions: the
powers of the state
regulatory commissions are similar to CERC in
scope, in respect to their respective jurisdiction. The
organizational
structures
and
the
role
,
responsibilities of the state commissions have been
laid down to achieve some degree of commonness
and consistency and for developing sustainable
regulatory framework.

38.  State level regulatory commission have a very
significant role in the Distribution reforms that are
envisaged under the Electricity Act 2003. The state
commissions have to act as the effective instrument
to regulate the power utilities in the distribution to
protect the interest of the consumers and also
promote competition.