Compilation

Notes
Public Administration

PUBLIC SECTOR UNDERTAKINGS

 INDEX

1. Public Sector Undertaking

2. Forms of PSUs

3. Problems of autonomy, accountability and control

4. Organisation and methods

5. Work study and work management

6. Management Aid Tools- Network Analysis, MIS, PERT, CPM

7. Disinvestment
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Public Sector Undertakings

Definition

❖ Public Sector Undertakings are entities that are owned, managed or controlled by
national or state governments.

❖ Main objective: To deliver public goods and services at lesser rates (inclusiveness), quality
services, increase the industrial base and provide employment.

❖ Public Sector Undertakings may collaborate with private entities for the delivery of
Services.

Objectives

❖ Achieve the desired socio-economic objectives.

➢ Reduction in poverty, and unemployment and increase the nutrition level of the
country.

❖ Profits are utilised for the development of the country.

❖ The welfare of workers and society.

➢ Generally, PSUs from 1951 to 1991 functioning were based on Anti-Taylorism,

and POCCC (Fayol) or POSDCoRB (Gullick and Urwick) was not followed which led
to PSUs becoming loss-making.

❖ Welfare maximisation vs Profit Maximisation

Timeline of Events

❖ British rule left India severely underdeveloped.

❖ Negative perception towards Laissez Faire.

➢ Laissez Faire means Free-market economics.

❖ 1931 Karachi Session: Nationalisation of key industries.

❖ Political Freedom without Economic Freedom is fruitless.

❖ Mixed Economic model adopted after independence.

❖ Negligible private presence.

➢ Due to Licence-Permit Raj.

❖ Investment deficit in socio-economic sectors especially infrastructure.

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❖ Balanced social and economic development through planning.

➢ Five-Year-Plan was started

❖ PSUs: Shift from agrarian economy to industrial economy.

➢ Fred Riggs has talked about the Agraria-Transitia-Industria Society.

❖ Before Independence, there were few public-sector enterprises in the country.

❖ The Railways, the Posts and Telegraphs, the Port Trusts, the Ordnance Factories, and
All India Radio, and a few enterprises like the Government Salt Factories, Quinine
Factories, etc. were departmentally managed.

❖ Industrial Policy Resolution, 1948: The manufacture of arms and ammunition, the
production and control of atomic energy and ownership and management of railway
transport became the exclusive monopoly of the central government.

❖ The Second Five-Year Plan: The public sector was to function in accordance with the
socialist pattern of society. The public sector was expected to work as an instrument
for checking the concentration of economic power.

❖ The 1956 Industrial Policy Resolution gave a primary role to the state to assume a
predominant and direct responsibility for industrial development.

➢ This was the base for the second Five Year Plan and planning in the real sense
started from here.

❖ The Industrial Policy Statement of 1973 identified high-priority industries where

investment from large industrial houses and foreign companies would be permitted.

❖ The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on the
role of small-scale, tiny and cottage industries.

❖ The Industrial Policy Statement of 1980 focused attention on the need for promoting
competition in the domestic market, technological upgradation and modernisation.

❖ The policy laid the foundation for an increasingly competitive export-based economy
and for encouraging foreign investment in high-technology areas.

❖ On the eve of the Seventh Five-Year Plan (1985-1990), a broad-based infrastructure

had been built up, and basic industries had been established.

❖ Numerous policy and procedural changes were introduced in 1985 and 1986 (Arjun
Sengupta Committee Recommendations) under the leadership of the Rajiv Gandhi
 4

government which were aimed at increasing productivity, reducing costs and improving
quality.

❖ The focus was on opening the domestic market to increased competition and readying
our industry to stand on its own in the face of international competition.

❖ The public sector was freed from several constraints and given a larger measure of
autonomy.

❖ Post-1991 saw PSUs being privatised and the government gradually exiting from
sectors that were hitherto not possible.

Features of PSUs

❖ Government ownership:

➢ It is either totally owned by the government or the majority shares are taken up
by the government.

➢ Sometimes 50% of the share is owned by the government.

➢ Ultimate decision-making lies with the government.

❖ Government management and control:

➢ The autonomous body which is managed and owned by the government.

➢ The government controls and manages the organisation by appointing key

personnel. (National Power Training Institute).

❖ Public accountability:

➢ Operated by government funds.

➢ Accountable to the general public which is carried out by the parliament.

❖ Service motive:

➢ It provides service to the public.

➢ It provides goods and services to the public at reasonable prices.

➢ It is guided by service motive more than profit motive (a feature which has changed
over the years).

❖ Monopoly: The government has a monopoly in this sector.

❖ Separate legal entity: It is established under acts and is run under a law. It can purchase
and sell securities, can enter into any contract, can sue and can be sued.
 5

❖ Stability: It is generally stable and perpetual in nature as it has been set up by the law
and only a law can dissolve it.

❖ Flexibility in functioning:

➢ Government companies enjoy greater flexibility in their operations. There is greater

autonomy with these companies.

➢ Any decision can be taken easily and promptly.

➢ It can easily manage its internal matters.

➢ There is no instance of bureaucracy or red-tapism in these companies.

Advantages of PSUs

❖ Reduces monopoly of private entities.

❖ Better management of the country's natural resources.

❖ Economies of scale (Cost advantages)

❖ Labour interests are protected

❖ Affordable quality products for consumers

❖ Self-reliance: Hindustan Aeronautics Limited (HAL)

❖ Balanced production: Sustainable production compared to private entities.

❖ Reduced Exploitation of labour and the public.

❖ Better Accountability.

❖ Huge investments may not always be possible for the private sector.

Disadvantages of PSUs

❖ Lack of initiation and inefficiency.

➢ Theory X of Douglas McGregor.

❖ Monopolistic attitude of government.

❖ Political interference.

➢ PSUs are an example of why there is a need for a politics-administration

dichotomy.

❖ Indecisiveness and slow Decision Making.

➢ Multitudinous monarch because of the presence of government.

❖ Poor management
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➢ Absence of POCCC, POSDCoRB, Taylorism

❖ Slow Growth

➢ I.e. Social Man of Simon

➢ Soldering

➢ Satisficing not optimising

❖ Less Flexibility

➢ Weberian Bureaucracy→ More focus on rules and procedures

❖ Less Investment in innovation and R&D

➢ I.e- Closed system approach: No Feedback; One-Best-Way

❖ Rigidity in procedures

Arjun Sengupta Committee Recommendation

❖ Realising the critical role assigned to the public sector in the mobilisation of resources
for the Seventh Plan the government of India decided to set up a high-level committee
to review and suggest policies for improving the performance of public enterprises.

❖ This Committee, headed by Arjun Sengupta, then special secretary to the prime
minister, was set up in September 1984.

❖ The performance of a chief executive of a public enterprise should be evaluated on the

basis of an agreed set of clear targets.

❖ An appropriate information system capable of monitoring public enterprise

performance in terms of these targets should be developed.

➢ I.e. focus is on efficiency and economy (Classical thinkers).

❖ The Committee claims that from the point of view of planning and budgetary
management, public enterprises may be grouped as follows

➢ Enterprises operating in the core sector.

➢ Financially viable enterprises in the non-core sector,

➢ Enterprises in the non-core sector incurring losses.

❖ Government concern: overall strategic planning rather than day-to-day

administration.
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❖ The enterprises are accountable for their performance in relation to the goals set and
an appropriate mechanism for evaluation of their performance.

❖ "Management by objective" is accomplished by increasing the quality of controls and

reducing the quantity.

❖ In a parliamentary form of government, our public enterprises cannot be free from

governmental scrutiny of their general policies as well as some aspects of their day-to-
day operations.

❖ It is necessary to evolve a convention by which members of parliament accept some

self-imposed restraints on the nature of the questions they ask.

❖ United Kingdom - they found it necessary to pass the "Self-Denying Ordinance” which
limits governmental meddling by law and not by conventions.

❖ The committee argues that the only way to reduce governmental intervention in the
day-to-day operations of the enterprises is to create a holding company thereby,
eliminating the government's day-to-day contact with the enterprise.

❖ The Committee recommends that the concerned ministries should evaluate the
performance of holding companies under them.

❖ The Committee taking note of the suggestion made by some groups that there is no
need for representation of the government on the Board of Directors of public
enterprises, has however recommended that this practice should continue nevertheless.

❖ They argue that government directors are generally a positive source of help and
mediation between the government and the enterprises.

❖ It recommended a system of “Memorandum of Understanding” to improve the

performance of the PSUs.

❖ The Holding Company would also specify its plans for investments, production, capacity
utilisation, dividends, etc, for a 5-year period and, therefore, enter into a
memorandum of understanding with the government on a mutually agreed basis.

❖ Certain obligations would also be cast on the ministry or department regarding the
provision of equity, price level, etc.

❖ This memorandum of understanding would be reviewed each year and updated, and
the performance of the holding company judged on this basis, making due allowance
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for the failure or otherwise of the ministry or department to fulfil its part of the
understanding.

❖ It argues that the original objective of providing maximum autonomy in the day-to-
day management of public enterprise has not been met.

❖ The main culprits, according to the Report, are the specific clauses in the Articles of
Associations; Bureau of Public Enterprises; government guidelines and directions; the
procedures followed for scrutinising investment funding, etc.

❖ The Committee recommends that the tenure of chief executives and full-time directors
should be five years subject to a probationary period of one year and removal at three
months' notice for unsatisfactory performance.

➢ I.e. Stability of Tenure

❖ It recommends that disciplinary proceedings against board-level appointees is the

responsibility of the government.

❖ The government should consult the chief executive in appointing part-time directors.

❖ Each enterprise management must submit to its board of directors, once a year, a
manpower budget, the training or retraining plans for all categories of employees,
particularly the managerial cadres.

➢ Budgeting (Gullick and Urwick).

❖ In the case of a financially viable non-core sector, there is no need for detailed scrutiny
of investment proposals.

❖ The bonus should be linked to an increase in productivity at constant prices, not to

financial profits and losses.

➢ Taylor’s Differential Piece Rate System.

❖ The Committee says that a mechanism has to be found to compensate the enterprise
for the non-commercial burdens imposed by the government.

➢ I.e. Economic Man is ignored and Social Man is preferred.

❖ There are certain objectives that are common and these should form the basis for
general performance criteria.

❖ These general criteria may fall into four groups:

➢ Financial performance,
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➢ Productivity and cost reduction,

➢ Technical dynamism,

➢ Effectiveness of project implementation

❖ The Committee suggests the following three criteria to evaluate the financial
performance of public enterprises;

➢ Gross margin on assets (for all enterprises)

✓ Gross margin=Sales minus Operating costs

➢ Net profit & net worth (for core sector and profit-making enterprises)

✓ Net profit = Gross Margin minus depreciation minus interest.

✓ Net worth = Equity plus reserves

➢ Gross margin on sales (for service enterprises)

✓ Gross margin divided by sales

❖ Monitoring costs and productivity of core sector PSUs.

❖ The Committee has recommended dismantling PIS (Performance Information System)

and moving towards MIS (Management Information System).

❖ PIS is used by government bodies to monitor the socio-economically relevant behaviour

of its PSEs (Public Sector Enterprises).

❖ It guides managers to make decisions in the national interest.

❖ A conventional MIS provides managers with a wealth of details on standard costs,

inventory levels and a multitude of other factors which help them to control costs.

❖ The PIS, on the other hand, contains much fewer details in this area, being concerned
only with whether costs are rising or falling (and whether it is due to price or quantity
effects).

❖ The Committee recommends that the "performance audit" should be continued and
supplementary audit is not necessary for profitable non-core companies, once common
accounting policies are evolved.

❖ The Sengupta Committee endorses the occasional "postmortem", and "ex-post" studies
of the working of public enterprises by the Parliamentary Committee on Public
Undertakings.
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❖ The committee recommends that all major projects should include technology
adaptation programmes and for this purpose, the government should consider
providing part of this expenditure as grants.

❖ Loss-making enterprises are a burden on the public exchequer and, therefore, they
cannot expect the same degree of autonomy as financially viable units.

❖ The Committee recommends capital restructuring by converting debt into equity.

❖ Unless the public sector share of the market is such that the concerned public enterprise
is the price leader, there is no point in the public sector alone charging a price lower
than those of other producers.

Forms of PSUs in India

❖ Departmental Undertakings

❖ Public Corporations

❖ Government Companies

❖ Management Control Board

Departmental Undertakings

❖ It is one of the oldest forms of PSUs.

❖ It is organised, financed and managed in the same way as any other department of
the Government.

❖ Examples: Posts, Railways, Ports and Harbours

❖ Features

➢ The undertaking is a major sub-division or department of a Ministry in the Central

or State Governments.

✓ Union Government → Ministry → Departments (under Departmental head) →

Departmental Undertakings.

➢ It is financed by the annual appropriations from the treasury and its revenues are
paid into the treasury.

➢ It is subjected to budget accounting and audit controls.

➢ Recruitment, appointment and conditions of service of its permanent staff are

similar to other government employees.
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➢ The undertaking is under the departmental head who is answerable to the Minister
concerned.

➢ It enjoys sovereign immunity of the State.

❖ Merits

➢ It is effective in achieving the national objectives.

➢ It ensures maximum parliamentary control.

➢ The risk of misuse of public money is minimised.

➢ Enjoys monopoly

✓ I.e. there is no competition from other players.

❖ Demerits

➢ Lack of flexibility and initiative due to centralisation and red-tapism. Bureaucratic

control stifles (affects) venturesomeness (to try something new) and risk-taking
behaviour.

✓ Thus the focus is on

• Structure (classical theory),

• Showcases Theory X traits,

• Formalism in functioning

• Maslow’s lower-order needs

• Herzberg Hygiene Factor of Motivation

➢ Strict adherence to rules and regulations causes delays in decision-making. Most of

the decisions taken are political. Bureaucratic controls and Political interference
curtail freedom of action.

✓ It results in conflict in the organisation and the resolution is based on Follett’s

concept of Domination.

➢ There is no incentive for hard work as career advancement is based on good

behaviour and allegiance to rules.

✓ I.e. Anti-Taylorism, Formalism, Pressure of Informal Groups.

➢ It cannot take long-term policy decisions. It cannot be run like a business because
of government controls.
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✓ Decisions are taken based on Bounded rationality and incremental decision-

making.

➢ The lack of profit motive and absence of competition makes it unresponsive to the
needs of the society. Losses are borne by the treasury.

✓ I.e. complete disregard for 2 E’s (economy and efficiency).

✓ Closed System Approach

➢ Civil servants working here lack business acumen and professional skills.

✓ Generalists,

✓ Anti-Taylorism

✓ Against Follet’s concept of integration, functional authority etc.

➢ Much of the time is lost in answering parliamentary questions and other works
concerned with the legislature.

✓ Formalism

✓ Programmed work dominates the non-programmed work.

➢ Less stability owing to instability in the tenure of ministers.

✓ Because of the high level of overlap between politics and administration.

❖ In many countries, departmentally run enterprises are being converted into public
corporations.

➢ Examples from India: Steel Plants, Oil and Natural Gas Commission, All India Radio,
BSNL.

❖ Necessity of Departmental Undertakings

➢ Matters involving secrecy: Department of Atomic Energy

➢ Where the government want to exercise strict control and supervision: Broadcasting
and communication

➢ To generate revenue for the public exchequer: Railways

➢ For providing essential services: Electricity and Water

Public Corporations
❖ The era of corporations started out in the USA following the Industrial Revolution.

❖ A public corporation is a corporate body created by a special Act of the Legislature.

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❖ It is organised to achieve public purpose by law.

❖ The statutory corporation is a compromise between public interest and flexibility of

business operations.

❖ Public corporations are the result of the entry of the state into the field of business and
commercial enterprise.

❖ Features

➢ It is a legal entity.

➢ It is created by separate acts of Parliament or State legislature.

➢ It is financially self-supporting.

➢ The government appoints the Board of Directors, MD and Chairman.

➢ Employees of the Corporation are appointed by the terms and conditions laid down
by the corporation itself.

➢ It is not subject to budgetary, audit and accounting regulations.

➢ They are created for a specific purpose.

➢ They are accountable to the government.

➢ They enjoy autonomy in day-to-day management.

➢ Service motive over profit motive

Differences Between Public Corporation and Departmental Undertakings

❖ Departmental undertaking is usually employed in state regulatory activities while the

public corporation system is employed in public business enterprises.

❖ Departments are mainly money-expending services while public corporations are

money-producing as well as money-expending.

❖ The department is headed by a Minister while the Corporation is headed by a Board

of Directors who are experts.

❖ Policies and day-to-day administration in Departments are decided by the Minister

while in a Corporation it is decided by the Board of Directors.

❖ Departments have financial control while corporations have financial autonomy.

❖ Public corporations operate on a self-supporting basis.

❖ Personnel procedures vary in departments and corporations.

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❖ There is a direct relationship between income and expenditure in corporations.

❖ Corporations are subject to commercial audits and not government audits.

❖ Corporations enjoy less political control compared to departments.

Merits of Public Corporation

❖ Enjoys administrative and financial autonomy and therefore can make long-term
policy decisions.

❖ It can adapt itself to the demands of the environment as it is free from government
regulations.

➢ I.e. open system approach

❖ It is not affected by political changes much.

❖ It can employ professionally trained experts.

❖ As it is established by law, the law can be changed to suit the situation.

De-merits of Public Corporation

❖ It is dependent on the State Legislature or Parliament to make changes.

❖ In actual practice, there is political interference in the functioning of corporations.

❖ In practice, the Board of Directors contain civil servants and appointees of politicians.

➢ This will lead to formalism and a lack of clarity in its functioning.

❖ In the absence of profit motive and competition, there is no incentive to work hard
and strive for efficiency.

Control over Public Corporations in India

❖ The government has the power to appoint the Chairman, MD and Board of
Management.

➢ This system is highly opaque.

❖ The government can remove any member from the Board.

❖ If the Board fails to carry out the purposes for which it was set up or fails to carry out
the directions of the government, the government can supersede the corporation and
appoint a new board.

❖ The government is authorised to frame rules and regulations for the working of the
corporation.
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❖ The government can enquire into the workings of the corporation.

❖ The minister can issue directives to the corporation.

❖ Ministers can appoint financial advisers to the governing board.

❖ Money matters beyond a threshold needs government approval.

❖ The government can fix the prices of goods and the rate of payment for services
rendered.

➢ Welfare dominates over profit.

❖ Parliamentary control is exercised through questions, adjournment motions, debates

and parliamentary committees.

❖ Committee on Public Undertakings examines the reports and accounts of the

corporations.

Government Companies

❖ A government company is a company in which not less than 51% of the paid-up share
capital is held by the Central Government or by any State Government or partly by
the Central Government and partly by one or more State Governments.

❖ Company can be regarded as a mixed enterprise as it contains both public and private
interests.

❖ Examples: BHEL, Hindustan Machine Tools Ltd., Oil and Natural Gas Commission.

❖ Its features are:

➢ It is registered or incorporated under the Companies Act and is also governed by

the Act.

➢ It has most of the features of a private company.

➢ It is a legal entity.

➢ Its management lies with the Board of Directors who are appointed by the
Government based on the extent of shares held by the Government.

➢ Its Articles and Memorandum of Association can be revised by the Government.

✓ Memorandum of Association→ establishes the relationship between the

company and its shareholders.
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➢ They are exempted from the personnel, budgeting, accounting and audit laws, rules
and procedures applicable to government departments.

➢ Employees are recruited by the Company and they are not government servants.

➢ Their accounts are audited by an auditor appointed by the CAG.

➢ Annual Reports are tabled in the Parliament or State Legislature.

➢ It is accountable to shareholders and the governments that have a stake in it.

❖ Merits

➢ It is an autonomous body and can manage its own affairs.

➢ It enjoys flexibility and initiative.

✓ Theory Y traits.

➢ It is the only form of organisation by which the government can make use of the
managerial skills, technical knowledge and expertise of the private sector.

➢ Its work is similar to a private company.

➢ Management is cautious as its annual reports are tabled before the legislature.

➢ It can be created by an executive decision.

❖ Demerits

➢ Interference from government.

➢ The Board of Directors consists of civil servants and officials from the Ministry.

➢ It erodes the Constitutional responsibilities which PSUs owe to the Parliament.

➢ It ends up being a proprietary concern of the government.

➢ There is limited public accountability.

❖ Necessity

➢ When the government wishes to launch an enterprise with a certain private

interest. E.g.: Hindustan Steel Limited.

➢ When the government wants to promote and develop a field of economic activity.
Eg: Export Credit and Guarantee Corporation.

➢ When the government wants to control a company in the private sector without
nationalisation.
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➢ When the government feels it necessary to initiate the process of development and
transfer the undertakings to the private sector once it is on its own legs.

Management Control Boards

❖ It is a special form of organisation adopted in India for the overall management of

river-valley projects.

❖ It is a set-up by the Central Government in association with the State Government

concerned.

❖ They are set up by the resolutions of the government.

❖ The control board has the responsibility for the management of the project including
its technical and financial aspects.

❖ It exercises overall control over the project including settlement of disputes that may
arise on the distribution of water between the states.

❖ It consists of representatives from the Central and State Governments.

❖ The Chief Minister in charge is the Chairman of the Board.

❖ The Board is not a statutory body but an executive body.

❖ The board makes policy decisions and appoints committees to make routine operational
decisions.

❖ Merits

➢ It provides unitary and uniform control over a river valley project.

➢ It provides a means for direct participation by both central and state governments.

➢ Quick decision making

➢ Effective control and direction before, during and after construction.

❖ Demerits

➢ It is an administrative agency and therefore can function only in an advisory

capacity.

➢ It is not legally accountable to the Parliament.

➢ The funds allocated are shown as loans to the State government and do not account
for the funds before the Public Accounts Committee.

➢ Effectiveness is weak where more than one State government is involved.

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➢ Sometimes consultation with the control board is bypassed by the State

government.

Case Study- 1
❖ Karnataka Solar Power Development Corporation:

❖ A joint venture Company with an equity stake of 50% each between Solar Energy
Corporation of India(SECI), GoI and Karnataka Renewable Energy Development
Limited.

❖ First solar park of the state in Tumkur for a cumulative capacity of 2000MW.

❖ World's second-largest solar park after Bhadla Solar Park in Rajasthan.

❖ KSDC helped in land acquisition where the farmers were asked to lease out their land
rather than sell.

❖ State-sponsored companies like these have taken the lead in improving the renewable
energy infrastructure in the country.

❖ With aggressive bidding costs, solar bids have reached as low as Rs 2.44 per kWh which
is in line with the subsidised price for large solar firms in the US.

❖ State-sponsored companies have also created massive “plug and play" parks taking
care of land acquisition and permits.

❖ This case study shows why there is a need for PSUs in India

➢ Multiple Goals are served here

✓ Environmental sustainability

✓ Delivery of Electricity

✓ Providing farmers with additional income

✓ Ensuring Balanced Regional Development

Case Study- 2
❖ Steel Authority of India Limited has brought down its debt of Rs 10,000 Crore in 3
months.

❖ The availability of extra land will help the Company to revamp its finances further
(Land Bank).

➢ GIS-enabled Land Banks

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❖ Focusing on increased volume brought down costs, clearing inventories and clearing the
scrap steel that was “lying around” has helped in achieving this feat.

➢ These all helped in bringing down the debt.

➢ Due to Digital India, every piece of information related to PSUs is digitally available
leading to fewer chances for maladministration.

Case Study- 3
❖ A 123-year-old department formed by the Government of India, PESO (Petroleum
and Explosive Safety Organisation) is responsible for monitoring and ensuring the supply
of medical oxygen to all states and Union Territories.

❖ PESO Kerala along with the State Health Department, has been monitoring the oxygen
needs of the state since March 2020, ever since the pandemic hit the country.

❖ They have been amping up the medical oxygen supply in the state accordingly.

❖ PESO saw to it that the private players involved in the manufacture of oxygen did not
divert it for industrial purposes.

➢ Advantages of PSUs

✓ They can keep a check and control over private activities in non-Programmed
situations.

❖ The cooperation between the central government, state government and private
players has helped in making Kerala have surplus oxygen at a time when other states
were struggling to meet the demand.
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❖ The Kerala Metals and Minerals Ltd (KMML) converted its gaseous industrial waste to
liquid medical oxygen to be used in hospitals.

❖ KMML is a Kollam-based public sector undertaking which manufactures Titanium

Dioxide.

Other Cases

❖ Government companies have lost almost fifty per cent of their efficiency in the last ten
years.

➢ ROCE (Return on Capital Employed) is a ratio that measures a company's

profitability and the efficiency with which its capital is employed.

➢ ROCE is calculated by dividing a company's earnings before interest and taxes

(EBIT) by the capital employed.

➢ The ROCE indicates how efficiently the long-term funds of owners and lenders are
being used.

➢ The higher the ratio, the more efficient the use of capital employed.

❖ The gradual decline in the ROCE of the CPSEs from 25.43 per cent in 2008-09 to
14.21 per cent in 2017-18 is a clear indication that either the CPSEs are losing their
monopoly status or their competitive edge.

❖ Between 2009-10 and 2018-19, net revenue from operations to capital employed
had reduced from 137.1% to 92.6%.

❖ The net profit to capital employed reduced from 10.15% to 5.56%.

❖ Privatised CPSEs have been able to generate more wealth from the same resources
which confirms that privatisation unlocks the potential of CPSEs to create wealth.

❖ Three decades ago, Indians waited years to get a landline telephone connection from
the telecom department.

❖ Today India has the world's highest per-capita data consumption and cheapest data
rates.

❖ A fine example of the State exiting and allowing private competition.

Autonomy, Accountability and Control

❖ Autonomy implies the operational freedom to make quick decisions with minimum
political interference, red-tapism and formalism.
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❖ Public Accountability implies the answerability for the results of the undertaking to the
community.

❖ The need for public accountability arises due to the following:

➢ To ensure that the public undertakings are operated in the interests of the public.

➢ To ensure that the public money invested in these undertakings is properly utilised.

➢ To serve as a check on the misuse of autonomy by managers.

➢ To ensure that the undertakings use their monopoly power for the national welfare.

❖ Accountability and Control may sound similar but control gives very little room for
individuality or innovation.

❖ Control: Every action requires prior approval and only with the sanction of a higher
authority any decision can be made.

❖ Thus officers are always at the mercy of “orders”.

❖ "You are only as good as the order you receive".

❖ Accountability while following procedures still encourages innovation within the limits.

❖ Bringing a balance between all the three is very difficult and this is evident from the
countless "conflicts" that exist in organisations.

❖ There are basically two ways of controlling an enterprise.

➢ One can, either, hold an enterprise responsible for results (also known as
Management by Objectives).

➢ Or, where goals are difficult to specify, one can control the enterprise by controlling
procedures and processes.

❖ The latter is achieved by laying down detailed rules and procedures for monitoring.

❖ This requires a great deal of intervention in the operations of the enterprise and, hence,
leads to allegations of lack of autonomy.

❖ However, when autonomy is granted it is often abused as the goals are not clear. That
is, accountability suffers.

❖ This, in turn, invites a cut-back in autonomy and takes the enterprise to "square one",
i.e., less autonomy but more accountability.
 22

❖ This classic "autonomy pendulum" can be observed in public sectors all over the world
since most governments find it hard to specify goals.

❖ The situation in India is, therefore, not unique.

❖ If one can improve the "quality of control" by specifying goals and objectives clearly and
developing performance information and evaluation systems to monitor public
enterprises, this dilemma would disappear.

Parliamentary Control
❖ Budget Debate:
➢ It covers the working and performance of the public sector enterprises.
➢ The budget of PSE can be increased only by the vote of the Parliament.
❖ Questions:
➢ The first hour of every day during a session is meant for asking questions.
➢ Answers are given orally or in the written format.
➢ Ministers however take refuge under "questions are related to day-to-day
administration, hence cannot be answered under the interest of autonomy.”
❖ Discussion on the working of the undertakings:
➢ It is a practice to debate the workings of PSEs.
➢ There is no fixed schedule for such debates.
❖ Annual Reports:
➢ Public corporations by law are supposed to submit their respective annual reports
on their policies, activities and programmes.

➢ The report is submitted along with the report of the auditors and is laid before
both the Houses of Parliament.

➢ However, most of these reports provide sketchy details.

➢ Information is generally concealed.

❖ Parliamentary Committees

➢ The Committees which exercise control over PSEs are the Public Accounts
Committee, the Estimates Committee and the Committee on Public Undertakings.

➢ Public Accounts Committee (PAC)

 23

✓ The main function of the PAC is to examine the reports of the CAG and
ascertain that the money granted by the Parliament has been spent by the
Executive Government within the scope of the demand.

✓ It extends even to Public Corporations.

✓ Till 1964 PAC and EC looked into the affairs of public undertakings.

➢ Since 1964 the Committee on Public Undertakings has been looking into the works
of public undertakings.

➢ Estimates Committee

✓ Constituted for the first time in 1921.

✓ All members are from the Lok Sabha.

✓ A minister cannot be elected as a member of the Committee.

✓ Examines the Estimates included in the Budget and suggests economies in the
Public Expenditure.

✓ Suggest alternative policies.

✓ They examine the budget only after it has been tabled in the Parliament thus
reducing the effectiveness of the Committee (post-mortem work).

✓ It cannot question policies laid down by the Parliament.

✓ Recommendations are advisory.

✓ It doesn't examine all the ministries and departments.

✓ Lacks expert assistance from bodies like CAG.

➢ Committee on Public Undertakings

✓ Examines the report and accounts of the Public Undertakings.

✓ It examines the business practices and commercial practices of public

undertakings.

✓ It is barred from examining major policy decisions of the government and also
from interfering in day-to-day matters of administration.

Executive Control

❖ The necessity of arming the ministers with certain powers of control over public
enterprises has been clearly realised everywhere.
 24

❖ It is only through ministerial directives that the enterprise can be brought in line with
the requirements of current policy and coordinated with the national plan.

❖ The absence of ministerial control can lead to confusion.

❖ Corporations and Companies enjoy a greater degree of autonomy when compared to

departmental undertakings.

❖ The Department is completely integrated with the Government and cannot claim any
autonomy from the control of the executive, as a legal right.

❖ A minister is completely responsible for the departmentally managed state enterprise.

❖ Ministerial control over public corporations may be established through the following:

➢ Appointing members of the governing board. No qualifications are laid down for
the appointees.

➢ Ministers have the power to remove the directors or members of the governing
body for reasons mentioned in the Act.

➢ Ministers have the power to issue to the Corporation's directives on matters of

general policy. In case of a dispute, the decision of the Government is final. However,
the directives of the Minister should not interfere with the internal day-to-day
working of the Corporation.

❖ The Minister's approval is necessary for the Corporation's schemes and programmes.

❖ The Minister's approval is required for Capital investments and borrowings.

❖ The Ministers have the power to seek the necessary information from the Corporations.

❖ The accounts of the Corporations have to be kept in a form settled in consultation with
the Government or Auditor General and the audit of the account is usually done by
auditors appointed by the Minister or the Auditor General.

The Reality of the Trio

❖ The Government has granted enhanced powers to the Boards of profit-making

enterprises under various schemes like Maharatna, Navratna and Miniratna.

❖ The main objective of the Maharatna scheme which was introduced in 2010 is to
empower mega CPSEs (Central Public Sector Enterprises) to expand their operations
and emerge as global giants.
 25

❖ The Government introduced the Navratna scheme, in 1997, to identify Central Public
Sector Enterprises (CPSEs) that had comparative advantages and to support them in
their drive to become global giants.

❖ Under this scheme, the Boards of Navratna CPSEs have been delegated enhanced
powers in the areas of

➢ Capital expenditure,

➢ Investment in joint ventures/subsidiaries,

➢ Mergers & acquisitions,

➢ Human resources management,

❖ In October 1997, the Government decided to grant enhanced autonomy and delegation
of financial powers to some other profit-making companies subject to certain eligibility
conditions and guidelines to make them efficient and competitive.

❖ These companies, called Miniratnas, are in two categories, namely, Category- I and
Category II.

❖ With the increased controls that were experienced in the pre-LPG era the cry for
autonomy seems to be the next logical conclusion in the clamour (confusion) for
improving the functioning of CPSEs.

❖ But the path chosen for achieving the above objective seems to be pinned solely on
privatisation and disinvestment.

❖ It seems that the narrative of accountability and control has been watered down
considering the mounting losses of some lacklustre CPSEs.

❖ 'Disinvestment and privatisation' need not be the only answer to reform the public
sector companies.

❖ They can be rejuvenated and transformed into global champions if freed from the
stifling controls of insipid government machinery and by de-politicisation.

❖ It further articulates that the government's roles as a majority stakeholder, policy-

maker, and regulator should be detached.

❖ In the landscape of the public sector in India, the government's role as the owner of
the PSEs (Public Sector Enterprise) overlaps with its role as their regulator and
policymaker.
 26

❖ The efficiency, objectivity, and profitability [Politicians and Bureaucracy behaving as a

social man] of the PSEs suffered as a result of no fault of their own, and they all along
have been blamed unfairly for mismanagement and inefficiency, for which the
government is equally responsible.

❖ Despite the veneer (thin covering) of autonomy given to them the government never
refrains from interfering with every aspect of their functioning, often at the cost of
their profitability.

❖ Bureaucratic and political control as well as interference continue to encroach upon

their autonomy thus affecting efficiency and stymying growth.

❖ Once touted as the "Timekeepers to the Nation" HMT sent the last of its employees for
voluntary retirement in 2016.

❖ This was seen as the result of excessive political control and lack of adaptation to the
changes that happened in the Indian Economy post-LPG (Liberalisation, Privatisation
and Globalisation) reform.

➢ I.e. failure to infuse Comparative Public Administration (CPA).

❖ Another case cited is the story of The Hindustan Fertilizer Corporation which employed
1200 people but did not produce anything as the Eastern European machinery did
not fit the building.
 27

❖ Everybody acted as if they were working and the political bosses did not feel it necessary
to revamp the situation till LPG came knocking.

❖ The plant was closed in 1986 and shut down in 2002.

❖ In short vast infrastructure was left unutilised and abandoned.

❖ This clearly necessitates autonomy and two-way accountability: Not just PSEs being
accountable but even the government must answer to the public as to why an obsolete
PSU was being run if it was not producing anything.

❖ The inward-looking policies and the somewhat closed economy till 1991 helped CPSEs
even though they lacked autonomy and were excessively controlled by the formidable
duo of bureaucrats and politicians.

➢ Criticism of Bureaucracy.

❖ The LPG era saw CPSEs gradually being given more autonomy as they were now listed
in stock exchanges, competing with private players for space, accounting architecture
was changed, budgetary support was withdrawn, workers were being laid off, etc.

❖ But at the same time, the government retained its control over them by holding the
majority stake.

❖ This showed that accountability and autonomy need not be viewed as "Amensalism"
but can be seen as a symbiotic relationship.

❖ But for most CPSEs, this was not to be.

❖ Rather CPSEs post-1991 saw themselves at a crossroads (confused).

❖ On one side they had to improve corporate governance, upgrade the skills of their
employees, update their technology, and align their accountability norms and Human
Resources policies with the demands of the market.

❖ On the other side, excessive Bureaucratic Control (not accountability) that did not
understand the vagaries of market economics increased their trouble.

➢ Thus most of the CPSEs started functioning in their comfort zone as they didn't
want to antagonize their superiors. This led to status-quoism.

❖ Bureaucratic appointments were based less on merit and more on "Quid Pro Quo". (“I
scratch your back, You scratch my back”)
 28

❖ The resultant conflict between the management and ownership prevented CPSEs from
being run as competitive organisations that are run by professional boards.

❖ This affected decision-making and resulted in the lacklustre performance of CPSEs.

❖ This resulted in long gestation periods for projects, poor project appraisal, and
improper feasibility study of projects which further led to cost and time overruns.

➢ E.g.- Hindustan Aeronautics Limited took more than 3 decades to manufacture

Light Combat Aircraft Tejas.

❖ Marked improvement was seen in the performance of CPSEs post-1990 because of

improved autonomy.

❖ The reinvention of CPSEs (thanks partly to the “Ratna Culture” → i.e. Maharatna,
Navratna and Miniratna) saw their profits and performance improving.

❖ But most of these were cosmetic autonomy as the government continued to exercise
control and took decisions that were not sound administratively or economically.

❖ The cry for autonomy is further justified by the classic case of Air India.

❖ The merger between Indian Airlines and Air India by the Ministry of Civil Aviation in
2007 was a mockery of autonomy as discretion was not given to concerned officials
before going ahead with the merger.

❖ This is evident from the fact that the combined losses shot up by more than 10 times,
from Rs 770 crore in 2006-2007 to Rs 7200 crore in 2008-09.

❖ Rumours of kickbacks (bribes) being received by politicians and bureaucrats reiterated

the fact that the need of the hour is autonomy and not excessive "Executive" control in
the guise of accountability.

Need for Autonomy

❖ Overcapitalisation PSEs

❖ Under utilisation of capacity

❖ A huge inventory list than required

❖ Increasing Overheads - Especially maintaining the township for staff.

❖ Overstaffing - Increased pressure of salary and pension

❖ No clear pricing policy

 29

❖ High cost of production

❖ Inefficiency

❖ Over-centralisation

❖ Uninspiring leadership that encouraged "routine" rather than "innovation".

➢ Theory X.

❖ Poor motivation and morale among workers.

❖ Political and Bureaucratic interference in day-to-day affairs.

30
 31

Memorandum of Understanding (MoU)

❖ A Memorandum of Understanding (MoU) is a negotiated agreement between the

administrative Ministry/ Department and the management of respective Central Public
Sector Enterprises (CPSEs).

❖ Under this, CPSEs undertake to achieve targets set in the MoU normally at the
beginning of the year.

❖ In MoU evaluation, the performance of CPSEs on selected parameters is compared with

the determined targets.

❖ The inclusion of an MoU helps make the management of the enterprise accountable to
the government.

❖ All CPSEs (Holding as well as Subsidiaries) are required to sign a MoU.

 32

❖ The holding CPSEs sign the MoU with their Administrative

Ministries/ Departments, while the subsidiaries sign the MoU
with their respective holding companies.

❖ The number of MoU-signing CPSEs has decreased over the

period due to various reasons such as the closure of CPSEs,
merging of the subsidiaries with holding companies and their
MoU on a consolidated basis, exemption from the signing of
MoU for sick/ under closure/ under-construction/ non-
operational CPSEs or other grounds as per the recommendation from the
Administrative Ministry.

❖ Institutional Arrangements for Implementation of MoU Policy:

➢ High Powered Committee (HPC):

✓ The High Powered Committee is the Apex body under the MoU system for
laying policy guidelines.

✓ HPC is headed by the Cabinet Secretary and comprises the following members:

• CEO (NITI Aayog),

• Finance Secretary,

• Secretary (Expenditure),

• Secretary (Statistics & Programme Implementation),

• Chairman (Public Enterprises Selection Board),

• Chief Economic Advisor (Economic Affairs) and

• Secretary (DPE).

➢ Inter-Ministerial Committee (IMC):

✓ The IMC finalise the sectoral template/CPSE-wise MoU parameters.

✓ The purpose of sectoral templates is to select and identify the parameters and
weightages relevant to the core business activities in that sector and or CPSE.

✓ IMC will also set the requisite levels of performance against each of the
parameters, so decided, as benchmarked targets.

✓ The IMC comprises the

 33

• Secretary (DPE) as Chairman,

• a Representative of the Chief Economic Advisor (Department of Economic

Affairs),

• Department of Expenditure, Ministry of Statistics and Programme

Implementation,

• NITI Aayog and Secretary/ representative of the Administrative Ministry

as a special invitee and

• any other expert co-opted on a need basis.

Way Forward

❖ Based on the recommendations of the HPC, the framework for the MoU System using
an online dashboard for the target setting and performance evaluation of CPSEs has
been put in place and made applicable from FY 2021-22 & onwards.

❖ The parameters included in the revised MoU process are market-oriented, reflecting
the shareholder's interest in terms of growth in revenue, EBITDA margin, return on
net worth, return on capital employed, asset turnover ratio, and market capitalization.

➢ EBITDA margin→ measure of a company's operating profit as a percentage of its

revenue.

❖ Adequate weightage has also been given to production-linked parameters pertaining to

CPSE's core operations.

❖ All the parameters are quantifiable and verifiable from the documents in the public
domain.

❖ Besides, certain government priorities/ programmes such as procurement from

MSMEs, CSR (Corporate Social Responsibility), etc. have also been included for
compliance by CPSEs, the non-compliance of which would result in a deduction of
marks.

❖ The revised MoU framework also provides for benchmarking based on growth and
emerging trends of the sector, the vision that has been worked by the Ministry about
the sector, and peer performance.

❖ The CPSEs will be allotted marks proportionately for the achievement of the target
figure for each parameter.
 34

❖ Score on all parameters would be added to arrive at the MoU score.

❖ The rating system of CPSEs based on the MoU score is as follows

➢ The ratings of CPSEs have decreased over the period of five years.

➢ The reason for this may be

✓ Closure of CPSEs

✓ Non-Operational of CPSEs

✓ Privatisation

✓ Under-Construction

❖ CAPEX

➢ The Department of Public Enterprises monitors and reviews the capital projects
and expenditures in CPSEs.

➢ CAPEX means any expenditure incurred towards the acquisition/ addition of fixed
assets or projects that on completion would form a part of fixed assets.

➢ It may be for expansion, modernisation or diversification.

➢ CAPEX may be decided on the basis of viable projects available for expansion,
modernisation or diversification, cash and bank balance or parked funds, net worth,
borrowings, etc.
 35

➢ Based on the figures provided by the Administrative Ministries and the Statement-
26 of Budget document of the Union Government, targets for CAPEX are
prescribed in the MoUs of CPSEs.

➢ In addition to this, CAPEX for select CPSEs having annual CAPEX targets of more
than

➢ Rs.100 Crore from FY 2022-23 is also compiled and submitted to the Prime
Minister's Office and Department of Economic Affairs on a monthly basis.

✓ This has led to a decrease in the instances of ministerial interference.

❖ Procurement through GeM (Government-e-Market) Portal

➢ GeM, hosted by the Directorate General of Supplies & Disposals (DGS&D) is a

paperless, cashless, & system-driven e-marketplace that enables procurement of
common-use goods & services with minimal human interface.

➢ It is a dynamic, self-sustaining and user-friendly portal for procurement by offices

of various Government Ministries & Departments, CPSEs & autonomous bodies of
the Central Government.

➢ DGS&D developed GeM with the technical support of the National e-Governance
Division (Ministry of Electronics & Information Technology).

➢ The intended benefits of the portal are listed below:

✓ Transparency:

• GeM eliminates human interface in vendor registration, order placement,

and payment processing to a great extent.

• Being an open platform, it offers no entry barriers to bona fide suppliers

who wish to conduct business with the Government.

• At every step SMS and e-mail notifications are sent to the buyers, the heads
of their organisations, paying authorities and sellers.

✓ Efficiency:

• Direct purchase on GeM can be done within minutes and the entire process
is online and end-to-end integrated with online tools for assessing price
reasonability.
 36

• For procurement of higher-value products & services, a transparent and

efficient bidding / Reverse Auction (RA) facility is available on GeM.

• For creating a bid / Reverse Auction (RA), buyers do not need to enter their
own technical specifications as they have been standardised on GeM.

• The bid / RA can be created expeditiously and finalised within a minimum

of seven days.

✓ Security and Safety:

• GeM is a secure platform and all the documents on the portal are e-signed
at various stages by buyers and sellers.

• The antecedents of suppliers are verified online and automatically through

MCA-21, Aadhaar and PAN databases.

• Furthermore, third-party assessment of suppliers is conducted by the

Securities and Exchange Board of India-empanelled credit rating agencies.

✓ Savings:

• The transparency, efficiency and ease of use of GeM have resulted in a

substantial reduction in prices on the portal compared with the tender,
rate contract and direct purchase rates.

• Average prices on GeM are lower by at least 15-20% and in some cases
even up to 56%.

• GeM also carries out demand aggregation for items to be procured by

various Central/State Government departments.

✓ Inclusivity in the Business Value Chain:

• Prosperity of the MSME sector is crucial for the growth of our country.

• The sector fuels the economy by providing employment and income to

millions of people who work for small, local businesses as well as in start-
ups.

• GeM expects to improve the ease of doing business for such small and
medium enterprises and provide inclusivity by giving them a fair and
transparent platform to participate in business activities generated from
Government sources.
 37

Interconnected Topics from Paper 1

Organisation and Method

❖ Also used synonymously with Organisation and management.

❖ It originated from the pioneers of scientific management that is Taylor and Gilbreth
and is the base for this technique.

❖ It is the systematic examination of activities in order to improve the effective use of

human and other material resources.

❖ It is highly technical and is conceptualised and implemented by the specialists/top-level

officers of an organisation to eliminate delay, wastage, overlapping, etc.

❖ It is an in-house mechanism that is undertaken to accommodate and implement

administrative changes and reforms in Organisation and methods.

❖ The basic steps involved in O&M (Organisation and Methods) are:

➢ Select the area/process that requires attention (done by the strategists of the
organisation).

➢ Record the current situation prevailing in it.

➢ Examine and analyse the existing scenario.

➢ Develop, design and evaluate alternative solutions and recommend improvement

opportunities.

➢ Implement the chosen solution.

✓ In the present era, the Laying-off process → Save Money: Brings down the
unwanted steps".

➢ Maintain and monitor the implementation of that solution to ensure adherence and
benefits and whether it is effective or not.

❖ The details/techniques used to follow these steps in O&M are:

➢ Work Study

✓ The scientific and systematic study of the work being done or to be improved
(refer to Taylor's scientific management).

✓ Work Study's types or sub-techniques are:

 38

• Method Study: Related to the tools and techniques as well as the path being
used in the work which is being studied.

➢ It is a systematic scrutinizing of all aspects like what, when, how, why, where, who
etc studied of the work case in order to get a proper understanding of the same
and develop a suitable strategy for improvement to avoid delay and wastage of
resources.

• Work Measurement: It is a supplement of the Method study where a study

is done on the type of work at hand and its content.

• Organisational analysis: It takes a holistic view by placing the work at hand

as an integral part of the organisation and its contribution to the working
of the whole organisation and how it affects the same.

➢ It helps understand how a single improvement in the work at hand will affect the
entire organisation and how other work will automatically improve in tandem with
this one, etc.

➢ Negative and positive effects, both are seen.

➢ Work management

✓ It is the integrated process that enables the manager to access efficient ways to
do a particular work.

✓ It strategies in detail the work within the organisation to make work simpler,
better and more efficient.

✓ It's important sub-techniques are:

• Task-based design: It is the detailed outline of the overall work of the

organisation in the form of a simple work chart.

• Work queue: Substantially arranging various activities within a particular

task. It also includes the 'to-do' list of the organisation.

• Work management Groups: It is the group in charge of outlining tasks,

queueing the work, performance evaluation, setting standards, etc.

• Work management can be taken up at both the upper as well as mid or

lower levels of an organisation/administration and takes into account not
only the work at hand but also the personnel in charge the skills they possess
 39

and what is required. Thus it is a very extensive as well as significant

method.

Forward Engineering Process

❖ It advocates that along with contemporary change, an organisation/administration

must also look into the future and anticipate changes to remain ahead of others and
that is to be done through the

➢ BOW (Barriers, Obstacles and Weaknesses) analysis,

➢ CINE MATRIX (Controllable Internal factors and Non-controllable external factors)

analysis,

➢ SWOT ( Strengths, Weaknesses, Opportunities and Threats) analysis,

➢ SPOT (Space, Pace, Opportunities and Threats) analysis.

Management Aid Tools- Network Analysis, MIS, PERT, CPM

❖ Management aid tools are those tools/techniques that help in work simplification and
efficiency of management processes.

❖ Network Analysis:

➢ It is a method for studying communication and socio-technical networks within a

formal organization.

➢ It is a quantitative descriptive technique for creating statistical and graphical

models of the people, tasks, groups, knowledge and resources of organizational
systems.

➢ It is based on social network theory and more specifically, dynamic network

analysis.

➢ It helps identify local and global patterns, locate influential entities, and examine
network dynamics.

❖ Management Information System (MIS):

➢ It is an integrated entity/system of information technology where interaction

between different parts/departments/projects of an organisation is enabled for
better and more efficient management practices (POSDCORB and others) and skills
to solve problems that occur between the parties obstructing work and through
communication systematically managed and stored information/knowledge.
 40

➢ It helps in automation.

➢ MIS helps managers extract information about the organisation and its different
departments for coordination in order to carry out their functions and
responsibilities in a cost-effective and time effective as well as efficient manner.

➢ It helps the managers in conducting simulations and decision-making as well.

➢ MIS come in different formats suitable to the particular department it is used and
the nature of work in question like Accounting MIS, Human Resources MIS, Financial
management MIS, Marketing and Sales MIS, Customer Service MIS, etc.

➢ The top management however has models of MIS that incorporate all departments
and processes of the organisation for their analysis.

➢ For Example:

✓ The Reserve Bank of India (RBI) has launched the Centralised Information
Management System (CIMS) to bring change in its information management
framework, for handling the massive data flow, aggregation, analysis, public
dissemination and data governance.

✓ The system uses state-of-the-art technology to manage big data and will serve
as a platform for power users to carry out data mining, text mining, visual
analytics and advanced statistical analysis connecting data from multiple
domains such as financial, external, fiscal, corporate and real sectors as well as
prices.

✓ In the short to medium term, it would lead to a paradigm shift in the Reserve
Bank's economic analysis and supervision, monitoring and enforcement across
multiple domains.

✓ The new system, which is RBI's next-generation data warehouse, is starting

with reporting by scheduled commercial banks and will be gradually extended
to urban cooperative banks (UCBs) and non-banking financial companies
(NBFCs).

✓ The Governor emphasised that RBI treats data as a public good and is
disseminating increasingly more data in the public domain for use by analysts,
researchers and the general public.
 41

✓ The central bank's preference is for general dissemination over meeting

individual requirements.

➢ MIS helps in decentralisation, democratisation, and participation by all through

proper management of information and its sharing subject to the condition that
the information is accurate and updated from time to time and the personnel are
educated and trained regarding it and then asked to use it to harvest all its benefits.

❖ Performance Evaluation and Review Technique (PERT)

➢ It is a relatively new planning and control system designed to help top management
with planning, research, problem-solving, decision making and control of
organisational processes.

➢ It analyses the tasks involved in completing a particular project, especially the

minimum time needed to complete the same.

➢ It is quite similar to CPM (Critical Path Method).

➢ It is probabilistic as it is based on the theory of probability that an event or situation

or activity is likely to happen/be completed in future if things are done and followed
in the very same rigid way as anticipated or designed, but not 100% surety.

➢ Disadvantages

✓ There can be potentially hundreds or thousands of activities and individual

dependency relationships and it is not possible to ensure things to happen the
way it is designed as we are dealing with human beings and there can be any
amount of natural as well as induced disasters in between.

✓ PERT is not easily scalable for smaller projects.

• I.e. it is not financially viable.

✓ The network charts tend to be large and unwieldy, requiring several pages to
print and special size paper.

✓ The lack of a time frame on most PERT/CPM charts makes it harder to show
status although colours can help (e.g., specific colour for completed nodes).

✓ When the PERT/CPM charts become unwieldy, they are no longer used to
manage the project.
 42

➢ However, if planning is done well and all pessimistic and optimistic factors are
studied as well as a most likely time design based on the experience of PERT can
help overcome the above.

❖ Critical Path Method (CPM)

➢ It was brought out by the chemical company Dupont in the 1950s. It is essential
for effective project management.

➢ It is an algorithm for scheduling a set of project activities.

➢ It was originally brought out for plant construction and maintenance purposes but
now is used in various projects of different natures like aerospace and defence,
construction, engineering, software development, etc.

➢ The essential technique for using CPM is to construct a model of the project that
includes the following:

✓ A list of all activities required to complete the project (typically categorised

within a work breakdown structure),

✓ The time (duration) that each activity will take to complete, and

✓ The dependencies between the activities.

➢ Using these values, CPM calculates the longest path of planned activities to the end
of the project, and the earliest and latest that each activity can start and finish
without making the project longer.

➢ This process determines which activities are "critical” (i.e., on the longest path) and
which have "total float" (i.e., can be delayed without making the project longer).

➢ In project management, a critical path is the sequence of project network activities

which add up to the longest overall duration.

➢ This determines the shortest time possible to complete the project.

➢ Any delay of an activity on the critical path directly impacts the planned project
completion date (i.e. there is no float on the critical path).

➢ A project can have several, parallel, near-critical paths.

➢ An additional parallel path through the network with a total duration shorter than
the critical path is called a sub-critical or non-critical path.
 43

➢ Compared to PERT, it is deterministic and not probabilistic as it does not look into
circumstantial factors while completing activities of a particular project, but is only
bothered about specifying how an activity is to be done and within what time it
should be done.

➢ Advantages of CPM:

✓ It helps in scheduling, monitoring, and controlling projects.

✓ The project manager can determine actual dates for each activity and compare
what should be happening to what is taking place and react accordingly.

• E.g.- [Link] of Delhi Metro was well known for completing projects
before the due date.

✓ The activities and their outcomes can be shown as a network.

✓ Displays dependencies to help scheduling.

✓ Evaluate which activities can run parallel to each other.

✓ Determines slack and float times.

✓ Widely used in industry.

✓ Can define multiple, equally critical paths.

✓ CPM determines the project duration, which minimises the sum of direct and
indirect costs.

➢ Disadvantages of CPM:

✓ CPM can be complicated, and complexity increases for larger projects.

✓ Does not handle the scheduling of personnel or the allocation of resources.

 44

✓ The critical path is not always clear and needs to be calculated carefully.

✓ Estimating activity completion time can be difficult.

CPM vs PERT- An Analysis

❖ Both CPM and PERT (Program Evaluation and Review Technique) provide the user with
project management tools to plan, monitor, and update their project as it progresses.

❖ Similarities between PERT and CPM:

➢ Both follow the same steps and use network diagrams.

➢ Both are used to plan the scheduling of individual activities that make up a project.

➢ They can be used to determine the earliest/latest start and finish times for each
activity.

❖ These can be termed as features of Neo-Taylorism

❖ Differences between PERT and CPM:

➢ PERT is probabilistic whereas CPM is deterministic.

➢ In CPM, estimates of activity duration are based on historical data.

➢ In PERT, estimates are uncertain and we talk of ranges of duration and the
probability that an activity duration will fall into that range.

➢ CPM concentrates on the Time/Cost trade-off.

Impact of Liberalisation and Privatisation

Miniratna- II Miniratna- I Navratna Maharatna

Should have Should have made a Miniratna category-1 Having Navratna status.
made a profit for profit for the past status, Schedule A
the past three three years CPSE, with excellent
years continuously. or "very good' MoU
continuously rating in three of the
last five years.
 45

Should have a ❖ Pre-tax profit A score of at least 60 ❖ Listed on an Indian

Positive net of 30 crores or in six selected stock exchange with
worth more in at least performance minimum
one of the three parameters. prescribed
years. shareholding under

❖ Positive net SEBI regulation.

worth ❖ Average annual

turnover of at least
25,000 crores,
average networth of
15,000 crore and
average net profit of
5,000 crores in the
past three years.

❖ Significant global
presence/
international
operations.

Powers to Board Powers to Board Powers to Board Powers to Board

❖ To incur ❖ To incur capital ❖ Incur CAPEX ❖ Incur CAPEX

capital expenditure on without any without any
expenditure new projects, monetary ceiling. monetary ceiling.
on new and ❖ Enter into ❖ Enter into
projects, modernisation. technology JV or technology JV or
modernisatio purchase of strategic alliances. strategic alliances.
n, and equipment up ❖ Obtain by ❖ Obtain by purchase
purchase of to 500 crores, purchase or other or other
equipment or equal to their arrangements, arrangements,
up to 250 net worth
 46

crores, or (whichever is technology and technology and

50% of their lower). know-how. know-how.
net worth ❖ Authority to ❖ Effect ❖ Effect
(whichever is undertake organizational organizational
lower). equity restructuring. restructuring.
❖ Authority to investment to ❖ Structure and ❖ Structure and
undertake establish JV and implement schemes implement schemes
equity subsidiaries in related to related to personnel
investment India up to 500 personnel and and HRM.
to establish crores in any HRM.
❖ Raise debt from
JV (Joint project or up to ❖ Raise debt from domestic capital
Ventures) 15% of the domestic capital
markets and
and networth of markets and
international
subsidiaries CPSE (overall international
markets.
in India up to limit of 30% of markets.
❖ The Board of
250 crores all investment ❖ The Board of
Directors have the
in any in JV and Directors have the
power to undertake
power to undertake
project or up subsidiaries).
M&A.
Mergers and
to 15% of ❖ Board of
Acquisitions. ❖ CMD is empowered
networth of Directors have
to approve
❖ CMD is empowered
CPSE (overall the powers of
to approve international
limit of 30% M&A.
international business.
of all
business tours. ❖ Holding companies
investment
❖ Holding companies are empowered to
in JV and
are empowered to transfer assets, float
subsidiaries).
transfer assets, fresh equity, and
float fresh equity divest shareholding.
and divest ❖ Investment decisions
shareholding. up to 5000 crores
for 15% of NW in
 47

❖ Investment one project up to a

decisions up to total of 30% of NW
1000 crore (or in all projects
15% of NW) in one combined.
project up to a
❖ Acquire raw
total of 30% of NW
material assets
in all projects
abroad through
combined.
M&A or investment
❖ Acquire raw
in a JV subsidiary up
material assets
to 5,000 crores (or
abroad through
25% of NW) in one
M&A or
project up to a total
investment in
of 40% of NW in all
JV/subsidiary up to
projects combined.
3.000 crores ( 25%
of NW) in one ❖ Create below

project up to a Board-level posts up

total of 40% of NW to the E-9 level.

in all projects
combined.

Corporate Governance

❖ Corporate governance refers to the values and guidelines followed by an organization

for its effective functioning.

❖ The concept of corporate governance has gained global prominence over the years,
primarily with the focus on monitoring, controlling and guiding the decision-making
of the top leadership of a company.

❖ During the era of globalisation, Indian corporations were pushed out of their comfort
zones.

❖ To survive and prosper internationally, they had to adapt their claustrophobic Indian
Corporate Governance models, to better attract global talent and customers.
 48

❖ A milestone in corporate governance was achieved when SEBI (Securities and Exchange
Board of India) was established and given statutory powers in 1992 by the Indian
government.

❖ In the Indian context, certain public sector and private sector organizations have
established effective corporate governance mechanisms.

❖ The Punjab National Bank's fraudulent issuance of LoUs (Letters of Undertaking) has
exposed the systemic chinks in Indian banking sector and the dual need for technology
and strong corporate governance to check frauds.

❖ The major impediment to achieving the desired level of competitiveness is the

governance deficit due to certain key issues which require immediate attention. Some
of these are:

➢ Autonomy of the Board

✓ A competent and autonomous Board is important for the success of any

corporate.

✓ However, Ministerial diktats may, at times, influence the Board agenda in the
case of PSUs and take precedence over strategic and commercial considerations.

✓ PSUs have no role even in the selection of independent directors.

✓ Without full operational and financial autonomy, it is difficult to have a

structured performance evaluation system for the Board members and fix
accountability.

➢ Ownership policy

✓ There is no ownership policy in place.

✓ It is needed to clearly lay down the role and responsibilities of the Government
towards minority shareholders and other stakeholders such as employees,
vendors, customers and communities.

✓ The Organisation for Economic Cooperation and Development (OECD) states

that "the government should develop and issue an ownership policy that defines
the overall objectives of state ownership, the state's role in corporate governance
of state-owned enterprises and how this policy is likely to be implemented."
 49

✓ The ownership policy should be disclosed and communicated to fix

accountability.

➢ Appointment of independent, non-executive directors and women directors on PSU

boards–

✓ Legal provisions and guidelines issued by SEBI and DPE (Department of Public
Enterprise) have laid down requirements for the constitution of the PSUs Board
to ensure their independence and gender diversity.

✓ A properly structured Board is necessary to ensure objectivity (i.e. there should

be no political interference) of the Board's decisions and exercise oversight over
the decisions of the Board and its Committees.

✓ Out of the top 27 PSUs, according to a recent study, 25 per cent do not meet
the criteria for independence of the Board and nearly 25% do not have a
woman director.

➢ Non-compliance with legal requirements and SEBI and DPE Guidelines -

✓ It is disconcerting to note that many of the top PSUs are falling behind in
complying with minimum requirements as envisaged by the SEBI and DPE
Guidelines.

✓ Even the compliance audit conducted by the Comptroller and Auditor General
of India has highlighted this issue. Other issues that were highlighted by CAG
were:

✓ In some CPSEs, the non-executive directors constituted less than 50 per cent
of the total strength of the Board of Directors.

✓ There was no woman director on the Board of MMTC Ltd. (Metals and Minerals
Trading Corporation).

• Note→ The compliance should come from the Board of Directors but they
follow hygiene factors and thus are not interested in improving the
functioning.

✓ Representation of independent directors in 24 CPSEs was below the required

number.

✓ Vacancies of independent directors were not filled in time in 13 CPSEs.

 50

✓ No independent Director was nominated in the committee by 7 CPSEs viz.

Antrix, BLI, GGL, HSCC, IIFCL, JCI and NHDC.

✓ JCI did not have a CSR (Corporate Social Responsibility) Policy in place.

✓ There was under allocation of funds towards CSR by 6 CPSEs viz. CCIL, HUDCO,
KPL, NCL, PFCL, UCIL.

➢ Excessive and overlapping regulation

✓ Besides Parliament, PSUs are also accountable to other authorities like the
Comptroller and Auditor General of India, (CAG); Central Vigilance
Commission, (CVC); Competition Commission of India, (CCI); and the Right to
Information Act, (RTI) etc.

✓ Over-regulation has not only created accountability problems but has also killed
corporate governance.

✓ The issue of Governance deficit in PSUs should be addressed and if the PSUs
have to make a mark on the world business map then they should be looked at
not as “Government” but as entities running to make judicious use of resources
they have been entrusted with.

Corporate Social Responsibility (CSR)

❖ In compliance with Section 135 of the Companies Act, 2013 and provisions of the
Companies (CSR Policy) Rules, 2014 which took effect from April 1, 2014, all
companies (including CPSEs) with a Net Worth of at least Rs 500 crore, or a minimum
turnover of Rs 1,000 crore, or a minimum Net Profit of Rs 5 crore are required to
spend at least 2% of their average Net Profit for the immediately preceding three
Financial Years on CSR activities as per the items listed in Schedule VII of Companies
Act, 2013.

❖ Such companies need to constitute a CSR (Corporate Social Responsibility) Committee

of the Board consisting of three or more Directors, of which at least one shall be an
Independent Director.

❖ The Board of every such company must:

 51

➢ Approve the CSR policy of the company, disclose contents of such policy in its
report, and place it on the company's website, after factoring in the
recommendations made by the CSR Committee;

➢ Ensure that the activities included in the CSR policy of the company (including
CPSEs) are undertaken.

❖ The total CSR Expenditure for the year FY 2021-22 stood at ₹4600 crore showing
progress of 2.61% as compared to the previous year.

❖ A total of 160 CPSEs undertook CSR activities during FY 2021-22 incurring a total
expenditure of 4600 crore.

➢ The New Public Serice Approach also strives for collaboration between the
Government and CPSEs

❖ The list of the top 10 CPSEs undertaking CSR expenditure during FY 2021-22 are:
 52

Public Enterprises Selection Board

❖ The Public Enterprises Selection Board (P.E.S.B) is a high-powered body constituted by

the Government of India Resolution dated 3.3.1987 which was subsequently amended
from time to time, the latest being on 11.11.2008.

❖ The P.E.S.B has been set up with the objective of evolving a sound managerial policy
for the Central Public Sector Enterprises and, in particular, to advise the Government
on appointments to their top management posts.

❖ Functions of the Public Enterprises Selection Board (P.E.S.B)

➢ To be responsible for the selection and placement of personnel in the posts of

Chairman, Managing Director or Chairman-cum-Managing Director (Level-1), and
Functional Director (Level-II) in PSEs as well as in posts at any other level as may
be specified by the Government;

➢ To advise the Government on matters relating to appointments, confirmation or

extension of tenure and termination of services of the personnel of the above-
mentioned levels;

➢ To advise the Government on the desired structure at the Board level, and, for
senior management personnel, for each PSE or group of PSEs;
 53

➢ To advise the Government on a suitable performance appraisal system for both the
PSEs and the managerial personnel in such enterprises;

➢ To build a data bank containing data relating to the performance of PSEs and its
officers;

➢ To advise the Government on the formulation and enforcement of a code of conduct

and ethics for managerial personnel in PSEs;

➢ To advise the Government on evolving suitable training and development programs

for management personnel in PSEs.

❖ Recent News

➢ The Public Enterprises Selection Board (P.E.S.B) held interviews for the position of
Indian Oil Corporation's (IOC) Chairman on May 16 2023 but rejected all 10
candidates.

✓ It had instead asked the Ministry of Petroleum and Natural Gas to constitute
a search-cum-selection committee (SCSC) for the selection of a candidate for
the top position.

✓ However, the government had extended the tenure of the incumbent Chairman,
Vaidya, by one year at the time.

✓ This was a rare case where a retired PSU executive had been given an extension
post-superannuation.

S K Roongta Committee Recommendations

❖ Former SAIL Chairman S K Roongta-headed panel submitted its report during the
UPA regime in November 2011:

➢ Increasing the number of listed CPSEs over the years.

➢ CPSEs need more functional autonomy to compete with the nimble private players.

➢ Policies of PSUs need to be replaced to suit the emerging business environment.

✓ I.e. PSUs are not following the Systems Theory.

➢ Security of tenure: minimum 3 years for Managing Directors and Chairman to

bring stability to the management of PSUs.
 54

➢ Formulate policies to free PSUs from the clutches of administrative ministries as

they interfere in the day-to-day affairs of corporatized entities thus hampering
their efficiency.

➢ Interference from ministries has impacted the trading of stocks of PSUs at

discounted values.

➢ The panel has also affirmed that having a business development committee in
addition to the audit, human resources and remuneration committees would help
strategise and evaluate business development proposals and guide a company's
diversification, acquisition, joint ventures, new business entry, organisational
structure review, etc.

➢ The committee recommended that the Comptroller and Auditor General of India
(CAG) should publish an annual report on the best practices in different CPSEs (i.e.
bringing Mental Revolution), as observed by it in the process of doing the oversight
functions, to be shared with other CPSEs. This, according to the Confederation of
Indian Industry, is expected to not only help CPSEs learn from each other and
improve their performance but also create a positive mindset around the role of
the CAG among them.

✓ I.e. Comparative Public Administration.

➢ Where there is a specific need to enter a partnership in line with the board's
approved strategy, an in-principle clearance should be taken from the
administrative ministry.

➢ To reduce government intervention, the panel has suggested segregation of the

government nominee's role on the board from his position in the government. This
would empower the government nominee to suggest perspectives in line with other
independent directors without prejudice.

➢ Any official views of the government could be conveyed to the board during board
meetings. This ensures that government views are taken into consideration along
with the other stakeholders.

✓ This will help in restricting the day-to-day intervention of the government in

the functioning of the organisation.
 55

➢ The panel recommended increased autonomy for CPSE boards in, the selection of
consultants, vendors with proprietary technologies, technology partners, joint
venture partners and acquisition of companies.

➢ It is necessary to give CPSEs more flexible selection/search processes and the

provision to negotiate settlements. However, such autonomy will bear fruit only
when managements are provided with clear guidelines.

➢ The committee further observed that the CPSEs have little say (limited opinion) in
the board composition.

➢ Boards often lack domain knowledge, and there are delays in appointments.

➢ The report suggested that the Department of Public Enterprise/ the Public
Enterprise Selection Board (PESB) should formulate a panel of approved names
from which independent directors can be selected.

➢ This panel of directors should be updated every six months.

➢ Apart from administrative ministries, CPSE boards should be allowed to suggest

names of independent directors to the panel. The nomination committee should
identify knowledge gaps in the board and recommend candidates from the
approved panel.

➢ The Central Vigilance Commission (CVC) should examine the database of

directors/personnel and make vigilance clearances to them available online.

✓ Example of e-Governance.

➢ The committee recommended that a separate body should be constituted within

the PSEB specifically for the selection of CMDs (Chief Managing Directors) and CEOs
(Chief Executives Officers) of Maharatna and Navratna CPSEs.

➢ In addition, a vigilant framework should be developed in discussion with the CVC.

➢ However, internal vigilance clearance should not be the responsibility of the central
vigilance officers (CVOs) of CPSEs.

➢ Instead of assigning CVOs on short-term deputation, the CVC should maintain a

panel of CPSE executives – at the level of executive directors and directors who
could be evaluated for the positions of CVOs.
 56

Disinvestment

❖ Disinvestment is defined as the action of a government aimed at selling or liquidating

its shareholding in a public sector enterprise in order to get the government out of the
business of production and increase its presence and performance in the provision of
public goods and basic public services such as infrastructure, education, health, etc.

❖ Funds from disinvestment would also help in reducing public debt and bring down the
debt-to-GDP ratio while competitive public undertakings would be enabled to function
effectively.

❖ The main objectives of disinvestment in India are:

➢ To reduce the financial burden of the sick, loss-making PSUs on the Government.

✓ E.g. - Air India

➢ To improve public finances.

➢ To introduce competition and market discipline.

➢ To fund growth, social sector welfare.

➢ To encourage a wider share of ownership.

➢ To depoliticize non-essential services

❖ The first sale of shares of public sector firms in small bundles to mutual funds and
institutional investors happened in 1991-92 under P.V. Narasimha Rao-Manmohan
Singh combine, who ushered in the 1991 economic reforms, but they too faced a
difficult time in its implementation.

➢ I.e. Social Man's concept of making decisions based on emotions.

❖ A Disinvestment Commission was established in 1996 by the Government of India, to

carefully evaluate the withdrawal of the public sector from non-core, non-strategic
areas and assure workers of job security and opportunities for retraining and re-
employment.

❖ It recommended the sale of equities or the outright sale of several PSEs, including Air
India.

❖ That year's budget promised to make use of the revenue from these equity sales for
education, and health, and to set up a fund to strengthen Public Sector Undertakings.
 57

❖ But for years, most of the money has been routed to the Consolidated Fund of India,
to reduce the deficit.

❖ In the 1998-99 Budget, the government announced that it would lower its
shareholding in public sector firms to 26% while continuing to hold the majority shares
in companies that were considered strategic.

❖ It also contained a promise to protect the interests of employees and to set up a

restructuring fund to provide compensation to employees.

❖ By 2000, private companies were allowed to buy a majority stake in them.

❖ Hindustan Unilever picked up 74% in Modern Food Industries, a bread maker.

❖ It also introduced the concept of strategic sales in public sector companies some of
which include the sales of Modern Bakeries, Hindustan Zinc, and BALCO, and
disinvestments in these fuelled major controversies as well.

❖ Via strategic sales, privatization was envisaged only in non-strategic areas.

❖ The demarcation was redefined by the Government in 1999 to include only defence-
related, atomic energy undertakings and railways among strategic enterprises and
treat all other enterprises as non-strategic.

❖ The government's determination “to take the policy through” (i.e. to take action) was
reflected in the setting up of a new Department of Disinvestment in 1999, which, in
2001, became a full-fledged Ministry.

❖ A dozen other companies including Bharat Aluminium Company, Hindustan Zinc,

Maruti Udyog and Videsh Sanchar Nigam Limited, besides around 20 hotels, changed
hands before 2004.

❖ The government was not keen on treading the strategic sales route.

❖ The UPA manifesto in 2004 said it would take up privatisation selectively.

❖ Unlike what the NDA had done, there would be no disinvestment just to raise funds to
meet short-term targets. Proceeds of disinvestment would be used for designated social
welfare programs.

❖ The UPA government chose to stay away from privatising CPSUs but continued to sell
"pieces" of CPSUs without losing control over them.
 58

❖ In pursuance of this, the government formed a National Investment Fund (NIF) in

2005, to which the funds raised from disinvestment were channelled.

❖ The purpose of the Fund, managed by professional investment managers, was to utilize
75% of the proceeds to fund social welfare schemes in education, health, and
employment.

❖ However due to the financial crisis of 2008-09, and later a drought, this was put on
hold for 3 years, and later in 2013, it was restructured to provide flexibility in using
the Fund.

❖ The Union Budget 2016-17 focused on the need to migrate from a disinvestment-
based approach to an investment-based approach for CPSEs.

❖ The thrust of the government also shifted from disinvestment towards efficient
management of its investment in CPSEs, as symbolised by the change of name in the
Department of Disinvestment to "Department of Investment and Public Asset
Management" (DIPAM) with an expanded mandate.

❖ DIPAM laid down comprehensive "Guidelines on Capital Restructuring of CPSEs" in May

2016 addressing various aspects such as payment of dividends, buyback of shares and
splitting of shares.

❖ Later the government put in place a mechanism/procedure along with indicative

timelines for the listing of CPSEs in February 2017.

❖ The new disinvestment mantra is to

➢ Minimize interference.

➢ Allow public sector undertakings to function along with commercial principles.

➢ Grant managerial autonomy in decision-making, such as in appointments.

❖ The new policy clearly highlights the distinction between privatization and
disinvestment.

❖ While sales of equity greater than 50%, maybe even 100%, is privatization, any
tinkering here and there constitutes disinvestment.

❖ Previous efforts at large-scale sale of shares have been frequently mired in controversies
and as a result, bureaucrats have developed a sort of an aversion to strategic sales.
 59

❖ In a course correction, the new disinvestment policy provides for land to be valued at
market price for inclusion in sales.

❖ This will help prevent any scope for rent-seeking and reduce discretionary powers and
thus enabling bureaucrats to do away with the status quo.

❖ NITI Aayog has been entrusted to come up with new recommendations about loss-
making units that can be sold, their assets valued and disposed of, and to carry out
possible strategic sales.

❖ Financial parameters of public sector companies, such as borrowings and operating

profits, are being closely monitored to identify possibilities of share buybacks, a new
kind of disinvestment the government has recently come up with.

❖ The government is planning to put on the block profitable entities like Bharat Petroleum
Corporation (BPCL) and Container Corporation of India (Concor).

❖ In November 2019 the government announced that it wanted to divest its entire stake
in BPCL (53.3%), Shipping Corporation of India (63.8%) and Concor (30.8%).

➢ It was due to adherence to the FRBM (Fiscal Responsibility and Budget

Management) Act targets.

❖ The market capitalisation of these companies has been valued at Rs 1.4 trillion.

❖ The move is seen as a strategy to fill the “Fiscal Hole" rather than improve the
performance of PSUs.

❖ The government will have to ensure that privatisation does not lead to job losses,
especially for the well-performing PSUs.

❖ Another strategy being mulled by the government is to let IOC and ONGC buy the
shares of BPCL, thus keeping it in government control.

❖ The Government will forego dividends on the equity holdings by selling off its stakes.

❖ Exposure to equity markets, as a part of the total financial balance sheet of Indian
households, stood at just 17% according to the NSE CEO.

❖ Thus, in case the public offer route is followed, it would imply transferring the common
ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians.

❖ Thus essentially implying that the real beneficiaries would not be the ordinary retail
investors but institutional investors.
 60

❖ Using funds made available from disinvestment to bridge the fiscal deficit is an
unhealthy and short-term practice.

❖ It is said that it is equivalent of selling 'family silver' to meet short-term monetary

requirements.

❖ Borrowing which is the currently used practice for bridging fiscal deficit, should
continue to be used since while borrowing, the government has to make interest
payments in the future against a one-time borrowing from the market, in the case of
disinvestment, future streams of income from dividends are forgone against a one-
time receipt from the sale of stakes.

➢ Capital Expenditure→ one-time investment but recurring return

➢ Revenue Expenditure → Recurring spending with no return being generated,

❖ Profit-making PSUs should not be disinvested as they are performing well in any which
way.

❖ Employees of PSUs would lose their jobs.

❖ Complete Privatisation may result in public monopolies becoming private monopolies,

which would then exploit their position to increase the costs of various services and
earn higher profits.

➢ Serving Citizen is replaced by Serving Clients principle. The welfare approach is

replaced by the User-Pay Relationship.

❖ Complete Privatisation results in a situation where political compulsions may make

companies being sold cheap to preferred parties.

❖ A majority stake sale done to another CPSE results in no real change in ownership and
is thus just hogwash.

❖ Public Offer being the chosen approach for Disinvestments does not yield the best
realisation on the assets and is a far too time-consuming process.

❖ Auctioning to financial institutions should be the preferred modus operandi since it

gives the best realisation on the assets, and has minimal transaction cost.

➢ This helps ensure transparency and the government can yield maximum revenue.
 61

❖ Apart from generating a one-time sale amount, a lot of these stake sales have also
resulted in higher annual revenues for the government, thus nullifying the effect of loss
of dividends.

❖ There were annual outgoes associated with them, thus again nullifying the effect of
dividends.

❖ The loss of dividends, if any, is well compensated by gains in capital appreciation.

❖ Letting go of these assets is best in the long-term interest of the taxpayers as the
current yield (i.e. profit) on these investments in abysmally low.

❖ Even if the funds from the sale are not utilised for bridging fiscal deficit, much better
utilisation of these funds would be investments into critical sectors such as healthcare,
education and infrastructure or for retiring government debt rather than letting the
low-yielding capital remain locked in these assets.

❖ The returns on capital employed for the entire PSU sector is very low and the
government can find alternate avenues for deploying this capital which would yield far
better returns, both monetarily and otherwise.

❖ BALCO which was a profit-making company that earned the Government an average
dividend (over eight years) of Rs. 5.69 cr every year on the equity sold.

➢ The Government post-disinvestment, however, started getting Rs. 82.65 crore

every year.

❖ Similarly, CMC (Computer Maintenance Corporation) was a very well-managed and

profitable company, yet the average dividend was only 0.80 crore.

❖ The Government's benefit, post-disinvestment however was Rs.15.2 crore annually.

❖ Maruti Udyog Ltd. gave average returns to the tune of Rs. 13 crore annually to the
government. and IPCL gave Rs. 16.24 crore on equity sold against Rs. 242 crore and
149 crore respectively post-disinvestment.

❖ Wages increased by an average of Rs. 1600 per employee in Modern Food Industries
Limited.

Strategic Disinvestment

❖ Strategic Disinvestment refers to the sale of a public sector holding/undertaking to a

non-government entity and in most cases, to the private sector.
 62

❖ It is done so by the government in order to relieve itself of the burden of maintaining

a non-performing public enterprise.

❖ The importance of strategic disinvestment is as follows:

➢ Strategic disinvestment can be used for repaying government debts and for
investing in social programs like health and education.

➢ Through innovative management skills and technology, a strategic investor can

improve the growth of such units.

➢ Government presence in non-strategic sectors will only disrupt the market

dynamics and the burden of maintaining inefficient public sector undertaking will
fall on the general public.

➢ Investing in the economy will encourage spending which in turn will improve the
economy.

❖ Although there have been issues regarding strategic disinvestment in the past, it has
yielded favourable returns.

❖ An example is the Hindustan Zinc, which saw a fantastic increase in its profits after
its takeover by Vedanta in 2002.

❖ Challenges Regarding Strategic Disinvestment:

➢ Loss of revenue to the government should a profit-making PSU be sold.

➢ There might be incidences of 'Asset Stripping' as in the buyer will strip the PSU of
its valuable assets such as buildings, tools, machinery etc.

➢ Disinvesting in strategic assets such as oil refineries may be a threat to national

security as oil is an important strategic asset.

➢ Although using funds from disinvestment can be a major boost for the government
exchequer, it is a short-term measure that cannot be used often.

➢ Complete privatisation may result in the government losing its monopoly in certain
sectors.

❖ Strategic Disinvestment came to the fore with the government of India's decision to
sell Air India, Bharat Petroleum Corporation (BPCL) and the Container Corporation of
India.
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❖ Following the Union Budget of 2021, the disinvestment target was raised to Rs. 2.14
Lakh Crore, three times than the target of crossing Rs.67000 in the previous year.

❖ The guiding principle to strategic disinvestment in India is that the government plays
little to no role in the manufacture/production of goods and services in the day and
age of competitive markets.

❖ Regarding the potential of entities subject to disinvestment, they are best asserted by
strategic investors who evaluate based on the facts of technology, efficient management
and technology upgradation.

❖ Strategic disinvestment can be approached in the following ways:

➢ Minor disinvestment: The government gives away a portion of its stake but retains
a majority stake, preferably at 51%, in order to retain management control.

➢ Major disinvestment: The government sells off the majority of its stake and retains
minor holdings in the company.

➢ Complete privatisation: In this the government hands over complete control of its
holdings to a private player.

❖ Objectives of Strategic Disinvestment:

➢ Meeting budgetary requirements

➢ Reduce fiscal burden

➢ Raise funds to finance growth and development projects

➢ Improve market competitiveness and discipline

➢ Transfer of commercial risks

❖ Since 2015-16, the Government has revived the policy for strategic disinvestment by
substantially overhauling its approach for the disinvestment of CPSEs.

❖ NITI Aayog was mandated to identify the CPSEs for strategic disinvestment.

❖ Till February 2021 the NITI Aayog has identified CPSEs for strategic disinvestment
based on the criteria of

➢ National Security;

➢ Sovereign function at arm's length, and

➢ Market Imperfections and Public Purpose.

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❖ The policy on strategic disinvestment is based on the economic principle that the
Government should discontinue in sectors, where competitive markets have come of
age and the economic potential of such entities may be better discovered in the hands
of strategic investors due to various factors such as infusion of capital, technological
upgradation and efficient management practices.
❖ In order to realize the mission of a New, Self-reliant India, there was a need to redefine
public sector participation in business enterprises and to encourage private sector
participation in all sectors.
❖ Against this backdrop, the New Public Sector Enterprise (PSE) Policy for Atmanirbhar
Bharat was approved by Cabinet, on 27th January 2021 and was notified on 4th
February 2021.
❖ The scope of this Policy is limited to the existing Central Public Sector Enterprises,
Public Sector Banks and Public Sector Insurance Companies.
❖ The policy does not apply to certain classes of public sector entities such as Not-for-
profit companies, or CPSEs providing support to vulnerable groups, or having
developmental/promotional roles, etc.
❖ The policy intends to minimise the presence of the Government in the PSEs across all
sectors of the economy.
❖ Under the New Public Sector Enterprise (PSE) Policy public sector commercial
enterprises have been classified as Strategic and Non-Strategic sectors.
❖ The following four broad Strategic Sectors have been delineated based on the criteria
of national security, energy security, critical infrastructure, provision of financial
services and availability of important minerals:
➢ Atomic Energy, Space and Defense;
➢ Transport and Telecommunication;
➢ Power, Petroleum, Coal and other minerals; and
➢ Banking, Insurance and Financial Services.
❖ In Strategic sectors, the bare minimum presence of the existing public sector
commercial enterprises at the Holding Company level will be retained under
Government control.
❖ The remaining enterprises in a strategic sector will be considered for privatisation or
merger /subsidisation with another PSE or for closure.
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❖ PSEs in non-strategic sectors shall be considered for privatisation, where feasible

(possible), otherwise, such enterprises shall be considered for closure.
❖ Approval of the Government for strategic disinvestment of a specific PSE shall be taken
from time to time, on a case-to-case basis.
❖ The timing for specific transactions will however, be contingent, inter alia, on the
considerations of appropriate sequencing, sectoral trends, administrative feasibility,
investors' interest, etc.
❖ Based on the recommendation of NITI Aayog, the Government, since 2016, has given
'in-principle' approval for strategic disinvestment of 35 CPSEs and/or Subsidiaries/
Units/ Joint Ventures of CPSEs and IDBI Bank.
❖ Out of the 36 cases, 33 cases are being handled by DIPAM and 3 cases are being
handled by the respective Administrative Ministry/ Department.
❖ Out of the 33 cases being handled by DIPAM, strategic disinvestment transactions have
been completed in 9 cases; 5 CPSEs are under consideration for closure; 2 cases are
held up due to litigation.
❖ The remaining 17 transactions are at various stages.
❖ With progress on the privatisation of Air India, the government has crossed a significant
milestone.
❖ The government of India has received Rs. 2,700 crore cash sale proceeds from the
strategic sale of Air India Ltd.
❖ Privatisation of Air India is expected to improve the performance and productivity of
the airline and help to rejuvenate the aviation sector of the country.
❖ The Cabinet Committee on Economic Affairs (CCEA) empowered an Alternative
mechanism to approve the highest bid of M/s Tata Steel Long Products Limited for
93.71% shares of JV partners of 4 CPSEs and the Odisha Government.
❖ Globally, PSUs account for:
➢ 20 per cent of investments,
➢ 5 per cent of employment and up to
➢ 40 per cent of domestic output (International Finance Corporation, 2018).
❖ According to the Fortune Global 500 Company Rankings 2019, around 25% of
companies are linked to or controlled by the government.
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❖ The developing countries have a higher presence of PSEs among their top companies as
compared to the developed countries.
❖ Developed countries have gradually moved away from the PSE model of growth to
encourage private investment and competition.
❖ International events like:
➢ The breakup of the erstwhile Soviet Union.
➢ East Asian Financial Crisis
➢ Mounting losses of PSUs
➢ Pressure on the government exchequer
❖ led to the privatisation of several PSEs.
❖ However, PSEs continue to play a key role in many developing countries in
➢ economic development by ensuring the implementation of government schemes and
policies.
➢ enhancing the geo-strategic reach of countries by acquiring strategic assets through
targeted investments.
❖ PSUs help to ensure energy security, and national security (for example, defence),
supply public goods and services at concessional rates to targeted groups in the country
and support governments in pursuing sustainable development goals (SDGs) as observed
by reports of the World Bank and OECD.
❖ The top eight countries in the world with the highest share of PSEs, are namely China,
United Arab Emirates (UAE), Russia, Indonesia, Malaysia, Saudi Arabia, India and
Brazil, collectively account for more than 20 per cent of the world trade
❖ Among them, China has strategically pursued its global expansion plan through SOEs
(State Owned Enterprises) in its Belt and Road Initiative (BRI), to enhance regional
connectivity between China and countries in Asia, Africa, Europe, South America and
the Pacific (OECD, 2018).
❖ Over 80 Chinese SOEs are part of this initiative.
Second Administrative Reforms Commission (SARC) Recommendations
❖ The asymmetry of power has to be reduced to conform to ethical behaviour.
❖ Over-regulation, severe restrictions on economic activity, excessive state control, and
near-monopoly of the government have to be reduced altitude to prevent the spread
of corruption.
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➢ I.e. Rent-Seeking attitude.

❖ The Commission feels that the prevailing practice of nominating serving officers on the
boards of public sector bodies may compromise with the desired objectivity and
independence necessary for decision-making in these bodies.
❖ It would be unrealistic and imprudent for an official to sit in judgment of a decision
taken by a Board of which he is a member.
❖ Best practices of good governance prescribed for the corporate sector must be included
in the public sector.
❖ Audit Committees appointed by the State Government with independent members of
proven integrity and professional competence is one such practice.
❖ Public sector banks lack innovation and as a result, have a narrow product offering.
❖ There is a need to establish strong ties between the public and private sectors in
education.
❖ Civil servants should view civil society organisations and the private sector as partners
in the process of the country's governance.
❖ There is a need to shift from the pre-eminence of governance to effective governance
with a focus on decentralisation and citizen-centricity.
❖ Clarity on objectives has to be achieved by both the parties, private and public, at the
outset for the success of PPP projects.
❖ Appropriate coordination and review mechanisms must be created to develop mutual
trust and confidence.
❖ Creating competition by providing licenses to private sector or civil society bodies to
provide public services, breaking up a large public sector service dispensing unit into a
number of smaller public bodies and give the choice to the public to choose through the
process of bidding.
➢ I.e. Public Choice Theory
❖ Agencification i.e. the extensive use of executive agencies in administration has been
found useful in conducting an extremely wide range of functions and has been the
cornerstone of public sector reforms around the world.
❖ There is a need for tracking outcomes and not readily measurable outputs.
❖ There is a necessity to bring PSUs under the purview of internal audit.
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Conclusion
❖ CPSEs were created with social and egalitarian goals in mind.
❖ The private sector was literally absent in the 1950s
❖ It was necessary to give employment to the youth.
❖ But post-1990s even socialist and communist countries learnt the hard way that
CPSEs need to be revamped (Bludgeoning fiscal deficit).
❖ Orientation has shifted from the primacy of social welfare objectives towards
commercial viability, operational profitability, competitiveness and innovation.
❖ Finance Commissions have recommended disinvestment as a strategy for sick units at
the State and Central levels.
❖ Proceeds of disinvestment should be used to partially retire the debt.
❖ This will go a long way in reducing the revenue expenditure at both the state and
central levels.
➢ Reducing the revenue expenditure→ Reduction in salaries, pensions and
administrative expenses.
❖ Independent regulatory authorities divorced from the concerned Ministries are needed
to allow a level playing field and make prudent economic decisions.
❖ Non-priority enterprises should be relinquished.
❖ Timely adoption of e-Governance, the Internet of Things, Industrial Revolution 4.0, Big
data, etc is the need of the hour.
❖ The continuation of a loss-making CPSE because of the "commanding heights
sentiments" of a bygone era is bad economics.
❖ CSR funding from both private players and CPSEs can take over the role of welfarism.
❖ This will reduce the burden of the state and they can be the facilitating link between
private players and NGOs to uplift society.
❖ Moreover, CSR can help in grassroots participation, local government involvement,
cooperative federalism, community participation, etc.
❖ CPSEs should focus on a minimum rate of return as recommended by earlier Finance
Commissions.
❖ Perform or Perish policy needs to be adopted for CPSEs that are not part of the
strategic sector.
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❖ The practice of creating new PSUs at the state or central level must be restrained as
more often than not new bodies are created to reward bureaucrats with plum postings
after retirement.
❖ Multiple bodies can be integrated or amalgamated.
➢ I.e. recentralisation.
❖ The government too should resort to hiring contract employees to reduce their revenue
expenditure for jobs of an ad hoc nature.
❖ The utilisation of resources and making decisions must be based on sound principles of
economics.
➢ I.e. Economic Man concept of Simon
❖ The pandemic has created a bludgeoning fiscal deficit and to close the gap rather than
resort to internal or external borrowing, selling of stocks or shares of performing CPSEs
cannot be blamed.
❖ Especially when private investment is down and demand-driven growth is negligible.
❖ Time and again making PSEs open to manoeuvring and manipulation by bureaucrats
and politicians ends up in crony capitalism or incestuous corporate relationships which
surface as "breaking news".
❖ Air India, BSNL and MTNL are PSEs that have gone bust because of crony capitalism
and government interference.
❖ Depoliticisation of PSEs, Professionalisation of management and Granting autonomy in
letter and spirit are the needs of the hour.
❖ Promotions and rewards to employees should be based on performance rather than
Weber's "Graded Structure and Career".
❖ India can take a leaf from Temasek Holdings of Singapore.
❖ Temasek's Charter mandates it to increase the value of its holdings in the long term.
❖ Only 26% of its holdings remain in Singapore, and 40% of its holdings are spread over
the rest of Asia.
❖ Temasek's model also allows the state to distance itself from the management of its
enterprises without relinquishing control and ownership.
❖ Government-linked Companies under Temasek are free to hire professional managers
at market rates without any undue interference.
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❖ Some of the companies under Temasek have emerged as global brands.

❖ Temasek professionally manages its subsidiary companies by appointing qualified
managers and technical experts on their boards.
➢ This is a combination of Theory X and Y because some amount of control is present
but largely complete freedom is given to the employees.
❖ It procures or sells the assets of the group through global investment and disinvestment.
❖ The government only manages the policy and stands at arm's length from the holding
company.
❖ Roongta Committee also made a similar suggestion i.e. to have a single holding structure
(SHS) for CPSUs to manage investments and disinvestments.
❖ The government should remain in the background to ensure that goods remain
accessible to citizens and monopolistic pricing tendencies are arrested.
❖ The Chinese example is notable here.
❖ China has been able to distance its government from PSEs initially through
management contracts, privatisation and finally through Holding Companies.
❖ China adopted the policy of "Zhua Da Fang Ciao" (Manage the large and let go of the
small).
❖ Chinese PSEs are legally separated from the government.
❖ As of 2019, China is home to 109 corporations listed on the Fortune Global 500 list,
of which 93 are state-owned.
❖ China thus has managed to make its SOEs (State Owned Enterprises) big, efficient and
globally competitive without relinquishing much control by further consolidating the
state control while simultaneously allowing the market to be the ultimate resource
allocator, and reserving its option to intervene if and when needed.
❖ Closer home Tamil Nadu Industrial Development Corporation (TIDCO) through a joint
venture between Tata Group and the Government of Tamil Nadu started Titan Watches
in 1984 in which TIDCO has 26% equity.
❖ TIDCO still has 26% in Titan which is a market leader in watches in India and has now
started to acquire global brands.
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❖ Government entities need to step outside their comfort zone and start making prudent
investment decisions that will generate revenue for the government rather than be
passive receivers of directions and funds from the government.

PYQ
Q- "The New Economic Reforms during the past three decades have not only reduced
the scope of industrial licensing and areas reserved exclusively for the public sector
but also infringed the autonomy of the existing public sector undertakings." Examine
(2022/20 Marks).
❖ Introduction:
➢ Write about New Economic Reforms (NER) adopted by India in 1991 in the form
of LPG (Liberalisation, Privatisation and Globalisation) and its benefits.
❖ Body:
➢ Yes, NER has affected
✓ Areas reserved exclusively for the public sector
• As the private sector is allowed in those sectors. E.g.- Private Companies
were given contracts for manufacturing Rafale Aircraft.
✓ Industrial Licensing
• License Permit Raj has been abolished
✓ Infringed autonomy of PSUs
• It has brought the bad practices in PSUs to light.
• Welfarism has taken the back seat.
✓ Thus, the focus has shifted to the 2 E’s (economy and efficiency) of the
classical era.
➢ No, the NER has not affected the PSUs
✓ As there is the transformation from Theory X to Theory Y and Social Man to
Economic Man.
✓ PSUs have to compete with private players. Thus the Public Choice approach.
✓ PSUs are demanding more autonomy which is similar to practice in China
and Singapore.
❖ Conclusion
➢ Mention the positive steps along with the relevant data as well as the New Public
Service approach.
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Q- India has significantly advanced in its development goals, increased efficiency in the
public sector and unlocked innovation in the private sector by adopting the approach
of building Digital Public Infrastructure. Elucidate. (2023/20 Marks)
❖ Introduction:
➢ Explain what is Digital Public Infrastructure (DPI).
❖ Body:
➢ How the development goals have advanced.
✓ Health
• Ayushman Bharat→ Cashless transaction
• Nutrition→ Portability of Ration Card.
➢ Efficiency of the Public Sector improved due to
✓ Implementing classical thinker's ideology such as better time study, work-
study, better allocation of work as well as the culture of MoUs.
✓ Dashboards are maintained to monitor the progress.
✓ Government e-marketplace for procurement by government departments.
➢ Innovation in the Private Sector
✓ Start-ups and ed-tech industries.
➢ DPI has made it possible to move from Social Man to Economic Man, Theory X
to Theory Y, Immaturity to maturity and achieve the 3 E’s (economy, efficiency
and effectiveness).
❖ Conclusion:
➢ Mention some of the challenges of DPI such as gender inequality, lack of power
supply etc.

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