Forms of Public Enterprise

Introduction
Public enterprise is created to address a specific problem found by the government (or of
the people) hindering growth and development. Hence, it is intended to address a specific
lacuna in the development of the country. Moreover, public enterprises are created not
with the aim of profit maximizing. Instead, creation of public enterprise is ought to
maximize the WELFARE of the people. When we say welfare, it is relating to, or
concerned with the improvement of the disadvantaged social groups. This definition is the
basis of a normative economic theory of public enterprises. "Normative" means that the
application of the respective pricing rules can be justified by some higher-order value
judgement s as formally expressed by social welfare functions.
Secondly, public enterprises aim to maximize particular managerial or political objectives.
Such objectives are the basis of a positive economic theory of public enterprises.
"Positive" means that the respective objective functions are meant as an actual
description of economic reality.
In the succeeding discussion, we will learn the various forms of public enterprises and its
functions in the development of the country. Likewise, we will discuss the coupled
advantages and disadvantages of these forms of public enterprise.
Three (3) Forms of Public Enterprises
An important question arises as to what should be the form of organization for running
state enterprises, suitable form of organization will increase the efficiency of the concern.
Excessive dependence on government or finances will increase government interference
in the day to day working. These enterprises should be run on business lines and
necessary autonomy should be allowed to them. Following forms of organization are
generally used for state enterprises.
A. Departmental Management:
Departmental form of organization of managing state enterprises is the oldest form of
organization. In this form, the enterprise works as a part of government department. The
finances are provided by the government and management is in the hands of civil
servants. The Minister of the department is the ultimate in-charge of the enterprise.
The enterprise is subjected to legislative security. Departmental management is suitable
for public utility services and strategic industries. In India, railways, post and telegraph,
radio and television are working as government departments. In the same way, strategic
industries like defence and atomic power are under government.
Characteristics:
(i) The undertakings are wholly dependent on government for finances. State
treasury provides finances and surplus money (profits) is deposited in treasury.
 (ii) The management is in the hands of the government. The enterprise is
managed and controlled by the civil servants of the department.
(iii) The budget of the department is passed by the Parliament and/or by the state
legislature.
(iv) The accounting and audit control applicable to other government departments
are applicable to state enterprises also.
(v) The department enjoys legal immunity. Governmental sanction is necessary for
using the undertakings.
Advantages:
(i) Useful for Specific Industries: Departmental form of organization is necessary
for public utility services. The motive of these industries is not to earn profits
but to provide services at cheap rates. Strategic industries like defense and
atomic power cannot be better managed than under government departments.
(ii) Help in Implementing Government Policies: Government policies and programs
are better implemented by the enterprises under direct government control.
(iii) Complete Government Control: Departmental undertakings are completely
under government control. These undertakings are associated with one of the
government departments. Government can regulate their working in a proper
way.
(iv) Legislative Control: These undertakings are under the control of legislatures.
Government is answerable to the legislature for the working of departmental
undertakings. Legislative control acts as a check on these undertakings.
(v) Source of Income for Government: These undertakings are run on commercial
lines. They earn profits like private enterprises. They provide finances to the
government for initiating other social and development activities.
(vi) Secrecy: Department undertakings can maintain secrecy in their workings.
Secrecy is especially necessary for undertakings like defense.
(vii) Useful for Developing Enterprises: Departmental form of organization is
necessary for those undertakings which are in a developing stage. They are
suitable for enterprises where gestation period is long.
Disadvantages:
(i) Excessive Government Interference: There is excessive government
interference in departmental organization. These undertakings are not given
freedom to decide their own policies.
(ii) Shortage of Competent Staff: Departmental undertakings are like
administrative departments. Civil servants are given control of these
undertakings. There is a shortage of competent persons who have commercial
experience. Civil servants are not suitable for running commercial
organizations.
 (iii) Centralization of Powers: All policies are decided at the ministerial level. The
powers are centralized at the higher level. It adversely affects the efficiency of
the concerns.
(iv) Red Tapism: There is delay in taking important decisions. Red tapism is
prevalent as in other government departments. Commercial organizations
cannot afford delay in taking decisions.
(v) Inefficiency: Losses in departmental undertakings are not taken seriously. No
efficiency standards are set for these undertakings. They are run as
government departments and not as commercial undertakings.
(vi) Political Changes affect their Working: The change in government involves shift
in policies of departmental undertakings. Every political party tries to manage
departmental undertakings according to its election manifesto. This adversely
affects the working of these undertakings.

B. Public Corporations:
Public Corporations are created by a special stature of a state or central government. A
legislative act is passed by defining the sphere of work and mode of management of the
undertakings. A public corporation is a separate legal entity created for a specific purpose.
According to President Roosevelt, “A public corporation is clothed with the powers of the
government but possessed of the flexibility and initiative of private enterprise”. “Public
Corporation is a continuation of public ownership, public accountability and business
management for public ends.”
An exhaustive definition is given by Earnest Davis, “Public Corporation is a corporate
body, created by public authority with defined powers and functions and is financially
independent. It is administered by a board appointed by public authority to which it is
answerable. Its capital structure and financial operations are similar to those of public
company, but its stock holders retain no equity interests and are deprived of voting rights
and power of appointment of the board.”
Characteristics:
(i) Separate Legal Entity: A public corporation is created by a separate legislative
act. It is a separate legal entity. It can sue or be sued without any government
approval.
(ii) Government Investment: These corporations are financed by the government.
In some cases, private capital may also be associated, but at least 51% of the
shares are held by the government.
(iii) Financial Autonomy: Corporations are not dependent on the state exchequer
for its day-to-day financial requirements. Legislatures do not pass their
budgets. They can also raise loans separately.
 (iv) Government Appointed Management: The management of the corporation is
appointed by the Government. Generally, a board is nominated to manage
these undertakings.
(v) Service Motive: The motive of public corporations is to provide service to the
public at a reasonable price.
(vi) Independent Recruitment of Employees: These corporations recruit their own
employees. They can appoint capable persons to manage the corporations on
commercial lines.
(vii) No Government Interference: Public corporations are free from government
interference. They execute their independent policies. They do not depend
upon government departments for determining their policies.
Advantages:
(i) Internal Autonomy: Public corporations have internal freedom. They can devise
their own policies and programs. They can set their own goals and can decide
their own line of action.
(ii) Flexibility: There is no rigidity in their working as in case of departmental
undertakings. The flexibility is necessary for the success of a business concern.
The management is free to take decisions in the interest of the organization.
(iii) Free from Government Interference: Public corporations are free from
government interference. They are not dependent on government
departments. Various policies are decided independently. Management is free
to manage these undertakings.
(iv) Employment of Competent Persons: These corporations utilize the services of
competent persons. They are free to employ persons according to their
requirements. All important positions are given to capable persons. They have
their own cadres of employees.
(v) Run on Business Lines: These undertakings are run on commercial lines. They
also earn profits like private concerns. It helps these undertakings to finance
their schemes and undertake expansion plans.
(vi) Accountability: These undertakings are accountable to the legislature for their
performance. They try to increase their efficiency, otherwise they are criticized
in the Parliament or state legislature.
(vii) Service to Society: Public corporations provide commodities and services to
the people at reasonable prices. Though they also earn profits, their primary
aim is to help the society in getting various services.
Disadvantages:
(i) Limited Autonomy: Though public corporations enjoy internal autonomy, still
government9s interference is there. Concerned government department
exercises direct or indirect control over these bodies. All-important policies are
decided with government approval. Management is also appointed by the
government. So, limited autonomy is exercised by these corporations.
 (ii) Difficulty in making Changes: Any change in the sphere of activities of the
corporation involves a change in the statute of the corporation. The statute can
be amended only by a legislature. It is a difficult process and takes much more
time.
(iii) Misuse of Financial Autonomy: Financial autonomy of the corporation is
sometimes misused by the management. Public money may be wasted on
unnecessary projects.
(iv) Lack of Personal Touch: Corporations are managed by the salaried employees.
Top managerial personnel are also paid employees. There is lack of personal
touch. Everything is managed in a routine way.
(v) Government Control: Though these corporations are autonomous bodies, still
there are many controls exercised by the government. Public Accounts
Committee and Auditor and Comptroller General of India exercise control on
these corporations.
C. Government Company Organization:
A company owned by central and/or state government is called a government company.
Either whole of the capital or majority of the shares are owned by the government. In
some cases, private investment is also encouraged but at least 51% shares are held by
the government. Management of these companies is under the control of the government.
Subsidiary companies of government companies are also covered under government
companies.
Government companies are registered both as public limited and private limited
companies but the management remains with the government in both the cases.
Government companies enjoy some privileges which are not available to non-government
companies. No special statute is required to form government companies.
Government companies enter those fields where private investment is not forthcoming.
Sometimes, government has to take over sick units in private sector. These companies
are also useful where joint ventures are to be taken up. Nationalized industries can also
be run up by government companies. Some of the examples of government companies
in India are Coal Mines Authority Ltd., Steel Authority of India Ltd.
Advantages:
(i) Flexibility in management: There is a freedom and flexibility in the management
of government companies. Companies can organize their working according to
the necessity of the situation.
(ii) Run on commercial lines: Government companies are run on sound business
lines. They earn surpluses to finance their own expansion plans.
(iii) Healthy competition: Government companies provide healthy competition to
the private sector. Private businessmen will have to be careful in fixing their
prices. The consumer is not at the mercy of the private businessmen.
(iv) Financial autonomy: These companies are dependent on the government only
for their initial investments. They can plan their own capital structure. The
companies earn profits and these profits can be used for further investments.
(v) Helpful in developing neglected sectors: There are certain sectors which are
important from the national point of view. Private sector may not be coming
forth to invest in such sectors. Government companies can enter all the
neglected areas and can help all-round growth.
(vi) Providing industrial environment: An industrial infrastructure is provided by the
government companies. They help the growth of ancillary units.
Disadvantages:
(i) Slackness in management: The management of government companies is
slackened under the garb of public service. These companies are not generally
as efficient as units in the private sector.
(ii) Political interference: There is a lot of political interference in government
companies. Every government tries to nominate directors from its own political
party and the companies are run on political considerations.
(iii) Red tapism: These companies are dependent on the government for taking
important policy decisions. Red-tapism in government departments affects the
working of these companies.
(iv) Limited autonomy: Theoretically, these companies are free from government
control but in reality, they are dependent on various government departments.
They have to get permission from government departments regarding loans,
capital and managerial appointments.
(v) Official domination: Civil servants are appointed on important managerial posts
of these companies. They are not capable of running these undertakings on
sound business lines.
ACTIVITY NO.2
1. What are the forms of public enterprise? Provide examples of Philippine GOCCs
per forms of public enterprise. (30 pts)