Public and Private Sector in Public and Private Sector in IndiaIndia

SUNEEL GUPTASUNEEL GUPTA

ASSOCIATE PROFESSORASSOCIATE PROFESSOR

GHS-IMR,KANPURGHS-IMR,KANPUR

PUBLIC SECTOR

A public enterprise is an organization which is

i) Owned by public authorities including central state or local authorities to anextent of 50% or more

ii)It is established for achievement of a defined set of public purpose ,which may be multidimensional

Objective1. To help in rapid growth and

industrialization and create necessary infrastructure for economic development.

2. Promote redistribution of income & wealth3.Create employment opportunities 4.Promote regional balance development5. Promote import substitution save and earn

foreign exchange for country.6. Basic Infrastructure (STC, Railways, SAIL)

Organization of Public Sector

•Ministry ( Railway,Finance etc)

•Departmental Undertaking (Defence,Post & Telegraph,Defence production unit)

•Statutory Corporation( LIC, AIR India, IFC,RBI,ONGC,NTC etc..)

•Central Board (Bhakra Nangal, Hira Kund ,Nagarjun Sagar dam)

•Government Companies ( Ashok Hotels, ITI, HMT Hindustan shipyard etc),

Pricing Practice

Administrative Price : Price fixed by Government

No profit –No loss Price ( DVC, Hindustan antibiotics, Hindustan Insecticides)

Cost Plus Price – ITI, HAL, Bharat electronic

Competitive Price

Follow the leader

Subsidized Prices

Discriminatory Prices

Private SectorPrivate Sector Privatization: Transfer of ownership and Privatization: Transfer of ownership and

control of an existing public sector control of an existing public sector enterprise ,activity or service to the private enterprise ,activity or service to the private sector. Privatization may be full or partial. It sector. Privatization may be full or partial. It may be selective ie. Some function are may be selective ie. Some function are transformed to the private sector, which other transformed to the private sector, which other are retained in public sector.are retained in public sector.

The entry of new private sector could introduce competition The entry of new private sector could introduce competition where PSU’s enjoy monopoly The existing PSU’s will be where PSU’s enjoy monopoly The existing PSU’s will be forced to go commercial and respond to the market forced to go commercial and respond to the market disciplinediscipline..

The Privatization movement The move towards privatization has gained momentum since 70’s. The following are usually mentioned reasons

1 The emergence of conservative government in principal industrial countries

2 The emergence of multinational entities

3 Technological changes

4 Emergence of local capital market and entrepreneurship

5 Dissatisfaction with performance of public sector

( 1960’s &1970’s saw emergence of literature pointing out the inefficiency of Import substitution policies and gave rise to question that why government Should intervene in the market place when it does not have any information about market players)

Reason for Indian Privatization1. Crippling Budget deficit2. Spectacular growth by economies of Korea, Taiwan, Malaysia in private sector3. Galloping cost of government intervention I trade and industry & procedural difficulty4. Collapse of USSR& communist government in eastern Europe

5. Changes in China6. Emergence of professional management7. IMF & World Bank extended arm to capitalism8.Gulf crisis9.Lack of demand in economy10.Integration of world trade11. Developed local capital market and Financing Institution

Recent Reasons

•To STENGTHEN Competition

•To improve public finance•To fund Infrastructure Growth•Accountability of share holders•To reduce unnecessary interference•More disciplined Labour force

The main reason for increased efficiency gain as a result of privatization are attributed to

(i)Less political interference in decision making

(i)Staff remuneration is more closely linked to productivity and profitability

(ii)Firm are exposed to financial market discipline as opposed to government support

(iii)Firm’s cost reducing effort are higher under competitive private ownership

Key obstacle to privatization(i)Lack of strong and high level political

commitment to the privatization program

(ii)Inappropriate design of privatization strategy( eg. In term of scope, technique sector and institutional capability of the government)

(iii) Unclear and weak institutional frame work-decentralized or centralized.( ministry and provincial level)

iv) Lack of proper preparation of enterprise for privatization or divestiture eg. Accounting and auditing , treatment of losses, social and environmental safety net

(v) Insufficient transparency and flexibility in term of the method of privatization, balancing, ownership, and control ( corporate governance)

(vi) Vested interest of manager, employees and customer

(vii) Lack of appropriate legal frame work (eg. Property right, foreign ownershipbankruptcy law )

(viii) Underdeveloped capital markets

WAYS OF PRIVATIZATIONWAYS OF PRIVATIZATION DISINVESTMENTDISINVESTMENT

CONTRACTINGCONTRACTING

FRANCHISINGFRANCHISING

PREMITING PRIVATE SECTOR ENTER INTO PSU RESERVED PREMITING PRIVATE SECTOR ENTER INTO PSU RESERVED AREAAREA

LIQUIDATIONLIQUIDATION

LEASINGLEASING

DisinvestmentDisinvestmentLong Term strategy on disinvestmentLong Term strategy on disinvestment

1. Strengthen profitable PSU to promote greater 1. Strengthen profitable PSU to promote greater competitiveness to enable payment of higher dividends to competitiveness to enable payment of higher dividends to the government to enhance Valuethe government to enhance Value

2. Financial restructure and revive loss making PSU to invite 2. Financial restructure and revive loss making PSU to invite private capital for long term turnaround.private capital for long term turnaround.

3. Enhance government receipt by disinvestment in 3. Enhance government receipt by disinvestment in profitable PSUsprofitable PSUs

Initially 40 out of the 245 PSUs were referred to the Initially 40 out of the 245 PSUs were referred to the disinvestment committeedisinvestment committee

The said industries were grouped into

I. Strategic Group. Arms and ammunitions and defense equipmentAtomic energyRialway transport.

II Core GroupONGC,OIL,BRPL,SAIL,GAIL,AI,CONOR,PHL,NLC,SECFL,WCFL,NALCO,IBP,NTPC,PGCL,NHPC,KIOCL.

III Non coreSCI,ITDC,IPCL,FACT,NFL,HCIL,HTI,ITI,MFIL,HLL,HEML,HZL,MOIL

YEARYEAR TARGET TARGET RECEIPTRECEIPT

ACTUAL RECEIPTACTUAL RECEIPT

1991-921991-92 25002500 30833083

1992-931992-93 25002500 19131913

1993-941993-94 35003500 NILNIL

1994-951994-95 40004000 48434843

95-9695-96 70007000 362362

96-9796-97 50005000 380380

97-9897-98 48004800 902902

98-9998-99 50005000 53715371

99-0099-00 10’00010’000 18291829

00-0100-01 10’00010’000 18701870

01-0201-02 12’00012’000 56325632

02-0302-03 12’00012’000 33423342

TOTALTOTAL 78’30078’300 29’48229’482

DISINVESTMENT PROCEDURE

GOI CARRIES DISINVESMENT IN ACCORDANCE WITH PRESCRIBED PROCEDURE TO ENSURE TRANSPERENCY

PROPOSAL OF DISINVESTMENT IS BASED (OF PSU) RECOMMENDATION OF DISIN. COMMOSSION

CONSIDERATION OF CCD (CABINET COMMTTE.ON DISINV.) CCD CLEAR THE PROPOSAL & SELECTION OF ADVISOR IS DONE THROUGH COMPETITIVE BIDDING

ADVISOR ASSIST IN ADVERTISEMENT IN NEWSPAPER INVITING EOI

ADVISOR PREPARE INFORMATION MEMORANDOM WITH PSU &SHORTLIST THE BIDDER ( GOI+ Rep of PSU+ BIDDER)

THE FINAL AGREEMENT ARE THEN VETTED BY MIN. OF LAW & APPROVED BY GOVT.

THE BIDS ARE EXAMINED & ANALYZED BY IMG & ITS RECOMMENDATION ARE PLACED BEFORE CCD FOR FINAL APPROVAL

AFTER ALL TRANSACTION IS COMPLETE CAG EVALUATES FOR PLACING IN THE PARLIAMENT & RELESEING TO PUBLIC