Public Enterprises have a close and continuous relationship with the government. The government has to oversee their working and control their operations because they are instruments of its economic and social policies and because of their great importance to the national economy. It is also argued that a closer control is necessary as the PE manager is neither inspired by personal gains nor gnawed by the final sanction of insolvency of his enterprise.
The government’s relationship with Public Enterprises is determined not only by the fact that the government is the sole or the majority shareholder but also by the fact that the government has to ensure that policies of Public Enterprises are compatible with the national priorities and objectives. Some enterprises operate in sensitive areas and require close and constant direction and supervision by the government.
The government – Public Enterprise relationship is affected by many factors taken together, of which the personality of the chief executive and his equation with the minister and the secretary to his minister is perhaps the most crucial. Further, the government feels more concerned about enterprises that are in deficit because parliament takes more interest in them, and also because a deficit may indicate less efficiency.
Nature of relationship
The government – public Enterprise relationship has many facets. They manifest themselves more in the form of advice, persuasion or simple communication of the government’s viewpoint, rather than the issuance of directions or orders.
The basic problem is to what extent the government should be involved in matters of policy, public interest, and operational efficiency of Public Enterprise. The government –Public Enterprise relationship is quite intimate, yet the necessary distance has to be maintained in those matters where autonomy has been granted.
If a public enterprise is not allowed to benefit from their autonomy there would be no point in establishing them as autonomy units, with high-powered boards and their own independent staff.
Formal powers of the government are laid down in the articles of association of the government companies, and for the statutory corporations in the incorporating statutes and the Rules made thereunder. However, the Articles or the statutes do not generally impose any particular duty or responsibility regarding public interest, such duties get manifested through government control.
The public interest involving those matters which the enterprise might not have regarded for if it concerns itself with its commercial success only. Such matters include not using monopoly power to exploit consumers, considering the requirements of development, for example, employment of socially disadvantaged groups.
It must be noted that the public interest need not necessarily conflict with business principles. What is good for the enterprise e.g. generation of resources is also good for the nation. Commercial efficiency is after all in the public interest. But what is important is that once the public interest has been stated and accepted, the enterprise must set out to operate commercially i.e. efficiently, within that context.
Autonomous Public Enterprises should be endowed with the maximum
authority, consistent with their responsibilities.
Principles of Government – Public Enterprise Relationship
- The government should be concerned with securing that Public Enterprises operates in the public interest. For this purpose, it should decide the broad policies to be pursued by Public Enterprises, including their financial and economic obligations.
- The government should seek to ensure the efficiency of Public Enterprises by exercising a broad oversight over them, but should not become involved in their management.
- The Public Enterprise should be left as free as possible to carry out the policies required of them as efficiently as possible.
- There should be a clear demarcation of responsibilities between the minister and Public Enterprises.
- The method of government control should be mainly strategic rather than tactical; Public Enterprises can have a clear idea of what the government requires of them if they are not subject to frequent, ad hoc, tactical controls.
- The government and Public Enterprises should be publicly accountable. It means that responsibility for actions, successes and failures should be publicly identifiable.
- The measure of management should not be purely commercial success or social achievement, but should be efficiency with which the enterprise carries out the joint commercial/special duties given to it. The efficiency is of two factors; success in giving customers a mix of goods and services they want and success in minimizing the cost of doing so.
- The ultimate sanction for bad management may be dismissal or non-reappointment in post, but improvement of management should be the first objective.
- Proper and fruitful exercise of government control depends on the attitudes and ability of both the minister and his secretariat and the Public Enterprises and its officials.
Some problems of public undertakings
Public enterprises are not free from difficulties. They have to work under certain limitations such that performance-wise their rating is sufficiently low.
- Objectives: There is lack of clear-cut objectives. Public enterprises are expected to help and guide the economy in numerous ways. However, any given public enterprise can be expected to have only limited objectives in view, such as creation of an investigable surplus for authorities or for expansion, providing infrastructure and the like. In many cases, a public enterprise is not clear as to what objective(s) it is expected to pursue. At some time, it might be accused of not pursuing one particular objective and at another time, some different objective, or it may be expected to pursue various objectives in general which could be contradictory and mutually exclusive. In such a situation, the enterprise could not simultaneously achieve a high degree of efficiency w.r.t all of them.
- Pricing policy
Pricing policy adopted by an enterprise may be designed to subsidize the consumer of its goods or services even when the overall economic policy of the country does not dictate so or the case may be that in order to cover its general inefficient working, the enterprise might be charging monopoly prices in the name of rationalizing them or ensuring a fair rate of return on invested capital.
The problem gets further aggravated on account of government intervention. Some enterprises are forced to procure their inputs from specified sources only. The authorities often intervene in matters of wage rates and prices of inputs and outputs. Hedged by price regulations such enterprises are left with no scope for improving their profitability.
- Spillover Effects
Public enterprises are interrelated with each other and private enterprises through input-output relations. They have a demand for each other’s products and depend on mutual demand-supply relations.
The result is that an inefficient working of an enterprise tends to spread its effects on to other enterprises also. When supplies from one enterprise are delayed, are highly-priced and of inferior quality, or suffer from any such defects, a chain activity takes place and quite a few other industries including public enterprises suffer.
Since most of the key and basic industries are in the public sector, their inefficient working causes much larger damage than would otherwise be the case.
- Incentives and Penalties
Public enterprises, even when they are companies or corporations, are not in a position to devise a high-grade system of punishment and incentives. Management personnel in public enterprises do not have any incentives to take initiative and try out new and better ideas. On the other hand, they are liable to explain their action if they deviate from the set practice even if the result of the initiative is good. The result is management personnel think it best to play safe and work any within the practice.
- Top Heavy Management
Public enterprises are burdened with inefficient and expensive management. The appointments to top positions are not always made on grounds of merit and efficiency only. These top positions are generally transferable from one concern to the other. The number of managers is so heavy.
- Red Tapism
Bureaucratic delays and the need to have specific sanctions of funds even when allocations have been made from the ministry of finance every time a non-routine expenditure is to be made, causing an escalation of costs and inefficiency.
- Cost consciousness
The unions, if they have enough of bargaining strength, are able to force higher wages with no link with production.
- Professionalism; There has been a lack of professionalism in the management, though this deficiency is being removed gradually through the public enterprise’s selection board.
- Gestation Period
Public enterprises have large long gestation periods.
- Over Regulation
The entire machinery of public sector enterprises is so entangled in rules, regulations and audit orientation that they mostly end up in under-utilized production capacity. This tendency is strengthened by delays in the surplus of essential inputs for which recourse to non-recognized methods of replenishment is not allowed.
- Social Burden
Expenses incurred on creation and maintenance of townships for the workers and other employees, the infrastructure and welfare facilities provided for them is also expenditure on creation and maintenance of per capita facilities are termed social burdens of the undertaking under consideration.