| Business Studies NCERT Notes, Solutions and Extra Q & A (Class 11th & 12th) | |||||||||||||||||||
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Chapter 3 Private, Public And Global Enterprises Notes, Solutions and Extra Q & A
This chapter examines the structure of a mixed economy, composed of the Private Sector and the Public Sector. The public sector, owned and managed by the government, is organised into three main forms: Departmental Undertakings, which are direct extensions of government ministries (e.g., Railways); Statutory Corporations, created by a special Act of Parliament for operational autonomy (e.g., LIC); and Government Companies, registered under the Companies Act to compete in the market (e.g., SAIL). The chapter traces the public sector's evolving role, from being the primary driver of development pre-1991 to a more competitive and performance-oriented entity after the economic reforms.
The contemporary business landscape also features powerful Global Enterprises (MNCs), characterized by their vast resources and advanced technology. To foster growth in this globalized environment, collaborative models have become crucial. Joint Ventures allow two or more businesses to pool resources for mutual benefit, while Public Private Partnerships (PPPs) are strategic alliances between the government and private firms, primarily for large infrastructure projects. These partnerships leverage private sector efficiency and resources to achieve public welfare goals and accelerate economic development.
Private Sector and Public Sector
The Indian economy is officially classified as a mixed economy. This framework is characterized by the coexistence and operation of both privately owned and government-owned business enterprises. This economic landscape is broadly divided into two major sectors: the private sector and the public sector. A clear understanding of the distinction between these two, their respective roles, and their evolution is fundamental to comprehending the structure and dynamics of the Indian economy.
The Private Sector
The private sector consists of all businesses that are owned by private individuals or a group of individuals. The primary motive of these enterprises is typically profit maximisation, and they operate on the principles of market demand and supply. The capital is arranged by the owners through their personal resources or by borrowing from various sources. These organisations are managed independently by their owners or professional managers appointed by them, and they operate subject to the laws and regulations of the country.
As detailed in the previous chapter, the various forms of organisation within the private sector include:
- Sole Proprietorship
- Partnership
- Joint Hindu Family Business
- Cooperative Society
- Company (Private Limited and Public Limited)
The Public Sector
The public sector, also known as the state sector, consists of various organisations that are owned and managed by the government. These organisations may be either partly or wholly owned by the central government, one or more state governments, or a combination of both. The government participates in the economic activities of the country through these enterprises. While they are also expected to generate revenue, they often have the dual objectives of earning a return on investment while simultaneously furthering social and economic welfare goals, such as developing infrastructure, ensuring balanced regional growth, and providing essential services to the public at affordable prices.
Evolution of the Sectors in India
The respective roles and importance of the private and public sectors have been shaped and redefined by India's industrial policies over the decades.
Pre-1991 Era: Dominance of the Public Sector
Following independence in 1947, India adopted a path of planned economic development. The Industrial Policy Resolutions of 1948 and 1956 placed significant emphasis on the public sector, envisioning it as the primary engine for industrial growth. This was done for several reasons: the private sector lacked the massive capital required to build heavy industries, there was a need to develop a strong industrial and infrastructure base, and the government aimed to achieve socialist goals of equitable development. The private sector's role was also defined, but it operated under a strict regime of licenses and regulations, with the government exercising significant oversight.
Post-1991 Era: Economic Reforms
The Industrial Policy of 1991 marked a radical and transformative shift. Faced with a severe economic crisis, India embarked on a new path of Liberalisation, Privatisation, and Globalisation (LPG).
- Liberalisation meant reducing government controls and freeing businesses from the "license-permit raj".
- Privatisation involved reducing the role of the public sector by initiating the disinvestment of the government's shares in Public Sector Enterprises (PSEs).
- Globalisation meant integrating the Indian economy with the world economy. This policy opened the doors to Foreign Direct Investment (FDI), leading to the large-scale entry of Multinational Corporations (MNCs) or Global Enterprises into India.
Today, the Indian economy is characterized by the dynamic coexistence of a vibrant and expanded private sector, a restructured and more competitive public sector, and large, influential global enterprises.
Forms of Organising Public Sector Enterprises
The government's participation in the economic and commercial activities of the country requires a formal and structured organisational framework. Public enterprises are essentially businesses owned by the public, operating with public funds, and ultimately accountable to the public through the Parliament. Depending on the nature of their operations, the need for financial autonomy, and the degree of government control required, a public enterprise can take one of the following three principal forms of organisation.
Departmental Undertakings
This is the oldest and most traditional form of organising public enterprises and represents the most direct form of government involvement in business. These enterprises are established as departments of a specific ministry and are considered an integral part or an extension of the ministry itself. They have no separate legal identity distinct from the government and are financed, managed, and controlled in the same way as any other government department.
They act through government officers, and their employees are government servants with the same service conditions as other civil servants. Classic examples of departmental undertakings include the Indian Railways (under the Ministry of Railways) and the Department of Posts (under the Ministry of Communications).
Features
- Funding: Their funding comes directly from the Government Treasury through annual appropriations (allocations) from the national budget. All revenues earned by them are deposited directly into the treasury.
- Accounting and Audit: They are subject to the standard budgeting, accounting, and audit controls that apply to all other government departments, often conducted by the Comptroller and Auditor General (CAG) of India.
- Staffing: The employees are government servants, and their recruitment and service conditions (pay scales, benefits, etc.) are the same as those of other government employees. They are often headed by senior civil servants from services like the Indian Administrative Service (IAS).
- Control: They are subject to the direct and absolute control of the concerned ministry. They are fully accountable to the minister, who in turn is accountable to the Parliament.
Merits
- Enables Parliament to exercise effective and direct control over their operations through the concerned minister.
- Ensures a high degree of public accountability as their functioning is open to parliamentary scrutiny.
- Revenue earned is a direct source of non-tax income for the government.
- It is the most suitable form for activities of strategic importance and national security, where secrecy and direct government control are paramount.
Limitations
- Lacks the operational flexibility that is essential for the smooth and efficient operation of a modern business.
- Suffers from significant delays in decision-making due to excessive bureaucracy and the need for ministerial approval for even minor decisions.
- Is unable to take advantage of business opportunities quickly due to a conservative, rule-bound, and risk-averse culture.
- Suffers from "red tapism," where actions must pass through proper, and often very slow, channels of authority.
- Is highly prone to political interference through the ministry, which can affect business decisions.
- Is often insensitive to consumer needs due to a lack of competition and the absence of a profit motive.
Statutory Corporations
Statutory corporations are public enterprises that are brought into existence by a Special Act passed by the Parliament or a State Legislature. This Act is the charter of the corporation; it defines its specific powers, functions, objectives, privileges, and its relationship with government departments. They are created to manage large-scale commercial undertakings with a high degree of autonomy.
A statutory corporation is a corporate body with a separate legal entity, created by the legislature, and is financially independent. It is designed to combine the power and backing of the government with the operating flexibility and initiative of a private enterprise. Notable examples include the Life Insurance Corporation of India (LIC), the Reserve Bank of India (RBI), and the Food Corporation of India (FCI).
Features
- Formation: They are set up under a specific Act of Parliament or State Legislature. This Act is tailor-made for the corporation and defines its entire scope of operations.
- Ownership: They are wholly owned by the state. The government has the ultimate financial responsibility, bearing any losses and having the right to appropriate any profits.
- Corporate Existence: It is a body corporate and has a separate legal entity, distinct from the government. It can sue and be sued, enter into contracts, and acquire property in its own name.
- Financial Independence: It is usually independently financed. It obtains funds by borrowing from the government or directly from the public and through revenues generated from the sale of its goods and services. It is not subject to the strict budgetary, accounting, and audit controls that apply to government departments.
- Staffing: The employees of these corporations are not government or civil servants. Their recruitment and conditions of service are governed by the provisions of the special Act that created the corporation, giving it flexibility in human resource management.
Merits
- They enjoy considerable independence in their functioning and a high degree of operational flexibility.
- Being financially autonomous, they are generally free from undesirable day-to-day government regulation and financial interference.
- They can frame their own policies and procedures within the powers assigned to them by the Act, allowing for quicker decision-making.
- They serve as a valuable instrument for economic development, combining public purpose with business efficiency.
Limitations
- In reality, their autonomy is often curtailed, as they are subject to many rules and regulations specified in their Act and by the government.
- Significant government and political interference often exists in major decisions, especially where huge funds or policy matters are involved.
- In corporations that have extensive dealings with the public, rampant corruption can become a major issue.
- The practice of the government appointing advisors and representatives to the corporation's board can curb its freedom and delay decision-making, especially if there is a disagreement between the board and the government nominee.
Government Company
A government company is a company that is established and registered under The Companies Act, 2013 (or any previous company law), just like any private sector company. It is defined as a company in which not less than 51 percent of the paid-up share capital is held by the central government, or by any state government(s), or partly by the central government and partly by one or more state governments. A company which is a subsidiary of a government company is also considered a government company.
These enterprises are established for purely business purposes and are intended to operate in a competitive environment, competing with companies in the private sector. The shares of the company are purchased in the name of the President of India. Well-known examples include Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL), and Hindustan Machine Tools Ltd. (HMT).
Features
- Registration: It is an organisation created and registered under The Companies Act, 2013. It does not require a special Act of Parliament for its formation.
- Separate Legal Entity: As a registered company, it has a separate legal identity, distinct from its majority shareholder, the government. It can sue and be sued, enter into contracts, and acquire property in its own name.
- Management: Its management and internal affairs are regulated by the provisions of the Companies Act and its own Memorandum and Articles of Association. The employees are appointed according to the company's own rules and are not government servants.
- Funding: It obtains its funds from government shareholdings and, if applicable, other private shareholders. It is also permitted to raise funds from the capital market by issuing shares and debentures.
- Audit: An auditor is appointed by the Central Government on the advice of the CAG. Its annual report must be presented in the Parliament or the State Legislature, ensuring public accountability.
Merits
- It can be established easily by fulfilling the standard requirements of the Indian Companies Act, a process much simpler and faster than passing a separate Act in the Parliament.
- It has a separate legal entity, distinct from the government, and can operate with a good degree of autonomy.
- It enjoys flexibility and autonomy in all management decisions and can take actions based on business prudence and commercial principles.
- By providing goods and services at reasonable prices, these companies can act as a check on private monopolies and curb unhealthy business practices.
Limitations
- Since the government is the only or major shareholder, the provisions of the Companies Act that are meant to protect minority shareholders do not have much relevance. The autonomy often exists only on paper.
- It can evade its constitutional responsibility to the Parliament. While a departmental undertaking is directly answerable, a government company, being a separate entity, has a more indirect accountability mechanism.
- With the government being the sole or majority shareholder, the management and administration can effectively rest in the hands of government-appointed directors, who may prioritize political objectives over commercial ones. This can defeat the very purpose of establishing it as a company to run on business principles.
Changing Role of Public Sector
The role envisioned for the public sector in the Indian economy has undergone a significant and fundamental transformation since independence. In the initial decades, it was expected to be the primary engine of economic growth and the cornerstone of a self-reliant, socialist pattern of society. However, with the landmark economic reforms of 1991, its role has been substantially redefined, moving away from a position of dominance to one that is more competitive, performance-oriented, and complementary to the private sector.
Role of the Public Sector before 1991
At the time of Independence, the Indian economy was underdeveloped, with a weak industrial base and inadequate infrastructure. The private sector was either unwilling or unable to make the massive, long-term investments required for nation-building. In this context, the public sector was given the 'commanding heights' of the economy and was expected to play a crucial role in achieving key socio-economic objectives.
Development of Infrastructure
The development of a strong infrastructure—including transport, communication, power, and heavy industries—is the bedrock of industrialisation. The private sector lacked the financial resources, technical know-how, and risk-taking ability to invest in these capital-intensive projects with long gestation periods. The government, therefore, took on the responsibility of building the country's core infrastructure through Public Sector Enterprises (PSEs), establishing industries like steel, power generation, railways, and petroleum that were vital for overall economic growth.
Regional Balance
To prevent industrial development from being concentrated in a few port cities and to remove glaring regional disparities, the government adopted a policy of promoting balanced regional development. Major public sector industries were deliberately set up in backward and rural areas. This strategy was intended to accelerate economic development, generate employment, and foster the growth of ancillary (supporting) industries in these underdeveloped regions, thus promoting more equitable growth across the country.
Economies of Scale
Certain industries, such as electric power plants, natural gas pipelines, and telecommunications, are 'natural monopolies' where huge capital outlays are required and efficiency is achieved only at a very large scale of operation. The public sector had to step in to set up these large-scale units to take advantage of these economies of scale, as only the government could mobilise the massive resources required to establish and run them economically.
Check over Concentration of Economic Power
A key social objective was to prevent the concentration of wealth and economic power in a few private hands. It was feared that if heavy industries were left to the private sector, only a few large industrial houses would control them, leading to monopolies and greater income inequality. The public sector was used as a tool to counter this. By setting up large industries under state ownership, the government ensured that the benefits of industrialisation—profits and employment—were shared more broadly among a larger number of people.
Import Substitution
During the second and third Five Year Plan periods, India's economic strategy was heavily focused on achieving self-reliance and conserving scarce foreign exchange. It was difficult and expensive to import heavy machinery required for building a strong industrial base. To counter this, PSEs were established in heavy engineering and other capital goods sectors to produce these items domestically. This policy of import substitution was crucial for making the Indian economy more self-sufficient.
Government Policy Towards the Public Sector Since 1991
By the late 1980s, it became clear that many PSEs were operating inefficiently, incurring heavy losses, and had become a significant drain on the government's budget. The new industrial policy of 1991, as part of the LPG reforms, radically redefined the role of the public sector. The focus shifted from expansion to improving efficiency, competitiveness, and performance. The four major elements of the new policy were:
- Restructure and revive potentially viable PSEs.
- Close down PSEs that cannot be revived.
- Bring down government equity in all non-strategic PSEs to 26% or lower.
- Fully protect the interests of the workers affected by these changes.
Reduction in Industries Reserved for the Public Sector
The policy of reserving core industries for the public sector was dismantled. The number of industries exclusively reserved for the public sector was drastically reduced from 17 in 1956 to just 8 in 1991, and subsequently, by 2001, to only three: atomic energy, arms and ammunition, and rail transport. This historic move opened up almost all sectors to private competition, forcing the public sector to compete with private enterprises on a level playing field.
Disinvestment of Shares
Disinvestment involves the sale of the government's equity shares in PSEs to the private sector and the general public. This was a cornerstone of the new policy. The main objectives were:
- To raise financial resources for the government which could be used for social sector schemes.
- To encourage wider public and worker participation in the ownership of these enterprises.
- To improve the performance of these enterprises by subjecting them to market discipline and introducing better corporate governance.
Policy Regarding Sick Units
The policy for sick (chronically loss-making) PSEs was made the same as that for the private sector. All such PSEs were referred to the Board of Industrial and Financial Reconstruction (BIFR). The BIFR, a quasi-judicial body, would examine each case to decide whether a sick unit could be restructured and revived or if it was unviable and should be closed down. To provide a social safety net for employees affected by this process, a National Renewal Fund was set up by the government to provide compensation through voluntary retirement schemes (VRS) and to offer retraining for redeployment.
Memorandum of Understanding (MoU)
To improve the performance of PSEs and grant them greater autonomy, the government introduced the MoU system. An MoU is a formal agreement between the management of a PSE and its concerned administrative ministry. Under this system, the management is granted greater operational freedom and flexibility but, in return, is held accountable for achieving specific, pre-agreed performance targets. This system aimed to create a balance between autonomy and accountability, freeing the management from bureaucratic control while making them answerable for results.
Global Enterprises (Multinational Corporations)
In the last few decades, especially since the economic reforms of 1991 opened up the Indian economy, Global Enterprises, more commonly known as Multinational Corporations (MNCs), have become a common and highly influential feature of the business landscape. These are gigantic corporations that have their headquarters in one country (the home country) but extend their industrial and marketing operations through a complex network of branches, subsidiaries, or affiliates in a number of other countries (host countries).
They are characterised by their colossal size in terms of assets and sales, a diverse portfolio of products, access to advanced technology, aggressive and sophisticated marketing strategies, and a truly global network of operations. Their business strategy is not confined to one nation; they aim to maximise profits on a global scale by integrating their operations across different countries.
Features of Global Enterprises
Huge Capital Resources
These enterprises are characterised by their possession of enormous financial resources and their ability to raise vast amounts of funds from various sources worldwide. They can tap into global capital markets to issue equity shares, debentures, and bonds. Their high creditworthiness allows them to borrow from international banks and financial institutions at favourable terms. This immense financial strength allows them to undertake large-scale projects, withstand market shocks, and survive under almost all circumstances.
Foreign Collaboration
MNCs often enter into agreements with local companies (both public and private) in the host country to facilitate their entry and operations. These collaborations can take various forms, including the sale of technology, licensing agreements for the production of goods using the MNC's brand name, or the formation of joint ventures for R&D or marketing. While these collaborations can be highly beneficial for the host country's companies, they sometimes come with restrictive clauses regarding pricing, dividend payments, and technology transfer that maintain the MNC's dominant position.
Advanced Technology
A defining feature of MNCs is their possession of technological superiority. They use sophisticated, capital-intensive, and advanced methods of production, which enables them to produce high-quality products that conform to international standards. Their entry into a host country often leads to the transfer of this superior technology, management techniques, and operational skills, which can significantly boost the host country's industrial progress and efficiency.
Product Innovation
MNCs are characterised by their highly sophisticated and well-funded Research and Development (R&D) departments. They invest huge sums of money in continuous R&D to develop new products, create superior designs for existing products, and improve production processes. This relentless focus on innovation is a key source of their competitive advantage and keeps them ahead of local competitors.
Marketing Strategies
The marketing strategies of global companies are far more effective, aggressive, and well-funded than those of most domestic companies. They possess reliable and up-to-the-minute market information systems and use powerful, globally-coordinated advertising and sales promotion techniques. Their well-known international brands, built over years with massive investment, give them instant recognition and credibility, making it easier to sell their products in any new market they enter.
Expansion of Market Territory
The vision and operations of MNCs extend beyond the physical boundaries of their own country. They operate through a strategically built network of subsidiaries, branches, and affiliates in numerous host countries. This global presence allows them to access markets worldwide, achieve economies of scale in production and marketing, and turn their products into iconic international brands. Due to their giant size and market power, they often occupy a dominant position in the markets they operate in.
Centralised Control
Global enterprises typically have their headquarters in their home country, from where they exercise overall strategic control over all their branches and subsidiaries worldwide. The broad corporate policy framework, key financial decisions, and R&D priorities are made centrally at the headquarters. However, to effectively operate in diverse cultural and economic environments, there is usually a degree of operational autonomy granted to the local management of the foreign subsidiaries, allowing them to adapt their tactics to local conditions.
Joint Ventures
A joint venture is a business arrangement where two or more independent business organisations agree to pool their resources, capabilities, and expertise to establish a new enterprise or to accomplish a specific task for mutual benefit. The risks involved and the rewards generated from the venture are also shared among the participating entities in a pre-agreed ratio. The businesses joining hands can be private companies, government-owned enterprises, or foreign companies.
A joint venture is essentially a strategic alliance. The reasons for forming a joint venture are varied but often include goals like business expansion, development of new products, or gaining entry into new geographical markets, particularly in another country. It allows companies with complementary strengths (e.g., one company has advanced technology, while the other has a strong distribution network) to come together and achieve what they might not be able to achieve alone.
Types of Joint Ventures
Joint ventures can be broadly classified into two main types based on their structure:
Contractual Joint Venture
In a contractual joint venture, a new, legally separate, and jointly-owned business entity is not created. Instead, the parties enter into a formal agreement or contract to work together for a specific purpose while retaining their separate legal identities. The parties do not share ownership of a single business but exercise some element of shared control over the specific project or venture as defined in their contract. A common example of a contractual joint venture is a franchisee relationship or a collaboration agreement for a specific construction project.
Equity-based Joint Venture
In an equity-based joint venture, a separate business entity, which is jointly owned by two or more parties, is formed. The key operative factor in this case is joint ownership or 'equity' participation. This new entity can be structured as a company, a partnership firm, or a limited liability partnership (LLP). In this arrangement, the parties share the ownership, management, capital investment, and ultimately, the profits and losses of the new entity according to their agreement.
Benefits of Joint Ventures
Joint ventures can provide significant strategic advantages to the participating businesses.
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Increased Resources and Capacity: By joining hands, companies can pool their financial resources, technical know-how, and human capital. This creates a stronger combined entity with an enhanced capacity to undertake larger projects, grow more quickly, face market challenges more effectively, and take advantage of new opportunities that neither partner could pursue alone.
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Access to New Markets and Distribution Networks: A joint venture is one of the most effective ways for a business to enter a new country or a new market segment. For example, a foreign company partnering with a local Indian company gains immediate access to the vast and complex Indian market. It can leverage the established distribution channels, supply chains, and retail outlets of its local partner, saving immense time, cost, and effort that would otherwise be required to build them from scratch.
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Access to Technology: A major incentive for many companies to enter into joint ventures is to gain access to advanced technology, patents, and specialised production processes. A company can save a lot of time, energy, and R&D investment by acquiring ready-made technology from its partner. This access to technology leads to the production of superior quality products, increases operational efficiency, and helps in reducing costs.
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Innovation: The modern marketplace is increasingly demanding, with a constant need for new and innovative products. Joint ventures allow businesses to combine their different skills, creative ideas, and knowledge bases to foster innovation. Foreign partners, in particular, can bring in new design philosophies, R&D capabilities, and a global perspective, leading to the development of new and creative products for the market.
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Low Cost of Production: When international corporations form joint ventures in India, they can benefit immensely from the lower cost of production. They are able to access low-cost raw materials and, more importantly, a large pool of skilled and semi-skilled labour at a fraction of the cost prevailing in their home countries. This includes technically qualified workforce members like engineers, scientists, and managers. This allows the international partner to source high-quality products for their global requirements at an extremely competitive price.
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Established Brand Name: When a business enters into a joint venture with a partner that has a strong, established brand name and significant goodwill in the market, it gains instant credibility and customer acceptance. If the joint venture is in India with a well-known Indian company, the new venture does not have to spend excessive time or money on brand-building activities. There is often a ready market waiting for the product to be launched, saving a great deal of marketing investment in the process.
Public Private Partnership (PPP)
A Public Private Partnership (PPP) is defined as a long-term, cooperative arrangement or relationship between a public entity (the government or its agencies) and a private sector entity for the purpose of designing, financing, building, and operating infrastructure projects and delivering other services that have traditionally been provided by the public sector. It is a partnership model that seeks to optimally allocate tasks, obligations, and, most importantly, risks among the public and private partners, leveraging the strengths of each.
The public partners in a PPP are government entities at various levels, such as central ministries, government departments, municipalities, or state-owned enterprises. The private partners can be local or foreign (international) businesses or investors who possess the necessary technical, operational, or financial expertise relevant to the project. In some cases, PPPs also include Non-Governmental Organisations (NGOs) and community-based organisations who are key stakeholders directly affected by the project.
The PPP Model
Under the PPP model, the government's role shifts from being the sole provider of a service to being a partner and a regulator. The public sector plays an important role in defining the project's objectives, setting performance standards, and ensuring that its social obligations are fulfilled and that sector reforms and public investment goals are successfully met. The government's contribution to a PPP is often in the form of capital for investment, the transfer of public assets (like land) to support the partnership, and providing the necessary legal and regulatory framework. It also bears risks that it is best suited to manage, such as political risk or the risk of changes in law.
The private sector’s role in the partnership is to bring its expertise in operations, project management, innovation, and financial resources to run the business efficiently and deliver high-quality services. The private sector is typically responsible for designing, building, operating, and sometimes financing the project, and is compensated over the long term through user fees (e.g., tolls on a road) or payments from the government.
PPPs have been successfully used worldwide for a wide range of large-scale projects in sectors like power generation and distribution, water and sanitation, refuse disposal, pipelines, hospitals, school buildings and teaching facilities, stadiums, air traffic control, prisons, railways, roads, billing and other information technology systems, and housing.
Features of a Typical PPP Project
Key Features
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Long-Term Contract: A PPP is based on a long-term and complex contract between the public and private parties, often spanning 20 to 30 years.
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Service Provision: The primary goal is the provision of a public service or the creation of public infrastructure.
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Risk Transfer: A key driver of the PPP model is the transfer of specific risks to the party best able to manage them. Typically, the design, construction, and operational risks are transferred to the private partner, who is considered more efficient at managing them.
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Financing Structure: The financing can be arranged in various ways. While in some models the facility is financed and owned by the public sector, in many others, the private sector is responsible for arranging the finance, which it recovers over the life of the project.
Application
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It is well-suited to large, complex capital projects where private sector expertise can lead to greater efficiency and innovation (e.g., building an airport or a metro line).
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It is also suited to projects where the public sector wishes to retain the ultimate responsibility for service delivery (like in a hospital, where the government runs the medical services) but wants the private sector to handle the construction and maintenance of the facility.
Strengths
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Efficiency and Innovation: It allows for the leveraging of private sector expertise and innovation, often leading to better quality services and more efficient project execution.
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Risk Allocation: It allows for the optimal allocation and transfer of design, construction, and operational risks to the private sector.
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Faster Project Completion: It has the potential to accelerate project completion due to the private sector's focus on timely delivery to start earning returns.
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Value for Money: When structured well, PPPs can deliver better 'value for money' for the taxpayer compared to traditional government procurement.
Weaknesses
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Complexity and Delays: PPP contracts are very complex and can be difficult and time-consuming to negotiate and finalise.
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Potential for Conflicts: Conflicts between the public and private partners may arise, especially on environmental, social, or quality considerations, which can be difficult to resolve.
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Higher User Charges: As the private partner needs to recover its investment and earn a profit, the cost to the end-user (e.g., tolls, fees) may be higher than if the service were provided solely by the government.
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Difficulty in Attracting Finance: In some models where the ownership remains with the public sector and revenue streams are uncertain, it can be difficult to attract private finance easily.
Example 1. Kundli Manesar Expressway
In this 135 km expressway project, a PPP model was used. The land was provided by the government of Haryana (the public partner), which represented its contribution and addressed a major project risk. The design, financing, construction, and operation of the road surface and toll plazas were handled by a private company (the private partner). The private partner recovers its investment by collecting tolls from users over a specified concession period.
NCERT Questions Solution
Short Answer Questions
Question 1. Explain the concept of public sector and private sector.
Answer:
The Indian economy is a mixed economy, comprising both the public and private sectors.
Public Sector: This sector consists of business enterprises that are owned, controlled, and managed by the government (either central, state, or local). The primary objective of public sector undertakings (PSUs) is not just to earn profit but also to provide essential services to the public and promote social welfare.
Private Sector: This sector consists of business enterprises that are owned, controlled, and managed by private individuals or a group of individuals. The primary objective of private sector enterprises is to earn profits. They operate under the market forces of demand and supply.
Question 2. State the various types of organisations in the private sector.
Answer:
The various types of business organisations in the private sector are:
1. Sole Proprietorship: Owned and managed by a single individual.
2. Joint Hindu Family (JHF) Business: A form of business found only in India, governed by the Hindu Law, where the business is owned and managed by the members of a Hindu Undivided Family (HUF).
3. Partnership: An association of two or more persons who agree to jointly run a business and share its profits and losses.
4. Cooperative Society: A voluntary association of persons who work together for their mutual benefit and welfare.
5. Joint Stock Company: An association of persons formed for carrying out business activities, having a legal status independent of its members. It can be a Private Company or a Public Company.
Question 3. What are the different kinds of organisations that come under the public sector?
Answer:
The different forms of organisations in the public sector, also known as Public Sector Undertakings (PSUs), are:
1. Departmental Undertakings: These are enterprises managed directly by a government ministry or department. They are financed and controlled in the same way as any other government department. They do not have a separate legal identity. Example: Indian Railways, Posts and Telegraphs.
2. Statutory Corporations: These are public enterprises brought into existence by a special Act of the Parliament or State Legislature. The Act defines their powers, functions, rules, and regulations. They have a separate legal entity. Example: Life Insurance Corporation of India (LIC), Reserve Bank of India (RBI).
3. Government Companies: This is a company in which at least 51% of the paid-up share capital is held by the central government, or by any state government, or partly by both. It is registered under the Companies Act and is managed by a board of directors. Example: Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL).
Question 4. List the names of some enterprises under the public sector and classify them.
Answer:
Here are some prominent public sector enterprises classified according to their form of organisation:
1. Departmental Undertakings:
- Indian Railways
- India Post
- All India Radio (AIR)
- Doordarshan
2. Statutory Corporations:
- Life Insurance Corporation of India (LIC)
- Reserve Bank of India (RBI)
- Food Corporation of India (FCI)
- State Bank of India (SBI)
3. Government Companies:
- Steel Authority of India Ltd. (SAIL)
- Oil and Natural Gas Corporation Ltd. (ONGC)
- Hindustan Petroleum Corporation Ltd. (HPCL)
- Coal India Ltd. (CIL)
Question 5. Why is the government company form of organisation preferred to other types in the public sector?
Answer:
The government company form is often preferred because it combines government control with the flexibility and autonomy of a private enterprise. Its key advantages over other forms are:
1. Ease of Formation: It can be established simply by following the provisions of the Companies Act, without the need for a special Act of Parliament, which is a time-consuming process required for statutory corporations.
2. Operational Autonomy: It enjoys significant freedom in its internal management and day-to-day decisions. It is relatively free from bureaucratic control and political interference compared to departmental undertakings.
3. Flexibility: It can change its objectives and rules by simply altering its Memorandum and Articles of Association as per the Companies Act, unlike statutory corporations whose powers are rigidly defined by their specific Act.
4. Ability to Attract Talent: Being free from rigid government rules for remuneration, it can offer competitive salaries and attract professional managers and skilled staff from the open market.
5. Private Participation: This form allows the government to raise capital from the private sector by selling minority shares, which facilitates discipline and efficiency.
Question 6. How does the government maintain a regional balance in the country?
Answer:
The government plays a crucial role in promoting balanced regional development by directing investment and resources towards underdeveloped or backward regions of the country. This is a key objective of public policy in India.
The primary way the government achieves this is by setting up Public Sector Undertakings (PSUs) in these backward areas. The establishment of large public sector plants, like steel plants or heavy engineering units, has the following effects:
- It creates direct employment opportunities for local people.
- It leads to the development of infrastructure such as roads, electricity, water supply, and housing.
- It stimulates the growth of ancillary industries and small-scale businesses in the region to support the main plant.
- It provides a market for local products and services, boosting the regional economy.
By taking these steps, the government helps to reduce regional disparities and ensures that economic growth benefits all parts of the country.
Question 7. State the meaning of public private partnership.
Answer:
A Public Private Partnership (PPP) is a long-term contract between a private party and a government entity for providing a public asset or service, in which the private party bears significant risk and management responsibility.
In essence, it is a collaboration model that combines the strengths of both the public and private sectors. The government (public sector) brings its social responsibility, policy-making role, and public accountability, while the private sector brings its expertise, technology, operational efficiency, and financial resources.
PPPs are typically used for large-scale infrastructure projects like highways, airports, ports, and power plants, where the government aims to leverage private sector efficiency for the benefit of the public.
Long Answer Questions
Question 1. Describe the Industrial Policy 1991, towards the public sector.
Answer:
The New Industrial Policy of 1991 marked a significant shift in the Indian government's approach towards the public sector. The policy aimed to reform and revitalize PSUs to make them more efficient and competitive. The key elements of this policy concerning the public sector were:
1. Dereservation and Restructuring: The number of industries exclusively reserved for the public sector was drastically reduced from 17 to 8, and later to just a few (related to atomic energy, railways, etc.). This opened up most sectors to private competition. The policy also focused on restructuring and reviving potentially viable PSUs.
2. Disinvestment of Shares: The policy introduced the concept of disinvestment, which involves selling a part of the government's equity (shares) in selected PSUs to the private sector, financial institutions, and the general public. The main objectives were to raise financial resources, encourage wider public participation, and introduce market discipline and accountability in PSUs.
3. Policy towards Sick Units: Chronically sick and loss-making PSUs were to be referred to the Board of Industrial and Financial Reconstruction (BIFR). The BIFR would assess the viability of these units and decide whether they could be restructured and revived or if they should be closed down. This was a major step towards addressing the issue of inefficient PSUs draining public resources.
4. Memorandum of Understanding (MoU): The government started signing MoUs with the management of PSUs. Through the MoU system, PSUs were given greater operational autonomy and freedom from government control, but in return, they were held accountable for achieving specific performance targets. This aimed to improve performance by balancing autonomy with accountability.
Question 2. What was the role of the public sector before 1991?
Answer:
In the period after independence and before the economic reforms of 1991, the public sector was envisioned as the primary engine of economic growth and was given the responsibility of commanding the "commanding heights" of the Indian economy. Its role was central to the government's development strategy.
The key roles of the public sector before 1991 were:
1. Development of Infrastructure: The public sector was tasked with building a strong infrastructure base for the country, including power generation, transportation (railways, airlines, shipping), communication, and heavy industries, which required massive investment beyond the capacity of the private sector at that time.
2. Balanced Regional Development: To counter regional inequalities, the government deliberately set up public sector units in backward areas. This was done to create employment and stimulate economic activity in these regions.
3. Economies of Scale: The government established large-scale public sector units in areas like steel, mining, and defense equipment to reap the benefits of economies of scale, which would have been difficult for the private sector to achieve.
4. Checking Concentration of Economic Power: A major objective was to prevent the concentration of wealth and economic power in the hands of a few private individuals. Public ownership of key industries was seen as a way to ensure equitable distribution of resources.
5. Import Substitution: The public sector played a crucial role in producing goods that were previously imported. This was aimed at making India self-reliant and saving precious foreign exchange.
Question 3. Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Answer:
It is generally challenging for public sector companies (PSUs) to compete with the private sector purely in terms of profits and efficiency, although it is not impossible. The reasons for this are rooted in their differing objectives, structures, and operational environments.
Reasons why competition is difficult for PSUs:
1. Different Objectives: The primary objective of the private sector is profit maximization. In contrast, PSUs have multiple social and economic objectives, such as regional development, employment generation, and providing goods at subsidized prices. These social obligations often reduce their profitability.
2. Bureaucratic Control and Lack of Autonomy: PSUs often suffer from excessive government control and political interference in their decision-making processes. This leads to delays and a lack of quick, commercial decision-making, which hampers efficiency.
3. Lack of Accountability and Incentive: Public sector management is often not held directly accountable for profits and losses in the same way as private sector managers. The incentive structures are not strongly tied to performance, which can lead to inefficiency.
4. Overstaffing and Labour Issues: As a model employer, PSUs often have surplus staff and find it difficult to downsize or enforce strict labour discipline, which increases their operational costs.
When PSUs can compete:
Despite these challenges, some PSUs have proven to be highly competitive. This is possible when:
- The government grants them significant operational autonomy, as seen in the case of 'Navratna' and 'Maharatna' companies like ONGC and IOCL.
- They are managed by professional and empowered boards, free from excessive political interference.
- They operate in a competitive market environment that forces them to become more efficient.
In conclusion, while the inherent structure and objectives of PSUs make it difficult for them to match private sector profitability, with sufficient autonomy and professional management, they can certainly become efficient and competitive entities.
Question 4. Why are global enterprises considered superior to other business organisations?
Answer:
Global Enterprises, also known as Multinational Corporations (MNCs), are considered superior to many other forms of business organisations due to the vast resources and strategic advantages they possess. Their superiority stems from several key factors:
1. Huge Capital Resources: MNCs have the ability to raise enormous amounts of funds from various sources across the globe. This financial strength allows them to undertake large-scale projects, survive losses, and invest heavily in technology and marketing.
2. Advanced Technology: They possess and have access to the latest and most sophisticated technology. They invest heavily in Research and Development (R&D) to develop innovative products and cost-efficient production processes, giving them a significant technological edge.
3. Product Innovation: With their focus on R&D, MNCs continuously innovate and improve their products. They can quickly adapt to changing customer preferences and launch new products, keeping them ahead of the competition.
4. Economies of Scale: Operating on a global scale allows MNCs to produce goods in massive quantities. This leads to large-scale production and marketing advantages, resulting in lower costs per unit, which smaller firms cannot match.
5. Sophisticated Marketing Strategies: Global enterprises have powerful brands and employ aggressive and effective marketing strategies. They have a worldwide distribution network and can spend vast sums on advertising and promotion, creating a strong global brand identity.
6. Professional Management: MNCs are able to recruit highly skilled and professional managers from around the world. Their management practices are often very efficient and specialized, contributing to their overall superiority.
Question 5. What are the benefits of entering into joint ventures and public private partnership?
Answer:
Both joint ventures and public-private partnerships are collaborative arrangements that offer significant benefits to the participating entities.
Benefits of Joint Ventures (JVs)
A joint venture is a business arrangement where two or more parties agree to pool their resources for the purpose of accomplishing a specific task. Key benefits include:
- Increased Resources and Capacity: By pooling financial and human resources, partners can undertake larger projects that might be beyond their individual capacities.
- Access to New Markets and Distribution Networks: A foreign company can gain access to the domestic market of a local partner, while the local firm can use the JV to enter foreign markets.
- Access to Technology: JVs are a common way for companies to gain access to advanced technology, patents, and expertise from their partners, which reduces their own R&D costs.
- Risk Sharing: The costs and risks associated with a new business venture are shared among the partners, reducing the burden on a single firm.
- Innovation: The collaboration of different cultures and expertise can lead to the development of new and innovative products and services.
Benefits of Public Private Partnerships (PPPs)
A PPP is a collaboration between a government agency and a private sector company for public projects. Its key benefits are:
- Leveraging Private Sector Efficiency: PPPs bring the private sector's managerial efficiency, technology, and innovation to public projects, often resulting in faster completion times and better quality service.
- Access to Capital: It enables the government to undertake large infrastructure projects without bearing the entire financial burden, as the private partner brings significant investment. -
- Risk Sharing: The financial and operational risks of the project are shared between the government and the private partner, with each party bearing the risk it is best equipped to manage. -
- Improved Quality of Service: Since the private partner's revenue is often linked to performance and usage, there is a strong incentive to maintain high-quality standards and provide efficient service to the public. -
- Focus on Core Activities: It allows the government to focus on its core governance and policy-making functions while leaving the operational aspects of service delivery to the more efficient private sector.