Essay on Public Sector Enterprises – Reasons for Their Failure

Essay on Public Sector Enterprises – Reasons for Their Failure. Public Sector is the sector under Government control funded by the tax paying public and for the benefit of the nation.

Prior to our Independence, we had essential services like Railways, Telephone, Posts and Telegraphs, Ordnance, Port Trusts etc. under Public sector. It was an age of discipline and strict ethical management. These are the stalwarts and forerunners which we inherited, immaculately formulated, run and maintained.

Post-independence, we had a Government and the Constitution which was working towards an egalitarian society and the public sector was thought of as a way towards achieving self-reliance. Economic growth to develop a sound agricultural and industrial base, diversifying the economy and overcome economic and social backwardness. To add plausible excuses to this idea, the government forwarded the following ones:

  • To protect employment – resulted in take over the sick units.
  • To have countervailing power on the operation of private monopolies in selected areas resulted in steel, fertilizer and chemical units.
  • To serve the needs of spare parts and equipment for strategically important sectors like Defence, Railways, and Telecommunications etc.
  • To check prices of important articles resulted in setting up of consumer oriented industries.

Over a period of time, we find several public sector units some with good intentions, some with intentions which were inherently bad and self-motivated and others with no excuses at all. With the situation that in 1950-51 we had 5 number of public sector units with an investment of about Rs. 30 crores to the present number of 240 units with an investment of Rs. 252554 crores. The bulk of the investment is in basic industries like Steel, Coal, Power and Petroleum, Fertilizers etc. which is about 50 percent.

The Public sector employment has two categories – the first being administration, defence, health, education, research and activities to promote economic development. The second category is that of economic enterprises owned by the Centre, State and Union Territories. In 1971 the total number of employees in the Public Sector stood at 71 lakhs which grew to about 200 lakhs in 2000. the share vis-à-vis the private sector in transport, power, gas and communications stood at 95 percent in the public sector. The overall percentage of employment is 70% in the organized sector.

Thus the Public sector has fulfilled one of the prime ideas behind it, that is generating employment but at what cost to the exchequer – a factor which needs to be thoroughly analysed and one of the prime reasons for failure.

Apart from generation of internal resources and payment of dividend, this sector has made substantial contribution to the exchequer through payment of corporate taxes, excise and customs duty and other duties. During the period 1997-2000 the Public Sector has contributed Rs. 48,000 crores to the economy thus occupying a prominent place in the economy and definitely growing in importance. These facts relate mostly to enterprises under the Central Government. But the ones under the State control have flattered to deceive and are total drains on the exchequer bringing the total sector into disrepute.

Compared to the performance of centrally controlled units, these State controlled ones have given deplorable returns, mostly in the negative. Enterprises in State Electricity Board, State Transport and Irrigation are the biggest culprits, but why? Primarily because of corruption. They are treated like nobody’s children to be used for the personal benefit of the staff. Engineers belonging to these units have slush money to the tune of crores. The working quality and services rendered by them are indeed condemnable. This poor quality is again due to callous and indifferent work culture inculcated in them, since their inception in the Public Sector. They have become only sources of receiving illegal gratification, theft and harassment. Complaints filed in consumer forums all over the country point an accusing finger to the blatant collusion of staff with power thieves. The same units under private companies like Martin & Burn were extremely efficient and image conscious. What is needed is stricter administration, fixation of responsibility and forthright officials, able to call the spade a spade.

The idea of privatization of these loss making units “would not be of any help so long as there is this crisis of good management”, PHD Chamber of Commerce and Industry has put the problem in the right perspective. The point is that there is a serious crisis of management that has plagued the public as well as private sector. If we succeed in enduring an efficient management culture and practices, probably the issue of privatization will be irrevalent, since in that environment both the Public Sector and the Private Sector would the working efficiently.

The reasons for failure of Public Sector Units are many and need to be categorized properly. An exercise in this regard highlights the following, the most important being: Man-power far in excess of actual requirement, inadequate training and education of workers due to poor manpower planning. The top management should be open to employees of the undertakings and technical persons should be given proper training in management. Indiscipline amongst workers, poor management-labor relations and the lack of law enforcement agencies add to the woes.

Ineffective management is another major factor which is the cause of inefficiency in the overall performance of Public Sector enterprises. Responsibilities are ill-defined and the officers take undue advantage of this. Bureaucrats are appointed as chairmen, managing directors and managers. Most of them are ill-qualified to do the job. To top this, the States have inculcated the practice of appointing defeated, over the hill, politicians to these posts, in most cases their qualifications are nil except proximity to power centers. What is needed is clearly defined responsibilities, the diminution of red-tape, power to take operational decisions and professional management.

Political factors influence decisions from location of plant, passing of tenders to appointment of employees and management. In most of the cases those lead to considerable wastage of resources. This is also one of the reasons for delays in completion of the projects and over run in original estimated costs. Tied-aid was also responsible for over-runs as the compulsion to buy imported equipment on a non-competitive basis together with expensive twin-key contracts to the aid providers shot the original estimates. A survey conducted found most of the Public Sector units over-capitalized as an example of which the Trombay Fertilizer Project was showcased. The project took 7 years to complete instead of the original projection of 3 years due to which the cost also shot up by 50 percent.

Another factor responsible for mounting losses is the pricing policy. Due to persistent demand from vested interests and political compulsions, the price of products are kept abysmally low, of course, inferior quality is another reason, due to which commercial profitability is affected.

Keeping all these factors in mind, the investments in Public Sectors appear to be a suicidal step for national economy and disinvestments in loss making units may be the right approach. They could be made profitable if the politicians, bureaucrats and employees stop treating these units as a milching cow and milch it as nobody’s concern. “Units of a Lesser God” would be apt.