Government
Activities:
Governments across the globe have been
taking care of law and order as well as developmental activities. There have
been phases when parts of world followed different models of governance. Role
of state has been changing with time and change has been significantly
different in different parts of the world. Centrally planned economies played a
significant role in some parts of the world where as most of the countries are
still struggling to find out good governance model based on representation of
people of the country. Governance looks for solutions to the problems existing
in the society. William Beveridge in his report identified five "Giant Evils" in British
society: squalor, ignorance, want, idleness and disease. In his report, he
suggested means to eradicate these giant evils and recommended a national,
compulsory, flat rate insurance scheme which would combine health care,
unemployment and retirement benefits. As per Beveridge, the unemployment
benefits should be held to a subsistence level. After its victory in the United Kingdom general election, 1945 the Labour Party pledged to eradicate the Giant
Evils, and undertook policy measures to provide for the people of the United
Kingdom "from the cradle to the grave[1]."
Certain specific activities are deemed
to be governmental or commercial. Under the anticipated proposed regulations[2] in USA, commercial activities would be operations
involving a hotel, casino, service station, convenience store, or marina. These
activities are examples that were identified as commercial activities in
various Notices, as well as in Section 906 of Pension Protection Act '06 of
USA. The governmental activities include activities related to the building and
maintenance of public roads, sidewalks, and buildings, activities related to
public work projects (such as schools and government buildings), and activities
that are subject to a treaty or special rules that pertain to trust land
ownership and use. In addition to listing certain specified activities, the
anticipated proposed regulations would provide a facts and circumstances test
for determining whether an activity is a governmental or commercial activity.
In India, many activities have been added as government activities apart from
basics like law and order, justice and legislation. Promotion of culture,
sports, watershed management, tribal welfare, minorities’ welfare etc. are such
additions and many more are happening year after year.
Essential
Government Activities:
Essential services or essential
government functions can be best understood as services that would normally be
provided by a tribe to its members. Essential government functions are
functions that a tribal government would normally perform in its daily
operation. The statutory interpretations of what constitutes essential services
and essential government functions have continued to evolve, with court cases
addressing these concepts. There has been a growing realization of essential
government activities and non-essential government activities. Non-essential
government activities are generally the commercial activities or activities
which may be carried out by competitive organization. Such activities are
generally not monopolistic in nature. In many countries commercial activities
of governments have been divested which has yielded the first and easiest gains
on the road to a more focused and effective government. It is being realized
across the globe that detergent production and sales, for instance, is not a
fundamental and essential activity in which the government should play an
active role. The successful corporatization of such activities have reduced the
burden on tax payers and yielded huge benefits to society from getting the
government out of the business of producing goods and services which are
produced better or equally efficiently by corporate. Although many governments
continue to be deeply involved in many such activities and using their limited
resources in the non-priority activities which results in putting constraints
on their countries’ growth. However, no serious evidence or analysis supports
this policy.
Every government agency is responsible
for carrying out activities for its citizen. Government must do what it is
supposed to do. It is the government which must determines which jobs are
essential. Activities which are essential in most developed and developing
countries are the activities of providing for the national security both at
borders and within the country. Border and coastal protection and surveillance
are gradually gaining importance and a lot of resources are consumed in
discharging its function by the government. Protecting lands, buildings,
waterways, installations, equipment and other property owned by the government
is one essential activity which governments have to carry out at any cost. Essential
government activities also include the matters related to foreign relations
essential to the national security or the safety of life and property of its
citizens. There may not be a government possible which does not take care of
its poor and needy citizens by offering them some sort of benefit payments and
the performance of certain contract obligations to facilitate the same. Good
governance cannot be possible without the government taking care of essential
health services to in-patients and emergency out-patients and ensure continued
public health and safety. Public health and safety is not only ensured through
hospitals but through precautionary means handled by government to ensure safe
use of food, drugs and control of hazardous materials. Maintaining law and order, police, delivery
of justice, health services, roads, railways, currency printing, minting,
elementary education, sanitation, drinking water, municipal governance etc. are
some of the essential government activities. Air traffic control and other
transportation safety functions, care of prisoners and other persons in the
custody, law enforcement and criminal investigations, emergency and disaster
assistance, activities that ensure production of power and maintenance of the
power distribution system, activities essential to the preservation of the
essential elements of the money and banking system, including borrowing and tax
collection activities and activities necessary to maintain protection of
research property are some other activities which are hitherto considered to be
essential government activity. Some activities may be considered as commercial
activity and are being done by business enterprises in different parts of the
world. There are many who strongly believe that “it is not the business of
government to do business”, but in many developing countries governments are
inclined or constrained to get into commercial activities to encourage
participation of other commercial ventures e.g. air travel and power
generation. Such ventures require huge investments which is either not
forthcoming or considered to be risky by the commercial sector.
There are countries which have a whole lot of activities handled by
government, especially centrally planned or communist countries. There are
other countries which have left many things to be handled by corporations or
private sector and limiting their presence only in core essential activities.
China and India have sports, family welfare, food, youth affairs, road
transport, town planning and buildings, industries and many more activities
done by the government.
Types of organizations:
DEPARTMENTAL
ORGANISATION:
The plethora of activities is carried
out by governments through different types of organizations. Most popular and
common organization of public service delivery is department. Departments are
Budgetary Organizations which are essentially managed by administrators. The
government’s hierarchy of officials and rules controls all strategic issues and
determines most day-to-day decisions related to production and delivery of
services, for example, staffing requirements, competency matrix and staff
levels, services offered, technology used, accounting and financial management
methods, salaries, and so on. Determination of revenues is done through direct
budget allocation by relying heavily on historical norms. Since the government
also controls type, quality and reach of services, other revenues are also controlled.
Any “excess revenues” generated belong to the public sector and goes without
any direct linkages to the efforts and expenditure incurred to generate it.
Similarly “excess losses” also are
covered by the public purse through budgetary allocations. Bureaucrats in the
hierarchy are responsible for monitoring service delivery organization and
managerial performance, which tends to be tied to input and financial control.
Most of the government is operated through department. In the commonwealth
countries the traditional Westminster system was followed and most government
services were provided by government departments headed by a Minister. Minister
is expected to be accountable for the success or failure of the department.
Through rarely in practice, Ministers were supposed to take full responsibility
and therefore to resign in the event of serious fraud or failures, even if they
were not personally at fault. The Westminster system was an extensive system of
checks and balances designed primarily to prevent misappropriation of public
money. It included both the responsibility of the Minister to Parliament and
the government, in place of the system of patronage under monarchy that had
prevailed in the United Kingdom until the 19th Century. Despite occasional
scandals, the departmental system achieved its objective of keeping the integrity
of the procedures and corruption in check. However, this was achieved alongside
development of a rule-bound bureaucracy which was often out of focus on
delivery. The bureaucratic system did not care for changing circumstances, or
‘customer focus[3]’, responsive to the requirements of the members of the community to whom
services were provided. In order to make systems more customers’ focused, many
systems were tried but the most important of which was the creation of
statutory authorities.
The
statutory authority model
Statutory
authorities are public institutions are generally established to provide
defined types of regulatory services. These are created through statue or separate
law. Generally government appoints independent set of people to handle day-to-day
management of such authorities but they are ultimately accountable to
government. Statutory authorities across the globe have been created to provide
a wide range of services. Australian Broadcasting Corporation of Australia is a
prominent example of statutory authority, though its name suggests otherwise it
does not work as a corporation. (For example, it does not pay dividends and is not subject to company
tax). Statutory authorities were often small organizations and expected
to operate on commercial lines, but were supposed to take forward varied objectives.
To ensure that it carries forward its objectives harmoniously representatives
of various stakeholders including business people are appointed as board members
of statutory authorities.
Autonomized
Organizations
Many
of the most serious efficiency and quality problems have been seen to be rooted
in management’s pervasive lack of control over resources (especially labor) and
production. Autonomization of such organizations is a reform that focuses on
“making managers manage”—by shifting much of the day-to-day decision-making
control from the hierarchy to management. These changes are often accompanied
by increasing the scope for generating revenue tied to service delivery. This
may be achieved by moving toward funding via performance-related payments, by
allowing paying patients to be served or by allowing copayments to be charged.
Additional revenue opportunities only motivate if revenue can be retained.
Therefore, autonomization reforms increase the scope for retaining revenue in
the organization. Often this is partially achieved by moving from a line-item
to a global budget, whereby savings in one service or budget area can be
shifted to another. Accountability arrangements still generally come from
hierarchical supervision. However, objectives are now more clearly specified.
Usually the scope of the objectives is narrowed, and focus on economic and
financial performance is increased. An agreement between the government and the
management may be concluded with monitorable targets regarding performance.
Responsibilities for performing social functions may be specified in the
agreement. Implementation of autonomization in the services sector has led to a
wide variety of arrangements. The amount of actual autonomy given to the
management has varied considerably. Most governments have been unwilling or
unable to transfer control over, for instance, labor, recruitment, salaries,
and staff mix and have instead left employees in the civil service. In some
cases, the organization has been legally established as a new form of
government agency—which serves to define the new governance arrangements,
secure the changes made, and persuade management that the changes are
irreversible. Accountability arrangements have taken many forms—but all of them
make some attempt to formally specify performance requirements in advance and
to monitor their achievements. These performance requirements have sometimes
been recorded in a framework agreement or “performance contract.” This
mechanism is intended to narrow and clarify the organization’s objectives as
well as to formally lay out the criteria by which management will be judged. In
a few cases, a board of directors has been established to implement this
process of monitoring managerial performance and depoliticizing decision
making. As noted above, these reforms have often been accompanied by a move to
global budgeting or performance-related payments, which leave some efficiency
gains in the department.
Different models of ownership:
Commercialization
Commercialization
involves the creation within government, of a business unit which operates on a
commercial basis, but is not a separate legal entity. Such business units are
expected to have specific financial and non-financial performance targets and
autonomous management of day-to-day operations. Moreover, community service obligations
are required to be separately identified, costed, funded and monitored, whereas
under full-cost pricing it is only necessary to identify as revenue an amount
equal to the difference between the cost of providing services and the revenue
generated from those services. Performance reporting and monitoring
requirements are correspondingly more stringent than under full-cost pricing.
In the absence of specific requirements to the contrary, such as a policy of
‘no forced redundancy’, a commercialized enterprise will seek to minimize
costs, and in particular to employ competitive tendering and contracting
wherever reductions in cost can be achieved as a result. Conversely, the
day-to-day management autonomy required for commercialization implies a corresponding
loss of accountability and of public control over operations. This process is
taken even further through corporatization.
Corporatization
Corporatization refers to the transformation of state assets or agencies into state-owned
corporations in order to introduce corporate management techniques to their
administration[4].
Though many, specially socialists, believe that corporatization is a precursor
to partial or full privatization, which almost always refers to a process
by which formerly public assets or functions are divested or handed over to
corporate entities which hold the equity along with or without government and
the shares of the state-owned corporation are listed on publicly traded stock
exchanges. A common model of corporatization is to corporatize institutions
handling state activities and operated as joint-stock companies. In most of the
cases, such entities have an equity holding pattern with majority of share
holding with state-owned. These entities are run by state entities separate
from a central government. The act of reorganizing the structure of government
owned entity into a legal entity with the corporate structure found in publicly
traded companies. These companies tend to have a board of directors (B of D),
management and shareholders. However, unlike publicly traded companies, the government is typically the
company's only shareholder and that the shares in the company are not traded
publicly. This concept is a major feature of the socialist market economy. In contrast, the
term may also refer to the construction of state
corporatism, where state-owned corporations are created and delegated
public social tasks resembling corporate nationalism, away from autonomous
privatization. Corporatization can also refer to non-corporate entities like
universities or hospitals becoming corporations, or taking up management
structures or other features and behaviors employed by corporations. The main goal of corporatization is
allowing the government to retain ownership of the company but still enable it
to run as efficiently as its private counterparts because government
departments sometimes are inefficient with the level of bureaucracy involved.
Furthermore, the government may one day feel that the private sector could do a
better job of running the company, possibly conducting an offering on the stock
market in order to divest it. Privatization
of public enterprises is, however, not the only possibility for public sector
reform. Especially in the case of public infrastructure utilities, high
transaction cost (e.g. specific investments), high degrees of contractual
incompleteness and monopolistic structures are the norm. In such cases the
welfare consequences of contracting-out government services to private partners
are far from clear (see e.g. Caves (1990) or Auriol and Picard (2009)). Under
certain conditions, e.g. quality shading à la Hart et al. (1997), it may be
preferable to keep a service public even though low-powered incentives prevent
cost-efficient behavior. Subsequently, corporatization of public firms has been
suggested as viable alternative to privatization. ’Corporatization’ or
’commercialization’ refers to institutional arrangements where the public
retains ownership but control rights over business decisions are handed over
from politicians to managers. As an alternative to privatization, corporatization implies
a shift of control rights from politicians to managers while ownership remains
public. Even though corporatized firms are fairly common, little empirical work
has tried to quantify the effects of corporatizations.
In
form, corporatisation normally involves the replacement of government agencies
or statutory authorities with a corporation operating under the company laws
applicable to private corporations but with all the shares (at least initially)
owned by the government. In some cases, government-owned corporations may be
set up under special legislation differing in some respects from that
applicable to private corporations. Corporatization
reforms have evolved based on efforts to mimic the structure and efficiency of
private corporations while assuring that social objectives are still emphasized
through public ownership. Under corporatization, provisions for managerial
autonomy are stronger than under departmentalisation, giving managers virtually
complete control over all inputs and issues related to production of services.
The organization is legally established as an independent entity and hence the
transfer of control is more durable than under departmentalisation. The
independent status includes a hard budget constraint or financial “bottomline”—
which makes the organization fully accountable for its financial
performance—with liquidation at least theoretically being the final solution in
case of insolvency. The greater latitude of management is complemented by market
pressures as an important source of incentives, crucially including some
element of competition or contestability. These market incentives come from the
combination of an increased portion of revenue coming from sales (rather than
budget allocation) and increased possibilities for keeping and using extra
revenue, as well as a hard budget constraint. The corporatized hospital is thus
much more a residual claimant than is the departmentalised one—in that it can
retain excess revenues, but is also responsible for losses. Accountability is
generated on three fronts: direct hierarchical control (or ownership
accountability) and funding/payment and regulatory accountability. Ownership
accountability is usually narrowed to cover a limited range of economic targets—as
part of the effort to mimic the effective governance structures associated with
private corporations.
However,
this emphasis on economic performance necessitates alternative arrangements for
ensuring social functions (services previously cross subsidized) are still
delivered. Under corporatization, these are usually pursued through purchasing,
insurance regulation, demand-side financing, or mandates that apply to all
organizations, rather than simply to public facilities. In practice, when a hospital
is corporatized, it is usually established as a private corporation, although
it is still publicly owned. The accountability mechanisms are anchored in the
creation of a board of directors and some form of corporate plan, which is a
binding agreement between the hospital (and the board) and the relevant
supervisory agency. This corporate plan contains financial performance targets
such as profit or rate of return on assets or equity, dividends and
reinvestment policy. The reliance on accountability from market pressures to
earn revenue has forced governments to establish a functioning framework for
direct payment or transfers to reimburse the service providers for the costs of
pursuing noncommercial objectives.
Privatisation
When
a government enterprise has been corporatised, it is rarely long before calls
are heard for its privatisation. The most extreme version of “marketizing”
organizational reforms is privatization. This reform entails transferring a
public service department to private ownership, either as a for-profit or not
for profit organization. Privatization naturally removes the government
organizations from all direct control of the hierarchy of government officials
or public sector rules. The organization is thus fully independent of the hierarchy,
although the management is likely quite constrained by the new owners. All
incentives come from opportunities to earn revenue, and the incentives are
relatively strong, since private owners or shareholders now are the residual
claimants on extra revenues, now called “profits.” It is the combination of
these two forces that drives the high- incentive features of this
model—complete exposure to a market to earn revenue and owners who are strongly
motivated to capture the revenues and monitor the management.
On
the assumption that external regulation represents a complete solution to
problems of monopoly, externality and so on, there is no obvious reason for
governments to retain ownership. In addition, it is claimed that privatisation
yields financial benefits to governments and even aimed at “retiring debts of
government”[5]. The second argument is not
supported by observation of privatisation in a number of developed countries.
Assuming that the proceeds of privatisation are used to repay government debt,
the resulting savings in interest are rarely sufficient to offset the loss of
income (dividends and capital gains) to the public (Quiggin 1995). The
principal reason is the fact that, for risky investments, the rate of return
required by private equity investors is considerably greater than the bond
rate, the rate at which the same investors are willing to lend to governments.
This ‘equity premium’ has never been fully explained, but appears to arise, at
least in part, from failures in risk-spreading by private capital markets.
One
of the most crucial differences between public and private corporations is that
the former are accountable to the public through ministers and the Parliament,
while the latter are accountable to shareholders who can exercise their rights
through general meetings or the supply of proxies. Both mechanisms have its
strengths and weaknesses. In view of the low frequency with which decisions of
boards are overturned by the votes of shareholders, and with which incumbent
directors are defeated in elections, the control exercised by shareholders is
effectively that of an exit option. Dissatisfied shareholders can sell their
shares on the market, and, if enough shareholders are dissatisfied, the firm is
likely to become a takeover target. By contrast, the control exercised by
voters over government-owned corporations takes the form of voice. In
particular, Parliament can inquire into the performance of government-owned
corporations and hold responsible ministers to account. If Parliamentary
accountability is to be effective, government-owned corporations need to be
more open to scrutiny than their private counterparts. In particular, scope for
withholding information on the grounds of commercial confidential must be
substantially curtailed. Accountability has costs, and these must be taken into
account in considering the extent to which government-owned corporations are
reformed along market oriented lines. This point may be illustrated by
considering the most direct form of accountability, the right of ministers to
intervene in the management of government owned corporations. To the extent
that such corporations are required to pursue social objectives distinct from
the objective of maximizing profit subject to specified community service
obligations, such intervention is necessary and desirable. On the other hand,
where ministerial intervention in commercial decisions is driven by short-term
political concerns, it is unlikely to be beneficial. Even the possibility of
such intervention may constrain the commercial decisions of the corporation. In
cases where the benefits of accountability are less than the costs, more
market-oriented reform, from corporatization to full privatization, may be
justified. Conversely, competitive neutrality requires that the profitability
targets for government-owned corporations should be adjusted to take account of
accountability requirements. More importantly, where private firms take over
the provision of public services from government-owned corporations they should
be subject to the same accountability requirements, including Freedom of
Information requirements that applied previously, unless a specific decision to
relax those requirements is made and justified by a public benefit assessment.
WHY CORPORATISATION?
A revolution is
stirring in against governments that spend more but deliver less, frustrated
with bureaucracies that give them no control, and tired of politicians who
raise taxes and cut services but fail to solve the problems faced by people. There
is a third way: that the options are not simply liberal or conservative, but
that our systems of governance can be fundamentally reframed; that a caring
government can still function as efficiently and productively as the best-run
businesses. Fundamental reinvention of government is already underway—where the
real work of government goes on. Entrepreneurial public managers of many
government agencies have discarded budget systems that encourage managers to
waste money, scrapped civil service systems developed for the nineteenth
century, and jettisoned bureaucracies built for the 1930s. They have replaced
these industrial-age systems with more decentralized, more entrepreneurial,
more responsive organizations designed for the rapidly changing, information-rich
world of the 1990s.Osborne and Gaebler[6]
isolate and describe ten principles around which entrepreneurial public
organizations are built. They:
1) steer more
than they row
2) empower
communities rather than simply deliver services
3) encourage competition
rather than monopoly
4) are driven
by their missions, not their rules
5) fund
outcomes rather than inputs
6) meet the
needs of the customer, not the bureaucracy
7)
concentrate on earning, not just spending
8) invest in
prevention rather than cure
9)
decentralize authority
10) solve
problems by leveraging the marketplace, rather than simple creating public
programs.
People now are
inquisitive about not knowing on what government should do, but on how
government should work. This has given a fillip to the corporatization. Corporatization
is generally aimed at enhancement of efficiency of government activities. This
needs to be done in a manner where there is no bias towards the entities
corporatized. A national competition policy which pushes structural reform with
competitive neutrality is the most desired thing for the corporatization to
succeed. Corporatization of government department provides a private sector
environment and governance regime with continued public ownership. It allows
the State, as owner, to provide strategic direction.
The
critique of public service provision
Pressures for reform of government business
enterprises arose from a number of sources. First, and most importantly, all
Australian governments, and particularly state governments faced what has been
called the fiscal crisis of the state – the conflict between ever-increasing
demands for the provision of services and limited capacity to raise additional
revenue. In these circumstances, it was more and more difficult to justify
financing unprofitable public enterprises. As fiscal pressure tightened,
governments demanded steadily higher rates of return from public enterprises.
The temptation to make cosmetic improvements to the budget balance sheets
through privatisation also increased. The movement towards market-oriented
reform, which became general in the 1980s, was also important. Inefficiencies
in publicly provided infrastructure services were seen as obstacles to the
development of competitive export industries. It was widely hoped that
improvements in the efficiency of transport, electricity and telecommunications
systems would enhance exports and reverse the rapid growth in the current
account deficit that followed financial deregulation in the early 1980s. Finally,
it is important not to overlook the element of fashion. In the private sector,
periods of enthusiasm for ‘conglomerate’ enterprises undertaking many activities
have been succeeded by periods of divestment and downsizing, in which activities
previously undertaken in-house are contracted out or separated and sold off.
The same fashions make themselves felt in the public sector. Critics of the
departmental and statutory authority models of service provision relied on the
concept of ‘transparency’, which was used to express the idea that government
policies should be directed to the achievement of specific, sharply defined
objectives, rather than being justified in terms of a broadly-defined notion of
the public good. Advocates of transparency sought to clarify the objectives of government
agencies, and to require that, if policies were justified in the name of particular
objectives, they should be funded out of the relevant budget. The idea of transparency
was used to justify the replacement of statutory authorities, whose managers
had a general objective of promoting the public interest, with corporatized enterprises,
which were directed to maximise profits subject to the satisfaction of specific
‘Community Service Obligations’ (CSOs). The other main element of the critique
was based on the concepts of public choice theory. Public choice theory was
based on the claim that politicians and public servants, like other economic
agents, were motivated by self-interest rather than by the desire to promote
the public good. In particular, it was argued that bureaucrats would seek to
pursue their self-interest by maximising their budgets (Niskanen 1968). An
important, but usually implicit, assumption in public choice analysis is that
the accountability mechanisms of the democratic system, designed to ensure that
politicians and bureaucrats pursue the public good, are ineffectual, or at least
inadequate. Conversely, advocates of market-oriented reform generally accepted,
somewhat uncritically, the proposition that capital market disciplines such as
the possibility of takeover (Manne 1965) resolved the agency problems
associated with the separation between ownership and control in large
corporations, first noted by Berle and Means (1932). Hence, it was assumed that the
appropriate path for public sector reform was to adopt systems of governance
closely approximating those of corporate enterprises with widely dispersed
shareholdings.
“The world is
changing, and with it our ideas about the state’s role in economic and social
development.”[7] Reforms
in the organization of service delivery are indicative of fundamental changes
in views about the appropriate role of the state in the economy. State-led
development is no longer seen as a viable model in many parts of the world.
Many factors have contributed to this realization:
• the collapse of centrally planned
economies
• the fiscal crises in welfare states of
advanced, industrial economies, and
• the recent Asian crisis—calling into
question the “miracle” of sustainable state-led growth of the East Asian
tigers.
In most of the developing countries, resources are scarce but overextended
governments try to do too much with further limited capability. In the process,
basic services expected to be delivered by governments become casualty. They
often fail to ensure safe living, maintenance of law and order, delivery of
justice, basic health and education, food, drinking water, and roads. There is
a sense of realization in governments that some of the essential activities
hitherto handled by government need to be done differently and under
corporatized mode.
Corporatisation
of Government Activities in INDIA:
India adopted the mixed economy approach for
economic development allowing for the role of both public sector and private
sectors. Guided by economic planning (Five Year Plans), the Central
Government and State Governments went for investments in the public sector
especially in areas, where the private sector was not forthcoming. Thus many
activities carried out by government are commercial in nature. Some public
sector entities are those that were either taken over from the private sector
on their falling sick, or were nationalized consequent to the policy
decision. In 1947, when the country became independent there were various
socio-economic problems confronting the country which needed to be dealt with
in a planned and systematic manner. India at that time was an agrarian
economy with a weak industrial base, low level of savings, inadequate
investments and lack of infrastructure facilities. There existed considerable
inequalities in income and levels of employment, glaring regional imbalances
in economic development and lack of trained manpower. As such, State’s
intervention in all the sectors of the economy was inevitable since private
sector neither had necessary resources, the managerial and scientific skill,
nor the will to undertake risks associated with large long-gestation
investments. Among the imperatives before the Government were the removal of
poverty, equitable distribution of income, generation of employment
opportunities, removal of regional imbalances, accelerated growth of
agricultural and industrial production, better utilization of natural
resources and a wider ownership of economic manpower to prevent its
concentration in a few hands. Problems of treating citizens fairly which
shall not only be governed by set of defined rules known before hand but I
shall be demonstrated accordingly. Government was also expected to respond to
special needs of the citizens and also special circumstances. There were too
many activities to be carried out with limited resources which required great
degree of efficiency with a lot of emphasis on integrity to ensure that funds
are spent prudently. Given the type and range of problems faced by the
country on the economic, social and strategic fronts, it became a pragmatic
compulsion to use the public sector as an instrument for self-reliant
economic growth.
The
government-owned corporations are termed as Public Sector Undertakings (PSUs)
in India. In a PSU, majority (51% or more) of the paid up share capital is
held by central government or by any state government or partly by the
central governments and partly by one or more state governments. Post Independence, India was
grappling with grave socio-economic problems, such as inequalities in income
and low levels of employment, regional imbalances in economic development and
lack of trained manpower, weak industrial base, inadequate investments and
infrastructure facilities, etc. Hence, the roadmap for Public Sector was
developed as an instrument for self-reliant economic growth. The country adopted
the planned economic development polices, which envisaged the development of
PSUs. Initially, the public sector was confined to core and strategic
industries. The second phase witnessed nationalization of industries,
takeover of sick units from the private sector, and entry of the public
sector into new fields like manufacturing consumer goods, consultancy,
contracting and transportation etc. State started playing its role in the
industrial development and for this purpose,
industries have been identified and categorized as under:
The dominant consideration for the continued
large investments in public sector enterprises was to accelerate the growth
of core sectors of economy; to serve the equipment needs of strategically
important sectors like Railways, Telecommunications, Nuclear Power, Defence
etc. and to provide a springboard for the economy to achieve a significant
degree of self-sufficiency in the critical sectors. The rationale for setting
up public enterprises was to ensure easier availability of vital articles of
mass consumption, to introduce check on prices of important products, help
promote emerging areas like tourism, etc. A large number of enterprises were
created out of "Sick Units" taken over from the private sector
inter alia, to protect the interest of workers. A number of public
enterprises were created to operate in national and international trade,
consultancy, contract and construction services, inland and overseas
communications, etc. Therefore, it was not the essential service or
activities which was started or taken over by the government. Many commercial
activities are still done by the government entities. Many of these entities,
working in different sectors are earning profits. The overall profits of
public sector enterprises in India is, thus, a heterogeneous conglomeration
of basic and infrastructure industries, industries producing consumer goods,
industries engaged in trade and services etc.
-
ensure the rapid
economic development and industrialization of the country and create the
necessary infrastructure for economic development
-
promote
redistribution of income and wealth;
-
create employment
opportunities;
-
promote balanced
regional development;
-
assist the
development of small scale and ancillary industries; and,
-
promote import
substitutions, save and earn foreign exchange for the economy.
There are about 250 PSUs of Central Government of India which are
called Central Public Sector Enterprises (CPSEs). Majority of these CPSEs,
including Maharatnas, Navratnas and Miniratnas, are earning profit and have
improved their financial performance over the years. In the context of the
policy of the government to grant more autonomy to the CPSEs and encourage
them to access the capital markets for their fund requirement, Corporate
Governance has become even more important. Under the recently introduced
Maharatna Scheme, CPSEs are expected to expand international operations and
become global giants, for which effective Corporate Governance is imperative.
In the recent past, government of India corporatized some existing government
activities where as diluted its equity many corporate solely run by it.
Telecom sector is the most visible sector where Department of Telecom was
corporatized in September 2000. Bharat Sanchar Nigam Limited[9] (BSNL) was created and it took over the business
of providing of telecom services and network management from the erstwhile
Central Government Departments of Telecom Services (DTS) and Telecom
Operations (DTO), with effect from 1st October, 2000 on going concern basis.
It is one of the largest and leading public sector units providing
comprehensive range of telecom services in India. BSNL is the service
provider, making focused efforts & planned initiatives to bridge the
rural-urban digital divide in ICT sector. In fact there is no telecom
operator in the country to beat its reach with its wide network giving
services in every nook & corner of the country & operates across
India except New Delhi & Mumbai. BSNL serves its customers with a wide
bouquet of telecom services namely Wireline, CDMA mobile, GSM mobile,
Internet, Broadband, Carrier service, MPLS-VPN, VSAT, VoIP, IN Services,
FTTH, etc. BSNL has 90.09 million cellular & 5.06 million WLL customers
as on 31.07.2011. Earlier, telecom services were corporatized in Delhi and
Mumbai through Mahanagar Telphone Nigam Limited[10] in 1986 by the Government of India to upgrade the
quality of telecom services, expand the telecom network, and introduce new
services and to raise revenue for telecom development needs of India’s key
metros Delhi, the political capital and Mumbai, the financial capital of
India. Corporatisation was aimed to achieve objectives such as expansion of
customer base and services, provide latest technology and services to the
customers, at affordable prices, achieve the highest level of customer
satisfaction and delight, diversify in other areas for providing telecom
services at national and international levels, provide convergence of
Telecom, Information Technology and related services and work for social
benefits. Subsequently equity holding of government in MTNL was diluted.
There are talks to further dilute the equity holding of government in
MTNL. Another prominent case of corporatization of government activity was
corporatisation of international telephony related activities given to Videsh
Sanchar Nigam Limited. This corporation was subsequently privatized. Printing
of bank notes and security papers and minting of coins was carried out by
departmental organizations under Ministry of Finance till 2006. A decision
was taken by the government to corporatize it. Though corporate entity is
fully owned by the government, management structure has been changed from
department to company with clear objectives and subsequent deliverables. As
per Department of Public Enterprises there is only one more case of
corporatization in last 30 years i.e. corporatization of Oil and Natural
Gases Corporation. On 23rd June 1993 ONGC was converted into a PSU
from a statutory corporation and is continuing as largest PSU of India.
|
Some
data of significance in the cases of corporatisation of Government Activities
in India:
As
per the information made available by the Department of Public Enterprises,
Government of India, corporatization of Department of Communication was done
into a Public Sector Undertaking on 19th March 1986. Videsh Sanchar
Nigam Ltd. was finally privatized in 2001-02.
Some
data of significance about these organizations, which were corporatized is as
under:
Cumulative
Assets of these three PSUs (OGC, BSNL and SPMCIL) have grown by more than 40% during
last 4 years (Table-1). However there has been a negative growth in profits due
to huge losses suffered by BSNL. Cumulative growth in loss of these PSUs is 34%
(Table-2). BSNL has been and is still a very big employer. However number of
employees is decreasing year after year. There is a negative growth of more
than 8% (Table-3) in number of people employed by these PSUs.
THE NATURE OF ORGANIZATIONAL REFORM
The growing awareness of the structural
nature of the problems in public service delivery has increasingly led policy
makers in some countries to make organizational reform a core component of
reforms. These changes are designed to improve the incentive environment by
altering the distribution of decision making control, revenue rights, and hence
risk among participants in the public sector. There is a wide range of
organizational reforms. Some focus on changing the mapping of functions across
Agencies. Decentralization is another common organizational reform in the
public sector, a reform that shifts decision-making control and often revenue
rights and responsibilities from central to lower level government agencies. Organizational
reforms that shift decision-making control to the provider organizations
themselves—and which attempt to expose them to market or market-like pressures
to improve performance, also attempt to
create new incentives and accountability mechanisms to encourage management to
use that autonomy to improve the performance of the facility.
After tasting the fruits of successful corporatization of commercial
activities, governments throughout the world have begun to apply these reforms
to another set of activities which are generally referred as public utility
services. Public utilities are entities controlled by government and
traditionally they have been responsible for utilities including
infrastructure. In the light of discussions about the ownership of these
utilities the role of the state in delivery of infrastructure services has been
redefined and it is found to be a more difficult path to navigate. There is no
second opinion that the state has a larger role to play here, but prevailing
wisdom on what that role is has changed substantially. In these sectors, the
long-held view was that the existence of a natural monopoly made it necessary
to keep these services in public hands—or in the hands of public sector
entities or corporations not working for profit. Technological changes,
institutional changes and innovation have made it possible to think and act
differently to diversify production and service delivery arrangements. These
interventions have enabled governments to derive huge improvements in
efficiency, quality, and responsiveness of services. This could be achieved
without putting any burden on the exchequer. In many countries and many sectors,
corporatization has demonstrated and brought to the fore the inefficiencies of
the earlier institutions of service delivery and exposed the hidden costs
associated with their set up. Discovery of these vital facts have prompted
states to escalate the reform process and identify the utilities or sectors
that have given favourable results after the organization of infrastructure
services in developing and developed countries are privatized or
commercialized. However there is still a strong feeling that the traditional
arrangement for public service delivery by a utility provider which is a
government monopoly department is the best option.
The latest wave of reforms in ownership of government activities are
evident in many countries where corporatization has started in the sectors
hitherto considered to be the core of government activities namely health,
education, and pensions. Reforms in these social sectors are difficult and policymakers
are struggling to carry out the corporatization model in these sectors to
address many problems in the services delivered in these sectors. Challenge is
to deliver but preserve the social protection and equity.
Organizational reforms such as
autonomization and corporatization are usually initiated to address problems in
publicly run health services with efficiency, both technical and allocative,
productivity, quality, and client responsiveness. However, these reforms are not the only
methods used to address these problems. Management reforms as well as reforms
of funding or payments arrangements are also commonly used to address these
performance problems in publicly run health services. We briefly discuss the
first two in this section.
Management
Reforms
Many attempts have been made to address
the problems in public service delivery systems through management reforms.
These reforms have included efforts to strengthen the managerial expertise of
public sector managers—both through training of existing staff and through
changes in recruitment policies to focus more closely on managerial skills.
Commonly, efforts are made to introduce improved information systems to
facilitate effective decision-making. Many of these efforts constitute part of
the growing trend of reform of public services by applying recent “best
practice” management techniques from private companies. Frequently, attempts
are made to introduce business process reengineering, patient focused care, or
quality-improvement techniques.[11] However, attempts to implement these new management practices have been
seriously constrained by the public sector context in which public provider
organizations operate. Private sector organizations have introduced recruitment
and compensation policies based on the best “personnel management” techniques
for finding and motivating high performers. Where attempts have been made to
apply these methods to public service systems, civil service constraints have
blocked or undermined them. A critical barrier to applying “best practice”
principles from the private sector is the broad lack of control that public
sector managers have over factors of production. Thus, although methods for
reinvigorating private organizations have sometimes been successfully
transferred to public service delivery systems, most attempts have been impeded
by the common constraints generated by public sector control structures.[12] Indeed, the attempts to apply private sector
management principles to public delivery of services have added momentum to the
organizational reforms discussed below.
Funding/Payment
Reforms
Reform of the funding and payment arrangements for public services
is another common approach to address problems with productivity, efficiency,
quality, and responsiveness. Problems with productivity and efficiency are
commonly addressed by altering the structure of funding or payments to
providers. These payments reforms usually tighten the link between resource
allocation and delivery of specific outputs. Examples include retrospective
fee-for-service, per diem, or case-based payments. Some reforms try to
encourage efficiency by shifting expenditure risk onto the providers via
capitated payments or prospective global budgets. These payments reforms
usually tighten the link between resource allocation and user or payer
selection. Examples include limited or fully competitive contracting with
providers, fund-holding with client groups, and demand subsidies. None of these
instruments is perfect. Each helps achieve one goal at the expense of others.
Systems that improve productivity encourage supplier-induced demand. Systems
that better contain costs usually encourage shirking and low productivity. The
incentives created under each payment structure can be powerful and often
create some degree of overshoot that must be addressed. Most systems are not
fully understood, nor are measures to compensate for the overshoot, or known
disadvantages. This often requires a mix of multiple payments structures, so
that the positive incentives of one element of the payment counterbalances the
negative features of the other. An example is the frequent combination of
capitation elements with fee-for-service in areas where productivity is
especially important. For payments system reforms to achieve their objectives,
evidence strongly suggests that reforms must also take place that encourage or
enable providers to respond to the new incentives. As discussed below,
organizational reforms are more complements to payments reforms than
substitutes. Neither may be effective on its own. A similar conclusion may be
reached regarding management reforms. Much as these management and funding
reforms may be needed to improve the performance of health care delivery
systems, in themselves they have led to limited results. The general conclusion
is that such reforms have often been unsuccessful because they did not get at
the roots of the problems of poor incentives inherent in the organization of
service delivery in the public sector.
Identification
of key factors causing wide variations in performance of organizations is a
difficult task but much progress has been made in identifying the key factors. These
fields are often grouped together under the title “economics of
organizations”—and all deal with considerations of information, motivation and
innovation and the implications for how productive activity can best be
organized. The consequences of corporatization are related to the degree of
political interference of governments[13]. Unfortunately, the
existing empirical evidence on the consequences of corporatization (e.g.
Shirley (1999), Bozec and Breton (2003), Bilodeau et al. (2007) or Cambini et
al. (ress)) has largely ignored this issue by focusing on potentially stronger
economic incentives and interpreting corporatization as a weak form of
privatization.
The traditional rationale for public ownership was based on a
simplistic model of individual behavior—presupposing that the objectives of the
government and the objectives of the managers running public organizations were
identical. Policymakers assumed that, if managers were told to pursue the
public interest, they would be able to determine what that meant and would have
the necessary incentives to do it. In practice, the vagueness of the objectives
and the difficulty of precisely determining and monitoring output has proved
“inimical to the efficient management of the (sectors) concerned.”[14]
Public ownership removed the opportunistic profit maximizer—but the civil
servant or politician has turned out to be no “high custodian of public
interest”; instead, they have tended to pursue their own private benefits.[15]
The economics of organization directly addresses the issue of how best to
structure organizations that consist of individuals pursuing their own
self-interest.
Since the beginning of the 1980s, the world has undergone a major
shift in thinking about the appropriate economic role of the state. Corporatization
of State activities has been at the core of this change ever since Britain and
France initiated privatization planning. In the last two decades, several
countries have launched ambitious programs of corporatizing their activities.
Although the extent, form, and pace of change have varied from country to
country, the general trend has been similar: the state has gradually withdrawn
from directly producing goods and services.
This is not surprising given that corporatizations have become an
integral part of the reform and globalization strategy in many economies. The
realization that the domestic capital markets, and their integration with the
global markets, can boost economic growth have resulted in liberalization
policies targeted specifically at increasing the supply/demand of securities
and the development of prudent rules, regulations, disclosure, legal and
accounting practices necessary for a well functioning capital market [see
Errunza (1999) and references therein]. The government should prioritize its corporatization
program by exiting from the activities which can be handled by private sector
in a more effective manner and which are not correlated to the government's
other assets and hence least likely to upset political and social interest
groups. The value gains are higher if the governments exit from the hitherto
pursued conservative public sector investment policies, ceteris paribus.
Background of the Study
From time to time,
measures were taken to reform the above departmental organizations by
Government in general and Ministry of Finance in particular. Government of
India takes reform majors on a regular basis and as a special project;
Expenditure Reforms Commission (ERC) was constituted to suggest reforms in the
functioning of Government organizations. ERC in its recommendation of Dec 2000
pertaining to Currency and Coinage Division had suggested corporatisation plan
of these nine units. Even earlier studies were conducted for improvement of
these units and efforts were made at unit level or at the level of Department
of Economic Affairs. Subsequently, an
independent consultant namely M/s IFCI was engaged to study the feasibility to
implement the recommendations of ERC.
The consultant submitted its report which was by and large accepted by
Government. IFCI Study indicated low productivity, delay in decision making,
wastages etc. in these government departmental organisations as major reason
for recommending corporatization. It was
envisaged that creation of Corporate entity will result in improved decision
making, operational flexibility – man power deployment, etc, accountability and
efficiency, disclosure of activities and financial health of the units in time
and in a professional manner and reward and remuneration linked with
performance and productivity. The report
suggested that Corporation will enable the management to take appropriate and
timely decisions to improve financial performance, manpower deployment and HR
policies. It will also facilitate setting up performance and productivity
standards, performance and productivity remuneration structure to be linked
with the. Corporatisation was
recommended as there was a trend worldwide to corporatise Minting and Security
Printing related operations.
Once such reports
are accepted by the Government, depending upon the nature and quantum of change
required, approval of competent authorities is obtained. The consultant
suggested conversion of government department into a company which required
approval of Cabinet Ministers of India. Accordingly, in September 2005 Cabinet
Note was put up for corporatisation of these nine units so that approval of
Cabinet is obtained. Union Cabinet approved corporatisation of units on
02/09/2005. Subsequently, a company namely Security Printing and Minting
Corporation of India Limited was registered under Companies Act, 1956 on
13/01/2006. Ministry vide Gazette
Notification transferred all assets and liabilities, staff etc. to the company
w.e.f. 10/02/2006. Since, the company was not having any liquid resources at
the time of creation and taking over of nine units, it was granted a loan of
Rs.7000 million (US$175 million) from Government as working capital to start
its operations and then be at its own. Further Government envisaged
modernization of security paper mill, capacity enhancement of security paper
production, modernization of currency printing unit and automation of various
activities being carried out in traditional manner. It has assured to provide
fund for the same.
SPMCIL was created in January 2006 with the intention of bringing
in 9 departmental organizations of Ministry of Finance under it as part of
corporatization process. These nine departmental organizations were and still
are responsible for printing of security documents, currency notes, passport
and other travel documents. They were brought under SPMCIL on 10th
Feb.2006 through an administrative decision supported by the backing of the
cabinet. It would took a lot of time before the actual assimilation of staff
and employees happened in the company. Hitherto government employees were not
very comfortable in the manner the corporatization was done and the
uncertainties regarding their future. There were several employee and labour
unions with wide range of demands and apprehensions about corporatization. It
was a herculean task for the management to bring them on table and negotiate an
amicable solution.
However, the immediate challenge before the management was to take
stock of assets and account for the liabilities as government has not given the
status of accounts to the new management or details of assets and liabilities.
Units were government departments, maintaining their accounts on cash basis and
subsidiary accounts of fixed assets and other details were either not
maintained properly or these were not updated for last many years. Thus preparing
accounts, consolidating it for all units and comply with statutory provisions
was a daunting task. In order to achieve
this, there was no option but to build on the available data and prepare
accounts of the units with maximum possible accuracy. These units were independently maintaining
cash account and a subsidiary account namely proforma account. Proforma Account
is a kind of accounting record generated at the end of financial year by
collecting and collating the data from cash accounts as well as other records.
There is no set accounting principle and no prescribed format to collect and
present information. Some broad outlines are stipulated such as requirement of
preparation of Balance Sheet, Profit & Loss Accounts and method of
calculation of depreciation. Available
data of proforma account was adopted and all expenses incurred by Government of
India in running these units, net of earnings were taken into consideration to
arrive at sources and deployment of funds.
As per the consolidation, these funds amounted to Rs.3237.71 crores as
on 10/02/2006. In order to complete the preparation
and compilation of accounts, account codes were devised, guidelines issued and
continuous monitoring was done to achieve this objective in a time bound
manner. There were several challenges
like non availability of accounting data, lack of trained manpower and
resources, non availability of authentic and revalidated data on assets,
preparation of books of accounts on commercial pattern and compliance with
provisions of Companies Act, Income Tax Act and other statutory compliances. With limited resources, account was compiled
deriving information from records maintained on cash basis. Inputs were taken from cash accounts
pertaining to cash items and from Proforma Accounts as well as other sources
for non cash items and non-government transactions. With concerted effort accounts upto
31/03/2006 were prepared, audited by Comptroller & Auditor General of India
and presented to shareholders in first Annual General Meeting of the Company
held in December 2006. It is the first
time when a Government of India company, created after conversion of Department
was able to get its accounts prepared and approved through all requisite
authorities within one year of its creation.
CONVERSION
OF ACCOUNTS
CHALLENGES
FACED:
SPMCIL came into
being as per notification of Government and without creation of necessary
infrastructure and support system to handle corporatisation. Consultant had
advised in reports about creation of a corporate headquarters manned with a
bare minimum strength. Even recruitment of those officers took time as
recruitments need to do be done by following a transparent and long drawn process.
Therefore, in the initial phases only a handful of officers were there to take
care of affairs at SPMCIL Head Office. At unit level no resources were
available for this challenging task. For sensitizing the workers of units about
corporatisaion, General Managers of the units were groomed to convey to the
union leader and stakeholders about the benefits of corporatization and address
the apprehensions of stakeholders about the loss or problems it is expected to
create to them. Union leaders of all units were briefed on many occasions in an
every organized manner by constituting a Core Group of union leaders drawn from
all units. Issue of entitlements of salary, leave, pension, provident funds,
compassionate appointments were the personnel management related issues where
as targets, productivity, uncertainty of requirements, overtime payments etc.
were other burning issues for discussion.
Financial Advisors
and Chief Accounts Officers (FA&CAOs) of the units were loaded with the
responsibility of handling the implementation of transition of accounts i.e.
from cash to accrual at unit level with their small team of untrained
personnel. Information on asset and liability at unit level was not available
or if available it was inconsistent or inaccurate. In order to make the task
easier and uniform across the units first detailed guidelines were issued in
April’06. This was prepared keeping the broad accounting policy followed by
business entities in mind. Further, methodology for accounting and timelines
for the project with clearly marked milestones were prepared. Regular meetings,
interactions and rigorous efforts for capacity building were initiated as part
of this project. Units were at different level of computerization and using
different formats to record information. There was no system of capturing
information as per accrual principles. Collating and collecting this
information at unit level was a major challenge. Since the units were
independent in the past, inter unit transactions used to be handled like any
other transaction which led to actual transfer of fund. This further used to
inflate turnover of all units put together as raw material of one unit was the
finished product of other unit and both were treating there output as sales. As
a result of corporatisation, banking became costly and every transaction of
transfer of funds used to cost a lot of money. Banking arrangement needed to be
reviewed to take care of different dynamic requirements of business pertaining
to both cash and non-cash transactions. At the end of all this there was a
major challenge of consolidation of the accounts inputs received from the
units. This included preparation of balance sheet as on 9-2-2006 with necessary
sub-ledgering. Soon after consolidation it was to be taken over in the books of
SPMCIL as on 10-2-2006. This required application of due diligence and accepted
principles of price considerations. Further issues haunting at the time of this
project was preparation of accounting details and disclosures pertaining to
receivables and payables, maintenance of fixed assets registers. Soon after
preparation of accounts it was to be approved by the Board, audited by the statutory
auditors and presented to shareholders in the AGM. Thereafter returns as
required under Companies Act of India, 1956 and other statutory returns were to
be filed.
In order to make the
task easier and uniform across the units first, detailed guidelines were issued
by the management in April’06. This was prepared keeping the broad accounting
policy followed by business entities in mind. Further, methodology for
accounting and timelines for the project with clearly marked milestones were
prepared. Regular meetings, interactions and rigorous efforts for capacity
building were initiated as part of this project. Accounting entries were
computerized using very popular accounts software with back up support
available at all units. Units were asked to enter the accounting data in
computer on a daily basis and send back up of accounts in an electronic form at
the end of month. Once the system established, back up was obtained on a
fortnightly basis. Accounts back up was reviewed and corrections were
suggested. As the situation warranted, feedback obtained and corrections
carried out from one unit were circulated in the form of guidelines for the
benefit of all units.
Prior to
corporatisation, transactions between units were settled on cash basis.
Receipts were inflated as it was counted twice in many cases. Further, banking
operations were also required to be carried out where book adjustment would
have achieved the results. Therefore it was decided to discontinue this
practice after the corporatisation. Now it is being handled through modern and
effective techniques i.e. Inter Unit Accounting on accrual basis. In this
system, Units’ balance sheet shows only funds from Corporate Office and its
application at their end. Since a lot of fund transfer was taking place at the
unit level, it was prudent to have banking arrangement whereby minimum time is
taken in fund transfer with minimum efforts and minimum possible transaction
cost.
CAPITAL
STRUCTURE OF SPMCIL:
As on 31.03.2006, in
the audited Balance Sheet of SPMCIL, there stands an amount of Rs.28,420.93
million (US$710.52 million) being funds adjustable from Government of India.
Due to earlier method of accounting, neither these funds could be linked and
traced through voucher level transaction nor is it desirable to do that. On the
scrutiny of records and assets maintained by different units, it was noticed
that huge blockage of funds is there in non-earning or unproductive assets.
These assets have remained idle in past and continue to remain so, due to
outdated machines and limited production capacity. Moreover, huge funds have
been blocked in social assets created due to social commitments of the
Government of India e.g. huge town ships with all infrastructure, dedicated
power stations, water and sewage line, fire brigade. Besides, large area of
land acquired in various units is lying idle, due to various security reasons.
Considering the above facts, it can be concluded that large amount of funds are
not engaged in any kind of income generating asset hence non-productive.
Besides, many units
were established more than 50 years ago and included Plants & Machineries
in their Fixed Assets which are either obsolete or non-functioning. They are neither
generating any kind of income nor engaged in the production process. Due to
this, SPMCIL had assets in balance sheet which represent sunk cost and in
addition it had to bear huge maintenance and social cost regarding the prior
social commitments of the Government.
Considering the
above underlying facts and principle of prudence, capital structure of the
company is being worked out. As all assets cannot be attributed as income
generating assets, hence need arose to identify assets into earning and
non-earning assets. In order to determine whether the assets to be treated as
financed by the Equity Capital and assets to be financed through Grant Capital,
classification of assets has been done. This is done to clearly calculate the
return on capital invested. Return on Equity Capital can be provided only
through income generating assets and Grant capital can be used in the creation
of various social and other assets.
Equity Capital:
Equity Capital
includes Funds attributable to Earning Assets i.e. Plant & Machinery, Tools
& Parts and Inventories which are engaged in production process. As
mentioned earlier, not the entire asset base is income generating asset. These
assets are being identified and categorized which are likely to be of the value
amounting to Rs. 9769.10 million (US$ 244.23 million) as on 31.03.2006.This
includes Rs.500,000 (US$12,500) Share capital already raised and Reserves &
Surplus of Rs. 323.76 million (US$ 8.09 million). Balance funds may be
allocated to Equity Capital which is Rs. 9445.34 million (US$ 236.13 million).
Grant Capital:
Grant capital represent
funds invested in social and maintenance assets and are non-earning in nature.
They have been spent either in acquiring assets facilitating production in
indirect manner but not directly attributing to commercial production
activities of the units. Besides, it includes social asset created due to
welfare and social policies of Government, for instance huge partly unused
residential colony for workers. It is estimated that asset which may be termed
as Grant Capital amounts to Rs.18354.50 million (US$ 458.86 million) out of
total remaining amount of Rs. 29632.80 million (US$740.82 million). From this
amount outside liabilities of Rs. 11278.30 million (US$281.96 million) have
been deducted to arrive at the balance which may be attributed as Grant from
Government.
Conversion of
accounts from cash to accrual was handled at SPMCIL in a professional manner.
This has benefited the management in monitoring of units on
industry standards, specially financial ratios and operational parameters.
Inventory built up was huge and now the issue has been flagged due to the above
reforms. It has resulted in liquidation of unserviceable/unused inventories,
increase in inventory turnover. As the process of reforms was handled almost in
a war like situation, available resources were drenched beyond their capacity.
In order to get the benefit of reforms and continue with it capacity building
and training is essential. A set up needs to be created to take care of
auditing at unit level in a timely manner. As accrual accounting involves
greater detailing, data capturing and analysis hence significant cost and
man-power (man-hours) are required. In the end it must be highlighted that it
involves more man-efforts and cost than cash accounting.
International references on corporatization
Fiji
Post and Telecom Department was corporatized in 1990 and Fiji Post and Telecom
Ltd (FPTL) was created. This department was corporatized and major change
adopted was in migration from cash based accounting to accrual accounting. For
establishing the commercial accounting system a core team was constituted and
help of external consultant also sought.[16] In Spanish Electricity Company
also did significant changes in accounting and financial system followed.[17] In 2004, Japanese
national universities were transformed into national university corporations
(NUCs). Each national university is a juridical public body separated from the
central government, although the former position was just a branch of the
Ministry of Education. The transition was implemented through the National University
Corporation Law which was the enactment of the report entitled “New Vision for
National University Corporations”. The report indicates three reforming points:
identifying the missions and goals of universities, defining the responsibility
and giving much autonomy in management through adopting business management
tools, and introducing a competitive mechanism among universities in addition
to respecting more needs of students and business world. Evidently these
principles have broadly appeared as new public management (NPM) or new
managerialism on higher education reform in other developed countries (Teixeira
et al., 2004; OECD, 2004) whose focuses are on result and customer-oriented,
market mechanism, and devolution or decentralization (Hood, 1991; Pollitt,
1993).
Theoretical
Framework
The proposed research will be carried on the assumption that
ownership of the enterprise is important and so is management and managerial
practices followed by the enterprises. There are instances of change of
management leading to significant change in the fortune of the enterprise where
as there are many cases where change in ownership of the enterprise has also
been found to be having a telling effect on the enterprise. To illustrate the
effect of corporatization on firm behavior, a simplified version of the model
in Shleifer and Vishny (1994) is considered. The specific framework is chosen
because it focuses on political considerations and allows a separation of
control and cash flow rights, thus opening a realm between state and market.
Other commonly used models like Hart et al. (1997) typically analyze
privatization as a dichotomous choice between a public and a private agent,
with the private agent having strong and the public agent having weak
incentives. If hybrid governance forms between public and private are
considered, they are typically just a linear combination of the two, i.e.
modeled with medium-strong incentives[18]. This is not the case in
Shleifer and Vishny (1994), where both public and private provisions are
characterized by strong, although different kinds of incentives. The crucial
assumption is that if public agents are elected politicians, they have strong
political instead of economic incentives. Conversely, private agents need not
win elections and rather have strong economic incentives, depending on their cash
flow rights. In such a framework hybrid governance forms between ’pure’ public
or private ownership are no longer simply modeled as having medium strong
incentives. Depending on the allocation of control and cash flow rights
intermediate cases represent different combinations of strong or weak political
and economic incentives. E.g. shifting control rights from a politician to a
manager (corporatization) reduces political incentives. As cash flow rights
remain with the public (treasury), economic incentives still remain weak if a
public firm is only corporatized. Thus, the definition of corporatization
adopted here is fairly narrow and means only that political incentive intensity
decreases as control rights are shifted from direct (political) management to
another institution.[19] Economic incentives increase
only if increasing proportions of cash-flow rights are transferred to the
manager (i.e. privatization in a narrow sense).[20]
The
consequences of adopting the approach in Shleifer and Vishny (1994) for
analyzing the effects of corporatization are quite substantial. Unlike other
models that view corporatization as a move towards stronger incentives and
potentially greater efficiency, here weaker political incentives are the only
source of effects from corporatization. Corporatized firms represent an
institutional configuration which has both weak economic and political
incentives. It is not a coincidence that these firms share many features with another
type of organization with soft incentives that is typically located between
state and market – non-profit enterprises. In the spirit of Glaeser and
Shleifer (2001), non-profit enterprises are a commitment to soft incentives
because control and cash-flow rights are separated. Similarly, corporatized
firms are a commitment to soft incentives, both economic but also political.
The separation of control and cash-flow rights is therefore not only expected
to weaken incentives in the case of profit versus non-profit but also for
political versus non-political firms. The bottom line is that corporatization
works through the decreased political incentive intensity. To illustrate the
idea more formally, a simplified version of the model in Shleifer and Vishny (1994)
is used. Two major simplifications arise: First, only cases where ownership
remains public are considered, hence ignoring privatizations. Second, for
brevity the model here does not cover bribes and corruption. Nevertheless, the
results obtained are in line with those of the more detailed and general model
in Shleifer and Vishny (1994). Moreover, instead of employment as the relevant
political variable I focus on prices for a public good. That the model is
general enough to analyze a wide variety of cases is not only envisaged in
Shleifer and Vishny (1994) but also clear from the fact that the only
requirement regarding the political variable is that its manipulation generates
some benefit for the politician.[21]
[1]
The Report of the Inter-Departmental Committee on Social Insurance and Allied
Services, known commonly as the Beveridge Report, 1942 was an
influential document in the founding of the Welfare
State in the United Kingdom.
[2] http://www.gpo.gov/fdsys/pkg/FR-2011-11-08/html/2011-28858.htm
[3] Governance of
public corporations: Profits and the public benefit, John Quiggin, Australian
Research Council Senior Fellow, School of Economics Australian National
University, http://ecocomm.anu.edu.au/quiggin
[4] http://en.wikipedia.org/wiki/Corporatization
[5]
Richard Prebble, Minister of State Owned
Enterprises, New Zealand
[6] D. Osborne and T.Gaebler, Reinventing Government, how the
entrepreneurial spirit is transforming the public sector, (New York: Plume,
1993).
[7] World Bank, World Development Report 1997:
The State in a Changing World (New
York: Oxford University Press,
1997).
[8] http://www.india.gov.in/outerwin.php?id=http://scopeonline.in/
[9] http://www.bsnl.co.in:9080/opencms/bsnl/BSNL/about_us/company/about_bsnl.html
[10] http://mtnlmumbai.in/index.php/about-us
[12] Chapter 7, in J.Q. Wilson, Bureaucracy: What
Government Agencies Do and Why They Do It (New York, N.Y.: Basic
Books, 1989)
[14] Organization for Economic Cooperation
and Development, Regulatory
Reform, Privatisation and Competition Policy
(Paris: OECD, 1992), p. 17.
[16]
FPTL Annual Report 1990.
[17] Tsamenyi, M.,
Cullen, J., & Gonz'alez, J. M. (2006). Changes in accounting and financial
information system in a Spanish electricity company: A new institutional theory
analysis. Management Accounting Research, 17, 409-432.
[18] The replaceability parameter _
in Hart et al. (1997) is an example in
this respect. This interpretation is also in line with
the less formal analysis of Williamson (1999).
[19] The definition is therefore different
from the interpretation that corporatization is a mild form of privatization,
e.g. as
adopted in Shirley (1999) or Cambini et al. (ress)
[20] In Shleifer and Vishny (1994) this is captured by the
parameter _ and
represents the direct effect of privatization.
[21] As for excess employment, it remains
an empirical issue not only to verify the existence of such practices but also
their
direction. Theoretically it may be the case that shifting
funds from excess employment or price reductions to more salient
uses has a positive
political benefit.
[22]
Previts, Parker and Coffman, 1990 (p 144)
[23]
Ansari and Euske, 1987
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