Private, Public, and Global Enterprises

Introduction

Enterprises, or business organisations, can be broadly categorised based on their ownership and control. This classification gives rise to the concepts of Private Sector and Public Sector enterprises. As businesses expand beyond national borders, we also encounter the concept of Global Enterprises.

The structure and functioning of an enterprise are heavily influenced by whether it is owned by private individuals, the government, or operates across multiple countries.

Private Sector And Public Sector

The economic activities in a country are typically carried out by enterprises belonging to either the private sector or the public sector.

Private Sector

The private sector consists of business enterprises that are owned, managed, and controlled by private individuals or groups. Their primary objective is generally to earn profits. Forms of business organisations like Sole Proprietorship, Partnership, Joint Hindu Family Business, and Private/Public Companies owned by private individuals fall under the private sector.

Examples in India: Reliance Industries Ltd., Tata Consultancy Services Ltd., Hindustan Unilever Ltd., most corner shops, partnerships, etc.

Public Sector

The public sector comprises business enterprises that are owned, managed, and controlled by the government. The ownership can be either by the Central Government, a State Government, or both. The primary objective of public sector enterprises is usually service to society and public welfare, although earning profits is also important for sustainability and growth.

Examples in India: Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL), Life Insurance Corporation of India (LIC), Indian Railways (as a whole), etc.

Mixed Economy

India has traditionally followed a mixed economy model, where both the private and public sectors co-exist and play significant roles in economic development. Certain industries were reserved for the public sector (strategic sectors), while others were open to both sectors. Over time, the roles have evolved, with increased participation of the private sector in many areas previously dominated by the public sector.

Comparison of Private and Public Sector Enterprises

Forms Of Organising Public Sector Enterprises

Public sector enterprises in India have traditionally been organised in three major forms:

Departmental Undertakings

This is the oldest and most traditional form of organising public enterprises. The enterprise is organised as a part of a government ministry or department. It is financed by annual appropriations made by the legislature and its revenues are paid into the government treasury. Management is through government officials.

Features:

• Managed by a government department.
• Financed by government budget appropriations.
• Revenue is deposited into the government treasury.
• Staffing is done by government employees (civil servants).
• Subject to strict government control and parliamentary accountability.
• No separate legal entity status.

Merits:

• Effective control by the concerned ministry.
• Ensures a high degree of public accountability.
• Revenues are a direct source of income for the government.
• Suitable for activities requiring secrecy, like defence.

Limitations:

• Lack of flexibility and autonomy.
• Inefficient management due to bureaucracy and red-tapism.
• Delays in decision-making.
• Unsuitable for commercial ventures requiring quick response to market changes.
• Staffing issues due to government recruitment rules.

Example: Indian Railways, Department of Post (partially), Doordarshan and All India Radio (historically, now autonomous bodies/corporations in certain aspects but still linked to government).

Statutory Corporations (Public Corporations)

A Statutory Corporation is a corporate body brought into existence by a Special Act of Parliament or State Legislature. The Act defines its powers, functions, rules, and regulations. It has a separate legal entity status.

Features:

• Created by a Special Act of Legislature.
• Separate legal entity.
• Financed by borrowing from the public and revenue from sales; not dependent on government budget.
• Staff are employees of the corporation, not civil servants.
• Managed by a Board of Directors appointed by the government.
• Financial autonomy within the limits of the Act.
• Subject to parliamentary or state legislature accountability.

Merits:

• Enjoys autonomy in internal administration.
• Flexibility in operations compared to departmental undertakings.
• Can formulate its own policies within the framework of the Act.
• Financial independence.
• Staff recruitment and terms based on corporation rules.

Limitations:

• Actual autonomy is often limited by government and political interference.
• May enjoy monopoly status, leading to inefficiency.
• Act creating it might be rigid, limiting flexibility.
• Board may not act in public interest but follow government directives.

Examples: Life Insurance Corporation of India (LIC), Reserve Bank of India (RBI), State Bank of India (SBI), Oil and Natural Gas Corporation (ONGC) - initially formed as a commission, now primarily a government company, but its origin was statutory. Food Corporation of India (FCI).

Government Company

A Government Company is a company registered under the Companies Act, 2013 (or any previous company law), in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.

Features:

• Registered under the Companies Act, 2013.
• Separate legal entity.
• Has perpetual succession and a common seal.
• Managed by a Board of Directors, which may include government nominees and private individuals.
• Financed by government shareholding and borrowings, and may also raise funds from the public (if it is a public limited company).
• Staffing is done according to the company's own rules (not civil servants).
• Subject to provisions of the Companies Act and governmental control.

Merits:

• Ease of formation compared to statutory corporations (simply needs registration under Companies Act).
• Enjoys significant managerial and operational autonomy compared to departmental undertakings.
• Flexibility in rules and procedures.
• Can compete with the private sector.

Limitations:

• Objective might not be purely commercial due to government interference.
• Board of Directors may not be truly independent.
• Lacks the special powers or status of a statutory corporation.
• Accountability might be less strict than departmental undertakings or statutory corporations.

Examples: Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL), GAIL (India) Ltd., Hindustan Aeronautics Ltd. (HAL), various state trading corporations and development corporations.

Comparison of Forms of Public Sector Enterprises

Changing Role Of Public Sector

The role of the public sector in India has evolved significantly since independence, especially after the economic reforms initiated in 1991. Initially, the public sector was envisioned as the engine of industrialisation, focusing on basic and heavy industries, infrastructure development, and achieving social objectives.

However, over time, public sector enterprises (PSUs) faced challenges like inefficiency, low profitability, delays in decision-making, and political interference. This led to a rethinking of the public sector's role.

Shift After 1991 Reforms:

1. Deregulation and Opening up to Private Sector

Many sectors previously reserved for the public sector were opened up for private participation (e.g., telecommunications, power, civil aviation, banking, insurance). This increased competition.

2. Disinvestment and Privatisation

The government started selling off its stake in PSUs (disinvestment) and in some cases, transferring management control to the private sector (privatisation). The objectives were to raise resources, improve efficiency, and unlock the potential of these enterprises.

3. Focus on Strategic Sectors

The government decided to focus the public sector's presence primarily in strategic sectors (like defence, atomic energy, railways) where public interest or national security is paramount. In non-strategic sectors, the government's presence is being gradually reduced.

4. Improving Efficiency and Professionalism

Efforts were made to professionalise the management of PSUs, grant greater autonomy (e.g., 'Navratna' and 'Maharatna' status for top PSUs giving them more financial and operational freedom), and make them more commercially viable.

5. Increased Accountability and Performance Orientation

Emphasis shifted towards performance evaluation based on profitability, productivity, and market competitiveness.

While the public sector continues to play a vital role in certain key areas and acts as a counter-balance to the private sector, its overall footprint and nature of involvement have transformed significantly, adapting to the liberalised and globalised economy.

Global Enterprises

Global Enterprises, also known as Multinational Corporations (MNCs) or Transnational Corporations (TNCs), are large industrial organisations which extend their industrial and marketing operations through a network of subsidiaries, branches, and affiliates in several countries.

These enterprises possess significant economic power and operate on a global scale, transcending national boundaries.

Features of Global Enterprises:

1. Huge Capital Resources

MNCs operate with enormous amounts of capital, allowing them to undertake large-scale operations and expansion projects globally. They can easily raise funds from international markets.

2. Foreign Collaborations

MNCs often enter into collaborations with local companies in foreign countries, involving joint ventures, equity participation, or technical tie-ups.

3. Centralised Control

The control of an MNC is centralised in the hands of the head office, usually located in the home country. Branch offices and subsidiaries in different countries operate under the strict guidelines and policies framed by the head office.

4. Sophisticated Technology

MNCs typically use advanced and capital-intensive technology, giving them a competitive edge in terms of quality and efficiency.

5. Extensive Marketing Network

MNCs have sophisticated marketing systems and networks spread across the globe. They often invest heavily in branding and advertising.

6. Expansion of Market Territory

Their operations are not confined to a single country; they operate and market their products/services in multiple countries, seeking new markets and resources.

7. Research and Development (R&D)

MNCs invest heavily in R&D activities to develop new products and processes, which fuels innovation and maintains their competitive advantage.

8. Oligopolistic Power

Due to their size and reach, MNCs often operate in global markets characterized by oligopoly (market dominated by a few large players).

Examples (operating in/from India): Hindustan Unilever Ltd., Maruti Suzuki India Ltd. (significant foreign stake/collaboration), various technology companies (e.g., Google, Microsoft), automotive companies (e.g., Tata Motors, Mahindra & Mahindra - Indian origin MNCs; Maruti Suzuki, Hyundai, Honda - foreign origin MNCs with operations in India).

Joint Ventures

A Joint Venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project, or any other business activity.

In a joint venture, each of the participants is responsible for profits, losses, and costs associated with the venture. However, the venture is its own entity, separate from the participants' other business interests.

Joint ventures are often formed for a limited period or specific project, although some can be long-term strategic alliances.

Types Of Joint Ventures

Joint ventures can take various forms:

• Equity Joint Venture: A separate legal entity (usually a company) is created, jointly owned by the participating parties who contribute capital and share equity.
• Contractual Joint Venture: The parties agree to collaborate on a project through a contract without creating a separate legal entity. They share revenues, expenses, and risks according to the contract.
• Domestic Joint Venture: Formed between two or more entities within the same country.
• International Joint Venture: Formed between entities from different countries (often an MNC partnering with a local company).

Benefits of Joint Ventures

• Access to Resources and Technology: Partners can combine their financial, physical, and human resources, and gain access to each other's technology or expertise.
• Access to New Markets and Distribution Networks: A foreign company can gain entry into a local market by partnering with a domestic company that understands the market and has established distribution channels.
• Lower Costs of Production: Partners can benefit from economies of scale or access to cheaper inputs.
• Reduced Risk: The risk associated with a large or new project is shared among the partners.
• Ease of Entry into Foreign Markets: For a foreign company, a joint venture with a local partner can navigate legal, regulatory, and cultural challenges more easily.
• Increased Speed to Market: By leveraging existing resources and expertise, a project can be implemented faster.
• Brand Building: Partnering with a known local entity can enhance the brand acceptance of a foreign company.

Examples in India: Maruti Suzuki (originally a JV between Government of India's Maruti Udyog and Japan's Suzuki Motor Corporation, though government shareholding reduced over time), Tata Global Beverages and Starbucks Corporation (Tata Starbucks), Hero Honda (historically).

Public Private Partnership (Ppp)

Public Private Partnership (PPP) is a long-term contractual arrangement between a public sector entity (like a government ministry, department, or local authority) and a private sector entity, for the provision of public assets or services where the private sector takes on significant risk and management responsibility.

PPPs are used to leverage the expertise, technology, and financial resources of the private sector to develop and manage infrastructure projects or provide public services that might otherwise be wholly undertaken by the government.

Key characteristics of PPPs:

• Involves a contract between a public and a private entity.
• Long-term nature (often spanning several years or decades).
• Sharing of risks and rewards between public and private partners.
• Private sector typically invests capital and manages operations.
• Focus on service delivery or provision of public infrastructure.
• Profit motive for the private partner, public welfare motive for the government.

PPPs come in various models, such as Build-Operate-Transfer (BOT), Build-Own-Operate (BOO), Build-Lease-Transfer (BLT), etc., differing in terms of ownership structure, risk allocation, and duration.

Examples in India: Development of airports (e.g., Delhi, Mumbai), highways and toll roads, power projects, ports, urban infrastructure projects, healthcare facilities, etc.

PPPs aim to combine the strengths of both sectors to deliver projects and services more efficiently and effectively than either sector could do alone, benefiting from private sector speed and innovation while ensuring public accountability and service standards.