Introduction || Planning Commission
Chapter-1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || Conclusion || Appendix A || Appendix B || Appendix C || Glossary

Chapter 16:
ORGANISATION OF PUBLIC ENTERPRISES

The Industrial Policy Resolution of April, 1956, recognising the need ul rapid industrialisation for promoting the accelerated growth of the economy, emphasised the key role of the public sector in setting up new industrial undertakings in the following words :

"The adoption of the socialist pattern of society as a national objective, as well as the need for planned and rapid development, required that all industries of basic and strategic importance, or in the nature of public utility services should be in the public sector. Other industries which are essential and require investment on a scale which only the State, in present circumstances, could provide, have also to be in the public sector."

2. A number of basic industries which require large investments and extensive collaboration with foreign firms or governments and which could be undertaken only on the assurance of future prospects, with no immediate gain in sight, would not normally be started if reliance was to be placed entirely on prr/aic enterprise. As the need for establishing these industries is urgent and insistent m tne present pnase of the country's development, it is inevitable that the scope of the public sector should be large. Moreover, in the case of industries where for technological reasons, the plants have to be large, requiring big investments, by organising them in the public sector, undue concentration of economic and industrial power in private hands can be prevented.

3. Rapid expansion of the public sector would materially contribute to increasing public savings for investment, making it possible thereby to increase the rate of growth. The particular advantage of the expansion of the public sector from this point of view is that a possible conflict between efficiency and the distribution of income is, to a large extent, eliminated. Increased profits, which in the private sector would create inequalities (and possible conspicuous and wasteful consumption), in the public sector can be directly used for capital accumulation. By efficient conduct of enterprises and following a rational and economically sound price policy for its products and services, the public sector undertakings ought to secure adequate return on capital employed and contribute their full share to the increase in the portion of national resources devoted to investment.

4. As a direct consequence of the objective of working towards the realisation of a socialist pattern of society, there will be large expansion of the public sector in a wide range of activities, covering fields as varied as mining and manufacturing, generation and distribution of electric power, construction, transport and communications, irrigation, banking and insurance, trade, social services, etc. Extended operations in all these fields will call for the development of appropriate organisations and, as experience is gained in their working, it will be possible to make them progressively more efficient and effective. Although the discussion in this Chapter is primarily with reference to industrial undertakings, most of the considerations have applicability to a wider field.

5. During the last few years a number of major industrial undertakings have been established in the public sector. Several more are due to come in existence in the course of the Third Plan. Indeed, an increasingly large number of new enterprises will oe e and iabhshed during each subsequent Plan period. So far, however, the main thought has been on initiating new projects and finding financial resources for them. It was getting things started which counted. The time has now come to give close attention to the question of how best to manage these enterprises so that they become efficient producers, capable of yieiamg siiDstautial surpluses which will provide for future expansion, and set an example ol: careful planning, good management and cordial worker and management relationship.

6. As soon as a new project has been established, in fact much earlier, it is of utmost importance to give proper attention to its effective management. No matter how well the project has been conceived and the plant engineered, it will ultimately succeed or fail on the strength of its management. Before attempting an analysis of certain shortcomings of management and seeking to identify areas calling for remedial action, the present position regarding the organisation of public enterprises in the manufacturing field may be briefly described.

7. Public enterprises in the manufacturing field have been organised in three forms. Some of them like the Chittaranjan Locomotive Works are administered departmentally; there are a few which are corporations constituted by a statute; but the majority are joint stock companies established under the Companies Act, although sometimes designated as corporations. The important enterprises of the Centre have been listed in the Annexure which shows under each administrative Ministry, the name of the enterprise, the year of its establishment and its legal status.

8. The "usual practice till recently was to establish each manufacturing unit as an independent company. Where it was felt that some special coordination was necessary between certain enterprises either because they were in the same field of operation or because they had special commercial or technical relations with each other, it was sought to be achieved by having a number of common Directors. Moreover, in the case of enterprises under the same Ministry, there was little difficulty of coordination because even the Chairman of the Board and some of the Directors were the same on account of the fact that directorships in many cases were held by certain officials ex-officio.

9. It has now been recognised that proliferation of special organisations of such number and variety as to be unmanageable should be avoided and there should be a definite policy of consolidating these organisations so as to bring together enterprises functioning broadly in the same field, fhis would enable provision of common facilities to individual units, which otherwise might be well beyond their means, and lead to overall economy and efficiency. For example, number of enterprises grouped together and working in the same field and pooling their resources can maintain an organisation of adequate side both for purchase and sale, with a net-work of branch offices on a large enough scale; can set up facilities for scientific and technological research; establish design and development organisation undertake technical training programmes and institute suitable systems of personnel selection and recruitment on a common basis. Also as enterprises in the group will be largely concerned with the same type of problems, interchange of experience will be very profitable with a view to arriving at common solutions. Bringing together of several manufacturing units under the same company in this manner should not, however, lead to excessive centralisation on the part of the Board of Directors or intervention in the day-to-day activities of the individual constituent production units; otherwise, the General Manager of the undertaking will not have the necessary authority and initiative to ensure the smooth and efficient conduct of the enterprise.

10. The awareness of these possibilities is reflected in the recent tendency to form large companies such as the Hindustan Steel Limited, the Heavy Engineering Corporation, the Heavy Electricals Limited, the Hindustan Insecticides Limited, the Fertiliser Corporation, the National Coal Development Corporation, etc., each of which controls, or is intended to control, a number of separate undertakings in steel, machine building, chemicals, fertilisers, coal mining, etc.

11. Till some years ago, in the earlier stages, projects were handled departmental^, Later, a decision was taken that government enterprises of a commercial nature should be organised as companies. At present in the case of most of the new projects, such as the Heavy Machinery Project at Ranchi, a company is formed to see that project through from the very outset, including the stage of construction. Also existing companies are being encouraged to establish new units in their field as illustrated by Hindustan Steel Limited being assigned the responsibility of establishing the Alloy and Tool Steels Plant at Durgapur and the new integrated steel works at Bokaro, and the Hindustan Machine Tools Company being charged with the responsibility of bringing into existence one or more machine tool factories.

12. It has become necessary now to give serious thought to the establishment of specialised agencies for designing and construction. These agencies would be able to undertake large works in connection with industrial development and to gain and preserve valuable experience of actual construction which could be put to use in the construction of similar succeeding projects. A start has been made with the establishment of design and construction organisations in Hindustan Steel Limited and Sindri Fertilisers Limited.

13. The successful operation of large industrial enterprises is a relatively new challenge. Efficient conduct of industrial and business enterprises requires that operational decisions should be prompt. They need not always be right for most such decisions are reversible and can be corrected later. Far greater delegation of authority and flexibility of operation is necessary to enable the management of the enterprise to product; results. If an enterprise does not have real autonomy it is not likely to be effective.

14. Lack of delegation within the enterprise is another common failure. Even as the general manager does not enjoy sufficient authority to manage effectively, there is often a failure by him and other management stall' in the hierarchy to delegate authority to others down the line, who cannot do their jobs properly without the necessary authority. The lack of delegation of authority is usually accompanied by a failure to define responsibilities and duties. Nobody can operate confidently or effectively or be held responsible for results unless he knows what he is supposed to do and has the authority to do it.

15. Another important factor which determines the success of an enterprise is whether there are enough experienced men in positions of management. A good plant can appear to operate, and in fact can operate in an uneconomic way, without enough management staff, but if their number is not sufficient, an enterprise will be handicapped by high production cost, low output, high wastage, mechanical and processing difficulties and break-downs.

16. Luck of quality of managerial personnel is another factor prejudicing the success of an enterprise. Besides, there being too few experienced persons in managerial posts, often the key positions as general managers, production managers, maintenance superintendents, etc., are held by people who do not have the requisite training and experience to do their jobs effectively.

17. The consciousness of profit and cost is also not as widespread as is necessary. The purpose of management should be to secure economic efficiency; cost consciousness is necessary to achieve the desired results. But even the most cost-conscious manager cannot control costs unless he knows what they are, and this is not feasible without the use of cost accounting and other management techniques which are not being used very widely. There are deficiencies also in selection of personnel, their training, and in securing maximum work from them while giving them maximum satisfaction.

18. Some important aspects, calling for suitable action, are discussed below :Public Accountability.—Democratic control of publicly owned industries is very important. At the same time it is generally agreed that a public enterprise, if it is to be run successfully, must possess a sufficient degree of autonomy from Government and Parliament. When day-to-day decisions of a public enterprise become the subject of parliamentary interpellations and discussions, the Ministers will find it necessary to ask for advance knowledge and approval of all decisions. Moreover, exposed to constant public scrutiny, the management will be afraid of making the day-to-day decisions necessary in commercial undertakings, and an ostensibly autonomous enterprise will be virtually stifled by red tape and bureaucracy. The need has, therefore, been felt for a Committee of Parliament which would enable informed parliamentary criticism to be brought to bear on public enterprises. This Committee would keep itself continuously informed regarding the working of public enterprises. It may be useful if membership of the Committee is for a period of about three years so as to give time to members to master complex facts and to ensure some continuity. This will also result in a growing number of members of Parliament taking a specialised interest in these matters. As Parliament would be assured of necessary vigilance by the Committee, individual members would count on the judgment of the members of the Committee for proper and periodic evaluation of the public enterprises.

19. Nature and functions of the Board of Directors.-—The main function of the Board should be to lay down the broad policies and the general objectives of the undertakings. Subject to the policies laid down, the Managing Director or the General Manager should have full authority and he should be held responsible for achieving the necessary results. Secretaries to the Min''stries should not be appointed as Chairmen rr Directors. It may, however, be useful, in the initial stages, to appoint one or two directors from amongst government officials who are actually dealing with the project in the administrative Ministry concerned and in the Finance Ministry. They will function like any other Director within the constitution of the Company and will be bound by its rules and regulations. In respect of subjects reserved for the Government, they will be able to explain to the Board of Directors the thinking within the Government and, when matters are referred to Government, they will be able to explain the views of the Board of Directors.

20. The Managing Director and/Or Chairman should be appointed by the Government and, except in the case of very small concerns, should be full-time. Other Directors may be full-time or part-time according to the requirements of the undertaking.

21. Membership of the Board should be on the basis of ability, experience and administrative competence, and should be open not only to the employees of the public undertakings but also to persons from outside. Having been selected to serve on the Board, all Directors must identify themselves with the interest of the undertaking.

22. The Board of Directors should have adequate powers to make appointments and to fix salaries. However, to avoid the risk of migration of personnel from one public sector undertaking to another if different scales of pay are adopted by them for posts of similar nature, it may be necessary to indicate to the Board broadly the basic scales of pay for different categories of posts. It should, however, be open to the Board to fix specific pays for specific jobs.

23. The powers of the Board for sanctioning of capital works will have to be considerably enhanced as the limits stipulated in the case of some of the big undertakings appear to be too low at present. The financial limits will have to be comparatively high in the case of big undertakings and could be more modest in the case of smaller undertakings. The reference to the Government for expenditure sanction should be reduced to the minimum so that within the frame-work of certain rules and limits, the Board of Directors should be free to proceed with the operations of the plant or the execution of a project.

24. Of late, there has been an attempt to form large companies under which are brought together separate undertakings of allied character. The constitution of such large companies has been considered desirable from the point of view of providing certain common facilities to individual units in the interest of overall economy and efficiency. The wider delegation of power from the Ministry to the Company should be accompanied by sufficient delegation of authority bv the Company to the General Managers of the individual undertakings. The defects of excessive centralisation would remain and the operation of individual undertakings would be adversely affected if the requisite authority and autonomy are withheld from the men on the spot who have to run the undertaking.

25. Managing Director/General Manager.— The leadership, guidance and the main driving force must come from the Managing Director/ General Manager. He must be selected on the basis of technical competence, administrative ability and quality of leadership. He must be able to see clearly what is going on and to know which department is not working satisfactorily and must have the requisite knowledge and authority to help the departmental managers to put it right. He must enjoy real autonomy within the frame work of general rules laid down and must be held responsible for the results. Day-to-day decisions should be his concern. It must be recognised that some mistakes will occur, for these are inevitable when decisions have to be taken quickly in the interest of efficiency. The flexibility of operations will be possible only if he enjoys a reasonable degree of freedom from being called upon to explain to a number of different people at different times why. certain decisions were taken and why departures had to be made from particular rules. For the proper discharge of his responsibilities, the General Manager should remain in charge of an undertaking for a reasonably long period so that he has an intimate knowledge of the problems and possibilities of his enterprise. Quick changes of appointments must, therefore, be avoided. At the same time, h''s security of tenure should depend on performance. If he succeeds, he will naturally be continued in office and receive encouragement; if he fails he must expect to be superseded.

26. The role of Financial Adviser.—All companies should be provided with an internal Financial Adviser who should function subject to the authority of the General Manager. In case of difference of opinion, it should be quite open to the General Manager to overrule the advice of the Financial Adviser, but there should be a convention that such cases should be brought to the notice of the Board by the General Manager at the next Board meeting.

27. The Financial Adviser should concern himself with problems of financial management rather than devote exclusive attention to those of control of expenditure. For this purpose it would be necessary to arrange for orientation of^ Financial Advisers in the principles and practices of financial management either before joining an undertaking or through refresher courses. This is required particularly for Financial Advisers who may be drawn from the usual channels available for this purpose at present.

28. Supnortinv Management.—The General Manager should have enough supporting management staff to provide adequate control, supervision, direction and training for all employees. This staff should be selected and appointed by the General Manager, subject to Board approval, and should be responsible only to him or to some one authorised by him. He should delegate and define adequate authority to them and then hold them responsible for performance.

29. Building up of Management Cadres:—The efficient functioning of the enterprises will depend greatly on two important factors bearing on personnel management, namely training for positions of responsibility in the organisation and development of personnel to serve as second line for eventual selection to key appointments. Managerial personnel for key appointments should not only be technically qualified but they should also develop an "all plant" outlook. The manner in which this should be done will depend on the particular circumstances of each enterprise, which may use specially devised courses and other practical ways such as giving opportunities to selected persons for proving their managerial capacity in suitable posts.

30. Advance Planning.—Planning, that is deciding in advance what is to be done, is a precondition for the success of an enterprise. It provides the basis for organisation, assembling resources, direction and control. An able manager is one who can say with an assurance based on detailed planning what products he would produce during the next month and the year, how many men and of what qualifications he would need and what wonid be the expense thereof, which materials and in what quantities would be required, what the spoilage would be and can state in similar specific terms the results he plans to achieve in other phases of his operation.

31. The plans for a given enterprise should fall into a hierarchy. A general obiective is accompanied by a whole seres of successively more detailed plans, each designed to implement the general plan of which it is a part. There have to be similarly general plans for longer periods, say five years, annual operational plans and budgets and detailed day-to-day programmes of individual departments.

32. The preparation of advance costs, operation and capital budgets will greatly reduce the need for making references to the administrative Ministry and strengthen the autonomy and flexibility of the enterprises. All enterprises, in their own interest, should, therefore, build suitable machinery for this purpose.

33. Advance planning provides an opportunity for seeing that each part fits in with the other and is directed towards the overall purpose. When bottlenecks or weak spots are uncovered by careful and realistic advance planning, there is often time to find a remedy before the event occurs, whereas expensive breakdowns may be unp'voidable if corrective action is not in'tiated until overwhelmed by a crisis. Moreover, trouble is often more easilv corrected in its eariv stages than after a crisis has developed. Thus. for example, preventive maintenance systematically carried out avoids expensive repairs and replacements and shutting down of plants later. The existence of a detailed plan provides the impetus for developing more efficient methods and procedures and also facilitates delegation of authority.

34. Setting up of specific goals and subgoals is an inseparable part of the whole planning process. A wide variety of operating standards and 'norms' need to be set up to express the anticipated results of the more detailed plan. These may include norms for use of raw materials power and fuel inputs of labour; overhead expenses; targets of output,, both in terms of quantity and quality; tasks for training, etc. Comparable data from other similar plants in the country and outside are often found of value in this connection. An operational budget of the enterprise, carefully prepared from this point of view, could serve as the goal towards which all activities are directed. Many benefits follow from such practice. It makes purposeful and integrated planning easier; it helps the executive and the operators to concentrate on the essentials and contribute to the constant vigilance that is necessary to keep the enterprise from unproductive activities; the accumulation of operational data and norms useful for planning provides the basis for building realistic programmes in future; and, most important of all; the setting up of specific goals and norms is an essential condition for administrative control, that is, the securing of results in accordance with plans. Standards and norms are vital if appraisal is to have any validity. Also the recognition and acceptance of specific and clearly defined objectives and standards play an important part in the motivation of individual effort.

35. Incentives.—An enterprise which has worked realistic 'norms' of performance would find it easy to introduce systems of wage incentives, which play an important part in raising labour productivity, reducing costs and improving quality. These systems fall into three broad categories : (1) wages regulated on piece work, (2) a basic wage for an agreed output to which is added a bonus proportionate to additional output, and (3) a bonus payable on the output of a group, each member of which draws a separate basic wage. The applicability of any system depends to a large extent on the specific situation of an enterprise and has to be worked out in relation to its requirements. All that can be said i< that incentive wage system should be introduced on the largest possible scale for the mutual benefit of the workers and the industry.

36. Research Departments.—It is necessary to maintain adequately staffed Research and Development Departments in the public undertakings which should constantly endeavour to improve the product quality and operational and technical efficiency through scientific studies. The recommendations of such departments should be implemented speedily. Innovations and new ideas should be suitably rewarded and publicised; There should be frequent exchange of technical and managerial experience between different public enterprises so that all benefit from the common pool of experience. Inter-plant visits will be useful in this connection.

37. Personnel Relations.—The enterprises of the public sector have a special obligation to follow labour policies which are conducive to securing and keeping a competent working force at a reasonable cost. This requires a suitable wage policy with incentives, careful selection of personnel, organised training to improve the skills of workers at all levels, opportunities for workers to attain higher positions as their ability improves, active encouragement of workers to make suggestions to improve the operations of the enterprise and recognition of useful ideas by suitable rewards, a grievance procedure to settle small problems before they become large, and generally an attitude towards the workers which will encourage added effort and initiative and give the employees satisfaction, a sense of participation and feeling of loyalty to the enterprise and pride for its achievement.

38. Surpluses and their utilisation.—When public enterprises run efficiently and follow a proper price policy for their goods and services, the results of their operations must be reflected in larger earnings and surpluses. In a developing economy, these constitute a ready and increasingly important source for financing investment either for the expansion of the enterprises which yield these surpluses or elsewhere in the economy. It is, therefore, incumbent on public enterprises to produce efficiently and to accumulate surpluses which should be earmarked for further development.

39. It is not enough for an enterprise to operate efficiently and carry out its assigned task satisfactorily. It must assume responsibility for continuously improving its performance and for initiatine and planning its growth and expansion. The management of a public enterprise should not merely carry out plans approved by Government, but must in fact be closely concerned with and be largely responsible for preparing the plans for further development and for securing the requisite resources.

40. A brief review like the one attempted here must of necessity leave many gaps. It is not the purpose to prescribe detailed operational recommendations for each enterprise but to touch upon some significant aspects to which greater attention needs to be given. Many of the enterprises in the public sector have already adopted policies and management techniques which have enabled them to produce remarkable results in relatively short time. The record of public enterprises, considering their relatively recent origin, is very creditable. The deficiencies of management to which attention has been drawn are as characteristic of enterprises in the private sector as in the public sector. Striving for constant improvement must be a common goal for all.

ANNEXURE List of major public enterprises of the Centre in the field of manufacturing and mining [With authorised
capital of Rs. 5 million and above]

* Departmental undertaking.; ** Statutory corporation.; All others are companies registered under the Companies Act.