CHAPTER

Chapter - I

Introduction

1.1 Public Enterprise reform has been at the top of the reform agenda worldwide since the early 1980s. In India, at the centre and at the State levels the process has gained momentum with the policy of liberalisation and reform announced by Government of India in 1991. The Government of Orissa has also embarked on a process of reform with restructuring of Power Sector, sale of Charge Chrome Plant at Brahmnipal to TISCO and sale of Talcher Thermal Power Plant to NTPC. However, the process of reforms, which has involved restructuring and disinvestment, has often been controversial, misunderstood and faced with legal hurdles. There are differences among political parties with regard to the objectives and processes of reforms. As the Public Enterprises involve taxpayers’ money, the public is also naturally interested to know about the reforms policy. The Administrative Departments and management of Public Enterprises (PSEs) also need a mandate in terms of clear policy pronouncements, so that they can effectively plan and implement the reform programmes. Keeping these needs in view, the Government of Orissa has decided to bring out this White Paper on Public Enterprise Reforms, which will serve as a basis of discussion and eventually as a policy paper for reforms programme.

1.2 In the context of India the reform process has been relatively new. The limited experience gained during the last ten years has demonstrated the difficulties that governments have faced in achieving reforms. The requirements of professional skill and strong political will for effectiveness of the process have created difficulties for smooth implementation of the reforms programmes. Lack of clarity about the reform process has often created confusion, and to a certain extent suspicion in certain quarters.

1.3 In spite of the difficulties, reform has become essential to ensure higher growth, promote efficiency, provide competition, improve quality of life and provide good governance. The Government of Orissa is determined to achieve a higher economic growth rate for the State through economic and social developments including development of industry, improvement in living conditions of weaker sections, employment creation and provision of facilities in social sectors, such as, health and education. During the last fifty years, however, the trend shows that the State has become poorer compared to the rest of India on various economic indicators. The Government of Orissa is committed to reversing this trend.

1.4 It is well recognised that quality of life not only depends on income level, but also on quality of goods and services available for consumption. In our national planning up to 1980, emphasis was laid on increasing production to meet the growing demands in all sectors and quality was neglected. The PSEs, with their monopoly positions, played a key role in production. The thrust since 1981 has been changed from production to productivity (through better use of resources) and also from volume to quality of production. This changed need can no longer be met by PSE monopoly, but by fair competition, which can be possible by encouraging multiple private owners. The State Government is committed to reforms, which will bring in such private owners.

1.5 Orissa has remained a backward State compared with the rest of the country on various indicators of development. The per capita income in the State (New series 1993-94) is Rs. 6767, which is short by Rs. 3437 or 34% of the All India average of Rs. 10,204. Similarly, for the whole country the population living below poverty line is only 26% whereas, for Orissa it is a staggering 47%. On social aspects the situation is no better. While the State's literacy rate is 51%, the All India average is around 62%. The infant mortality rate is 97 per 1,000 in Orissa whereas it is 70 per 1,000 for all States taken together. On infrastructure development, on percentage of children attending primary schools, on percentage of people living in pucca houses and households having safe drinking water, Orissa is far behind the All India average as is evident from Table-1.1. These conditions make it essential that the State lays greater stress on investment in the social sector.

Table –1.1

SELECT SOCIAL INDICATORS OF ORISSA AND FOR ALL INDIA

Sl. No.	INDICATOR	ORISSA	ALL INDIA
01	Per capita Income	Rs.6, 767	R.10, 204
	(New Series /1993-94)
02	Relative Infrastructure	98.90%	100%
	Development Index
03	Attending Upper Primary Schools	51.30%	57.60%
	(Classes VI-VIII)
04	Literacy Rate	51%	62%
05	Urban Household Living in Kutcha House	28.20%	9.50%
06	House Holds having safe drinking water	39.10%	62.30%
07	Infant Mortality Rate	97per'000	70 per '000
08	Life Expectancy at Birth	57.2 years	61.1 years
09	Population in Poverty	47.10%	26.10%

Source: “Fiscal impact and Financial performance of State level Public Enterprises in Orissa” by Infrastructure Professional Enterprises (P) Ltd. Basing on the report on CMI, Planning Commission Economic Survey etc.

1.6 The State of Orissa is in a disastrous financial situation, with huge revenue deficits year after year leading to repeated borrowings. The outstanding debt burden at the end of 2000-2001 was Rs. 21,035 crore and if no action is taken, this is likely to go up to Rs. 37,063 crore by 2005-2006. At present, the State's own revenue together with its share of central taxes and grants from the centre falls short of the expenditure on salary, pension, interest payment and repayment of principal by more than Rs. 150 crore and to meet this deficit and other expenses, the State is borrowing heavily. The State is no longer in a position to pay for the increasing needs of PSEs, which have accumulated very heavy losses and require heavy doses of fresh equity capital and loans to survive. The Government cannot afford such expenditure. The Government needs resources much more for social development, which has been relatively neglected. In the circumstances, the PSEs cannot expect to get any budgetary support from the Government.

1.7 This phenomenon of financial crisis, which the State is facing today, is also true for other States in India as well as for other countries. The demand on government funds has been rapidly increasing to meet the increase in expenditure on social services, which has created difficulties for government to provide sustained support to PSEs. It is also increasingly felt that in several activity areas, the private sector can undertake the job of owning and running enterprises equally or more efficiently than the public sector. A set of wide ranging international examples is set out below.

a) Like India many Latin American countries have faced situations in which PSEs incurred unprecedented losses leading to high inflation and high levels of government debt. The governments were compelled to resort to privatisation and restructuring. In case of UK, to revive the sluggish economy, the government accepted the free market policy and as a part of this policy most PSEs have been privatised.

b) An Indian neighbour, Sri Lanka, has carried out large-scale disinvestment in plantation, manufacturing, petroleum, finance, trading, agro, utility and service sectors. To expedite the process of disinvestment, it has set up the Public Enterprise Reform Commission (PERC) as a powerful body. A total of 42 enterprises have been privatised. Other neighbouring countries in Asia, such as, China, Malaysia, Pakistan and Nepal have also embarked on a process of privatisation.

1.8 Internationally, success or failure of reforms programme has depended on a number of factors. Committed leadership, clear policy framework, optimal institutional arrangement and clear phase-wise programme, supported by adequate communication and public relations efforts have been found to contribute to such success. Increasingly, governments are changing from ad hocism to clear policy on all these factors.

1.9 In view of the change taking place worldwide and its own need and rationale of reform, the Government of Orissa has accepted Public Enterprise reform as a part of its economic and development policy. In a larger sense the policy will be applicable, in addition to Public Enterprises, also to Co-operative enterprises and Departmental Enterprises engaged in commercial activities. The purpose of this White Paper is to set out this policy in clear terms, initiate a debate on this policy, build consensus among the stakeholders, seek support from other political parties and public in general and also provide through the white paper a mandate to officials to act, so that while implementing the policy everyone can work with a purposefulness and maximum economic and social benefit can arise for the State and the public whilst mitigating any negative effects.

Chapter - II

Public Enterprises: past & present

2.1 Historically the public sector has played a key role in the growth of the economy, both at national and State levels. Soon after independence when private capital was scarce and government was keen on achieving rapid economic growth, it was necessary to set up PSEs with substantial government direction and control to provide essential infrastructure, like railways, transport systems, electric power, roads, telecommunications and other essential services. Simultaneously, it was also felt that without the state's active role in the development of heavy industries, such as, steel, mines, coal, chemicals, petroleum and cement requiring large-scale investment, all-round development could not be achieved. Thus, the public sector was involved directly in manufacturing of essential products and services. By the mid 1960s the public sector was occupying the "commanding heights" of the Indian economy.

2.2 Following the Industrial Policy Resolution, 1956 and the primacy given to the state for development, the state government in Orissa set up a number of undertakings to operate in sectors, such as, power, transportation, construction, industrial promotion and development, forestry, fisheries, mineral and metals, textiles, tourist services, engineering goods and consumer products. There are 68 Public Sector Undertakings (PSUs) comprising of 64 Government Companies and four statutory Corporations. In addition there were 3 companies under the purview of Section- 619-B of Companies Act, 1956 as on 31^st March 2001. However, out of 64 Government companies, 30 Companies are now working companies. Out of the 34 non-working companies 09 are under liquidation, 23 are under closure and 2 have been merged.

2.3 Although a majority of PSEs have not performed well and have therefore been either closed or liquidated, their contribution to the State's development cannot be overestimated. When private capital was unavailable, particularly for the infrastructure sector, the State Electricity Board supplied electric power to remote areas. IPICOL and OSFC undertook the risk and provided much needed equity capital and term loans to private entrepreneurs. IDCOL directly set up industrial units of its own to produce cement, pig iron, ferrochrome, cables, transmission towers, tiles, rolled products, fasteners, etc and created the industrial base to attract other investors. OSIC played the nodal role of supplying inputs to small industries. In promoting social justice, the contribution of Orissa State Civil Supply Corporation was enormous as it supplied mid-day meals to school children and food grains at subsidised prices to weaker sections. Some PSEs also helped people in far off areas to upgrade skills and technology.

2.4 While PSEs have played key roles in the past, these enterprises have also absorbed huge investments of Rs. 9,795 crore in government companies and statutory corporations. In addition, the total amount of outstanding loan guaranteed by the State Government was Rs. 4,568 crore as on 31^st March 2001. For the 30 working companies, 34 non-working companies and four statutory corporations, the investment and accumulated profit/ loss as on 31^st March 2001 are placed at Annexure-I. If the loss making companies continue their operation and accumulate losses at the same rate, by the end of 2004-05, it is expected that their entire paid up capital will be wiped out.

2.5 Due to poor financial performance, the PSEs have run into financial problems and data for the five years (1995-2000) show that year after year the State Government has bailed out these undertakings by infusing fresh capital, loan, subsidies and waivers. Hidden subsidies by way of unabsorbed interests and guarantees have created additional burdens as are shown at Table-2. I. On the other hand, the reverse flow or commitment from the PSEs by way of interest payment, debt redemption or dividend payout has been quite meagre. During the five years such payments have been limited to Rs. 129 crore, Rs. 5 crore, Rs. 10 crore, Rs. 24 crore and Rs. 54 crore or on an average Rs. 44 crore per year.

TABLE-2.1

		BUDGET SUPPORT TO PSEs INCLUDING SUBSIDIES
							(Rs in Crore)
			1995-96	1996-97	1997-98	1998-99	1999-00	Avg.¹
I.	Direct Budget Support of which:		192	2148	433	316	193	314
	Equity Capital		31	657	65	-115	0	-17
	Loan Capital		15	1321	251	322	48	207
	Direct subsidies/ waivers		146	170	117	109	145	124
II.	Hidden Subsidies		130	393	537	556	542	545
	Unabsorbed interest on state investment ²		259	398	547	580	596	574
	Less: Interest / Dividends from PSU’s ³		129	5	10	24	54	29
III.	Total Budget Support (I + II)		322	2542	970	872	735	859
IV.	Guaranteed issued during the year		1025	480	235<