Financial Management in PSU

Meaning of Public Sector Undertaking

A Public enterprise can be defined as a business undertaking which is

owned, managed and controlled by the state large. Characteristics State Ownership Service Motive Public accountability Government control

, on behalf of public at

In many cases in India, the government has a substantial and even

majority holding in major private sector companies via the public financial corporations, but as this is not accompanied by public management and public control these enterprises cannot be called public enterprises .

Objectives
Economic Objectives

Political Objectives

Economic development Planned Growth Balanced Regional development Generation of surplus Provide employment

Public interest National Defense Socialism

Social Objectives

Control Monopoly Equitable distribution of wealth Provision of essential goods and services Takeover of Sick units

Special features of Financial Management in a public sector undertaking (PSUs):

Role of financial advisor: The financial advisor occupies an

important position in public sector undertakings. His concurrence is required on all proposals which have financial implications. Responsibilities To determine the financial needs of the firm and the ways these needs are to be met. To formulate a program me to provide most affective cost profit volume relationship. To analyze financial results to improve future operations. To conduct special studies to reduce cost and improve efficiency and profitability. To examine feasibility studies and detailed project reports from point of view of economic viability of projects. To perform routine operating functions.

 Capital budgeting decisions: The power up to certain limits, in

respect of individual capital expenditure items has been delegated to the board of public sector undertakings. For making investments beyond the limit the proposal goes to Public Investment Board which appraises and recommends projects to the Central Government. In order to ensure proper evaluation and implementation of capital budgeting decision, the following points are to be given due consideration: Guidelines provided by the government. Delegation of investment decision making power. Approval of public investment proposals.

 Capital structure decisions: Such decisions involve the

identification of different sources of finance. Normally PSUs are financed on the basis of half of their capital being in the shape of equity and the rest in the shape of loans. The funds are also provided to PSUs directly by the government. The following factors are taken into consideration at the time of designing capital structure gestation period level of business risk Capital intensity of project freedom of pricing.

Working capital management: The inventory constitutes a major portion of the working capital of public sector undertakings and hence proper inventory management should be given top priority by public sector undertakings. In the context of working capital management in public sector undertakings often face difficulties in following: Over inventory resulting in blocking of capital. No provision for working capital margin at the time of estimating cost of project. Capital intensive nature resulting in low current assets to fixed assets ratio. Lack of application of working capital management techniques.

 Audit: Public sector undertakings in addition to regular audit conducted by

professional accountants, are subject to efficiency-cum-propriety audit by the Comptroller and Auditor General of India whose reports are presented to Parliament every year.

Comparison of overall capital cost of the project with the approved planned costs. Production or operational outputs vis--vis under- utilization of the installed capacity. Systems of projects formulation and implementation. Planned rate of return Cost Control measures Research and development programmes. System of repair and maintenance. Adequate purchase policies Effective and economical procedures Project planning Undue waste, unproductive time for men and machines, wasteful utilization or even non utilization of resources.

 Annual report: The annual reports of public sector units though

similar to those of private sector units, tend to provide more information.

Pricing policy: The bureau of public sector undertaking has laid

down certain guidelines for pricing by PSUs with the objective to serve the overall interest of the community at large.

Issues faced by PSUs

Persistently loss making units that are irretrievable and either need to

be disposed off or handed over to private sector for overhaul. High wage bills to the total neglect of productivity. Under utilisation of capacities. Hasty nationalisation of sick concerns that ultimately turned out as an incentive for unscrupulous capitalists to bleed the enterprise white in the hope that once sick the Govt's intensive care unit would automatically jump to rescue. Unprofessional personnel practices. Appointment of politicians as part time chairmen Excessive rules and regulations causing red tapism.

 Poor infrastructural linkages among various segments like

power,coal,steel,cement,irrigation,transport and communication. Wrong product mix which saddles the public sector with unsold stock Obsolete technology. Low profitability which is an impediment to successful plan implementations. This is because of contradictions and dilemma in the socio economic objectives of the PSUs due their obligation to provide employment to a large base instead of profitability as well. They are not permitted to change their economic prices for the services they render and goods they supply.

Government moves for strengthening of PSU

Board for Reconstruction of public sector enterprises.(BRPSE) Listing of unlisted profitable PSEs Green Field privatization

CONCLUSION
The public sector is set for a major change. It is poised for a major face lift. The

public sector will become selective in the coverage of activities and its investment will be focused on strategic high-tech and essential infrastructure. The Government has also clarified that the public sector has to mend for itself and stop relying on Governments budgetary support. Privatisation has come as the greatest tool in the hands of the Government for bringing efficiency in the Public Sector Undertakings. It is the process of reforming PSEs and aims at reducing involvement of the state or the public sector in the nation's economic activities by dividing the industries between public sector and private sector in favour of the latter. The policy of Greenfield Privatisation has made considerable progress since the introduction of the new economic policy (NEP) in 1991. The process of redivide has been mainly through: De-licensing Reduction in budget allocation