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by FR. FELIX RAJ, SJ, DIRECTOR |  « back


Pricing in public enterprises
By Fr. John Felix Raj. S.J.


Public enterprises cover the institutions under public ownership and operation of public purposes. They have been defined as “that enterprises which meet the challenges posed by a dynamic and growing economy and which are willing and capable of shaping their attitudes, policies and operations to fulfill both the expressed and the latent needs of the community”.

In the widest sense, public enterprises include those undertakings which are;

  1. Wholly owned and managed by government;

  2. Wholly owned by government but managed by private persons under overall supervision of the government; and

  3. Where majority of the ownership and control is in the hands of the government. In a more specific sense, they would cover industrial and commercial undertakings of the government, which are in the form of statutory corporations or companies registered under the Indian Companies Act.

Private enterprises may fix prices at a level which would cover total cost and provide adequate return on capital employed, but public enterprises are not free to do so. There has been a fair deal of controversy in India with regard to price policies in public sector enterprises. One school supports the principle of "No-profit, no-loss" pricing on the ground that public enterprises should provide goods and services at a price just covering cost of production. On the other hand, another school is in favour of "profit-making” policy and argues that prices should be so fixed as to cover not only cost but also leaving a reasonable surplus.

Determination of a rational and proper pricing policy for public enterprises is of utmost importance not only to the enterprises themselves but also to the government as an investor, to customers and consumers and to the entire community. From the point of view of the government, the pricing policy attains great significance as the government is interested in pursuing the socio-economic objectives of these enterprises through the mechanism of pricing.

The main objectives for which public enterprises have been started in India are:

  1. Maximising the rate of economic and achieving the “Take-off” stage within a defined period;

  2. Maximising the growth of national income and of consumption level consistently with the first objectives,

  3. Maximising the reduction in inequalities of income and wealth and promoting equality of opportunity and

  4. Preventing the concentration of economic power in the private hands.

At the Ooty seminar held in 1962, Dr. V.K.R.V. Rao most vigorously put forward the view point that public enterprises should play their role in the generation of surplus. Following his stand, the government laid down the following guidelines regarding the pricing policies of public undertakings:

  1. For enterprises which produce goods and services in competition with other domestic producers, the normal market forces of demand and supply will operate and their products will be governed by the prevailing market prices.

  2. For enterprises which operate under monopolistic or semi-monopolistic conditions, the landed cost of comparable imported goods would be the normal ceiling within which it would be open to the enterprises to have price negotiations and fix prices at suitable levels. If the landed cost is found or believed to be artificially low or in other exceptional circumstances it is considered necessary to have higher prices, then the matter should be referred to the administrative ministry for examination.

In reality, the nature and the extent of socio-economic objectives in relation to public enterprises may not be capable of being defined precisely and may differ in amount and character from one industry to another, and so, the pricing policies may not be uniform in all public enterprises. Competitive undertakings attempt to maintain a fair competition in the market, and monopolist and semi-monopolistic undertakings are guided by the degree of monopoly they enjoy, and taking into account the character of the consumers of their products and the undertakings’ which purchase their outputs as inputs, they operate on the basis of “Break-even” or “Marginal profit” analysis.

In different sets of circumstances in the past, a variety of pricing approaches have been evolved by the government and employed in different enterprises. Enterprises like drugs and pharmaceuticals, Cement Corporation, and Indian Oil Corporation are under the system of price control, while Hindustan Aeronautics Ltd., Indian Telephone Industries, BHEL, Hindustan Cable Ltd, and HEC fix their prices normally by mutual consultation and negotiation with the government. Hindustan Machine Tools Ltd., State Trading Corporations (tea, jute, etc) Air India and Shipping corporation sell their products and services in the international markets. Thus the prices of their products depend upon the international market situations. Enterprises operating in the open market are HMT and modern bakeries. Their pricing policy is entirely dictated by the market mechanism. Even though there are various pricing approaches, as a matter of fact, there are only three pricing situations, namely, price control, cost plus criterion and competitive situation.

Duel pricing is a new concept evolved by the government in 1973. It was first adopted in the steel industry. According to this policy, 35 percent of steel produced in the public sector was to be sold to the priority sector at a reduced price and the remaining 65 percent to other users at a higher price. Duel pricing came to a stop on April 1, 1982, when the informal control on the prices of steel was withdrawn. Now the steel industry is free to sell its products at prices the market could bear. This recent step of the government has brought about realism in the pricing of iron and steel items.

An analysis of public enterprises’ pricing policies will show us that most of the public undertakings suffer from excessive cost of production due to large idle capacity, heavy inventories and over-heads, deficiencies in project planning constructional delays, defective productive management, inadequate marketing management, investment decisions, application of the rules of “public accountability” eroding even “operational autonomy” low productivity of labour and capital etc. These are manifestations of managerial inefficiency at various levels. The cost effectiveness has been found missing and the price increases have been used as a cover to secure increase in profitability in many public enterprises.

The management of many public enterprises are still not free to formulate their pricing policies and to fix the prices of their products. They have to obey the government directives in this respect. The power to give effect to an appropriate pricing structure is derived from the governmental prerogative of giving directives to the public enterprise managements. Often this is exercised informally without recourse to a statutory directive.

Determination of proper pricing policies is of utmost importance as it affects the public enterprises themselves, the government, the customers and consumers and the entire community. Therefore, there must be a rational policy with a macro motivation for the optimum allocation and utilisation of resources. Profit, being the reward for efficiency, must be an integral part of the pricing policy of public enterprises and they should earn sufficient profit to be ploughed back in the expansion of industry and to provide funds to the government.

The proper and rational policy must be co-ordinated with other policies regarding products, customers, sales promotion, sales appeals, etc. and carefully formulated after considering all the determinants of price and by giving due weightage to each determinant. Pricing is a fulcrum for all activities in a manufacturing unit. Hence it should be such as to increase production and sales and to secure an adequate return on Capital employed. The technique of pricing is a job that requires great flexibility and adaptation to market situations. Success of any business enterprise largely depends on its performance in the market. Appropriate pricing policy and strategy are the only tools for achieving success in the market.

 

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