Departmental undertaking is the oldest and traditional form of organising public sector enterprises. A departmental undertaking is organised, financed and controlled in much the same way as any other Government department.
It may be run either by the Central Government or by a state government. It is managed by government officials under the supervision of the head of the department concerned.
The undertaking is under the direct and ultimate control of a minister who is responsible to the Parliament. Some examples of departmental undertakings are: Indian Railways, Post and Telegraph, All India Radio, Doordarshan, etc.
Features: The essential characteristics of departmental undertakings are given below:
1. Part of government:
The undertaking is organised as a major sub-division of one of the departments or ministries of the Government. It is subject to direct control by the head of department.
The ultimate authority lies with the concerned minister who is responsible to the Parliament or State Legislature. The undertaking has no separate entity distinct from the Government.
2. Government financing:
The undertaking is financed through annual budget appropriations by the Parliament or the State Legislature. The revenues of the undertaking are paid into the treasury. It is wholly owned by the Government.
3. Executive decision:
A departmental undertaking is set up by an executive decision of the Government without any legislation.
4. Accounting and audit:
The undertaking is subject to the normal budgeting, accounting and audit procedures applicable to other government departments.
5. Civil service code:
The enterprise is managed by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government.
6. Sovereign immunity:
Being an integral part of the Government, a departmental undertaking cannot be sued without the consent of the government.
Merits: Departmental undertakings enjoy the following advantages:
1. Easy formation:
It is very easy to set up a departmental undertaking as no registration or special law is required. The undertaking is created by the administrative decision of the Government and no legal formalities are involved.
2. Direct government control:
The undertaking is under the direct and complete control of the State. Therefore, it is more effective in achieving the objectives laid down by the Government.
3. Public accountability:
There is maximum degree of Parliamentary control on the undertaking. Such control keeps the management alert. Accountability of departmental undertakings to Parliament is complete as their management is under the ministry concerned.
4. Proper use of money:
The risk of misuse of public money is minimised due to strict budget, accounting and audit controls. There is proper financial discipline over public funds.
It is easy to maintain secrecy of policy because the Government can avoid disclosure on the plea of public interest.
6. Aid to public revenue:
Departmental undertakings help to increase Government revenue because their earnings are deposited in the Government treasury. These undertakings help to reduce the burden of tax on the public.
7. Instrument of social change:
The Government can promote economic and social justice through departmental undertakings. It can also maintain effective control over the production and distribution of essential goods and services. Departmental undertakings serve as an instrument of public policy.
8. Public Interest:
Departmental undertakings can better serve public interest. They are very useful for public utility services and defence industries.
Limitations of Departmental Undertakings
A departmental undertaking suffers from the following drawbacks:
1. Lack of flexibility:
A departmental undertaking functions under strict Parliamentary control. The minister and top officials also interfere frequently in its workings.
The undertaking is reduced to a mere adjunct of the ministry and treated just like a government office. There is little delegation of powers. As a result, the staff of the undertaking gets little opportunity to exercise initiative. Lack of autonomy reduces the flexibility and efficiency of operations.
2. Lack of motivation:
In the absence of competition and profit motive, there is little incentive for hard work and efficiency. There is hardly any link between reward and performance, and promotions are based on seniority.
This leads to complacency and a 'devil may care' attitude. As losses are borne by the Government treasury and tax payers, these are not taken seriously. Employees try to shift responsibility and shirk duty.
3. Red tapism:
There is excessive centralisation of control which results in red tapism. Decisions are generally delayed due to bureaucratic procedures and political interference.
The enterprise cannot be run in a business-like manner. It fails to adapt itself to changes in technology and market conditions. Obsession with rules and strict adherence to procedures leads to lose of business opportunities.
4. Financial dependence:
A departmental undertaking has no independence of funds because all its earnings are deposited into the Government treasury. It cannot take long-term investment decisions as it is at the mercy of budgetary appropriations of the Government.
5. Inefficient management:
A departmental undertaking is managed generally by Government officials and civil servants who are sent on deputation. They are overburdened with paper work and cannot pay undivided attention to management.
The major portion of their time is spent in preparing answers to parliamentary enquiries. These officials generally do not possess the necessary expertise and experience in management.
Moreover, their tenure is not stable and they can be transferred at any time. Therefore they adopt a carefree attitude and lack a sense of responsibility.
6. Insensitive to needs of consumers:
A departmental undertaking is often negligent towards the needs and preferences of consumers.
The bureaucrats who exercise control work according to prescribed rules and procedures, Bureaucratic control and lack of incentive on the part of officials make the undertaking inefficient and irresponsive to consumer needs.