The operating contract happens to be a new device of administering public enterprises. According to this method the government enters into a contract with an established and reputed private company for management of a public enterprise. The government agrees to reimburse the contractor for all costs incurred by him.
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In terms of the contract, the contractor assumes the entire responsibility for the operation and management of the enterprise. Although the management enjoys less freedom, in managing an enterprise under this method than what he would have enjoyed under complete private management, yet, the degree of autonomy is non the less quite substantial.
This form of management has been mostly popular in the U.S., particularly in the fields of Atomic Energy Commission and Defense Department, relating to research and management of laboratories. In other fields it has not been used. In India, the Rourkela Steel Plant was entrusted to Krupp and Demag, a German firm, and Sindhri Fertilizers to Chemical Construction Corporation of America.
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According to Hanson, an important advantage of this method is that it provides a high degree of flexibility. Besides, a developing economy may achieve quick development in particular sectors, by arriving at contractual arrangements with foreign firms, as it would provide the necessary managerial skill and technical know-how.
However, there are certain difficulties associated with this method. If a foreign firm has been contracted for an enterprise, it may not act responsibly. It may not operate with economy. There are possibilities of misunderstanding between the foreign firm and the government, in which case the success of the enterprise will be in jeopardy. In the earlier years a lot of unpleasantness was created in India when the government had entered into contracts with foreign firms for the operation of Hindustan Machine Tools and Hindustan Shipyard Ltd., etc.