REPUBLIC OF THE PHILIPPINES

PROVINCE OF NORTH COTABATO

MUNICIPALITY OF MAKILALA
MAKILALA INSTITUTE OF SCIENCE & TECHNOLOGY
CONCEPCION, MAKILALA, COTABATO

Program: Bachelor of Public Administration

Course
FREE ELECT – Public Enterprise
Number/Title:
Credit: 3 Week #: 15 - 16 (June 7 – 13)
Instructor: Mr. John Martin P. Alvero

Contact Email: alvero.answers4modules@gmail.com

Information: Messenger: JOHN MARTIN P. ALVERO

General instruction: Read the content of the module carefully. This will help you
understand the topic for each module and will greatly help you answer the
exercises or activities at the end of each module. Each module is assigned within
a specific time period. You are expected to finish the module within the period
allotted. Should you have any queries and clarification regarding the module,
use the contact information available above. Kindly reach the instructor during
working hours from Monday to Friday. Do not forget to be courteous when
addressing your questions.

MODULE VII. ISSUES IN THE PERFORMANCE OF PUBLIC ENTERPRISES:

PROBLEMS AND REMEDIAL MEASURES

Overview:
ISSUES
The efficiency and effectiveness of the public enterprise sector will determine the
efficiency and effectiveness of the national economy. This conclusion is irresistible
and still valid. The question, however, is "how efficient and effective are public
enterprises?" A candid analysis may show, and even most ardent supporters of
the public enterprise sector recognize, that most of them have not been doing
well. Political leaders, policy-makers and planners began to view with dismay that
they have created an "unmanageable" monster and observed huge
underutilized capacities, low levels of productivity, inflated inventories, non-
optimum input-output ratios, overstaffing- all resulting in heavy losses and deficits.
On the other hand, quite a number of public enterprises have shown excellent
performances and entrepreneurial skills and have thus proved that, given the right
attitude, systems, and people, they can do even better. Therefore, there is a
strong awareness that there is a genuine desire to do something away to correct
their shortcomings.

PROBLEM
Many empirical studies regarding the managerial and economic performance of
public enterprises showed that their failures outweighed their achievements. This
is especially holding true for almost all African countries. The overall indication is

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that developing countries’ public enterprises are making persistent losses,
producing insufficient quantity or poor quality of products, while draining the
scarce financial and human resources. In this connection, we will ponder
(consider) over the main organizational and managerial problems that explain
the daunting performance records of public enterprises.

I. LEARNING OUTCOMES
At the end of this Chapter, you are expected to:
1. identify criteria in the evaluation of performances;
2. examine and determine factors affecting the performance of Public
Enterprise;
3. identify major problems of Public Enterprise; and
4. examine and determine remedial measures for problems of PEs.

II. TOPICS
Lesson 1: Criteria and the Competence Debates in the Evaluation of
Performances
Lesson 2: Factors affecting the Performance of Public Enterprise
Lesson 3: Major Problems (of PEs)
Lesson 4: Remedial Measures (for problems of PEs)

III. REFERENCES

 Ali, Jamal, “Meaning, Characteristics and Rationales of Public Enterprises”, Jigliga University,
July 2016.

IV. COURSE CONTENT

TOPIC I. CRITERIA AND THE COMPETENCE DEBATES IN THE EVALUATION OF

PERFORMANCES

A straightforward proposition in this regard is that evaluation criteria should be

related with the predetermined corporate objectives. The yardsticks for assessing
performance should be necessarily derived from the goals, which have been set
for the enterprise. It is indefensible position to ask an enterprise to achieve one set
of objectives and then at a later stage to judge its performance by a different set
of considerations. And yet this frequently happens. The success or failure of any
particular public enterprise must be judged in terms of the purposes for, which it
was created to serve and the special privileges (like grants or loans, low
depreciation rate, tax exemption) or, otherwise, the special obligations (like
standard procedures, operational methods etc.) stipulated in its founding charter
or by any legitimate governing authority. The corporate objectives that have
been discussed in earlier chapters when used as criteria of performance
measurement can be technically applied, and we can see this application by
using few examples in the following manner.

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A. MEASURING FINANCIAL AND COMMERCIAL PERFORMANCE
A generally accepted proposal to measure the financial performance of the
enterprise is "pre-tax returns on total capital employed". It might also be desirable
to examine some intermediate financial ratios such as: gross profits to sales, sales
to capital employed stocks to sales, and debtors to sales. The ratio of sales to
capital employed reveals the turnover of capital and its "productivity". Likewise,
the stock to sales ratio turns the spotlight on inventory management and might
reveal distressingly inflated stocks held for "safety" reasons, while the debtors to
sales ratio reveals the state of the receivables and may show that some of the
principal debtors are other public enterprises or the government itself. These ratios
are "intermediary" in the sense that they provide an explanation for the final result,
the returns on capital employed. They are of importance particularly as an
internal managerial tool for locating weak spots, diagnosing the causes of
profitability or loss and taking corrective actions.

B. MEASURING PRODUCTION AND PRODUCTIVITY PERFORMANCE

Productivity performance, as a measure of efficiency, is unaffected by market
imperfections or artificial pricing policies and other factors, which make
profitability unreliable measure. The criterion is physical in nature and measures
the efficiency with which resources are used, the productivity of the operations
and the efficiency of the input-output ratios. A starting point of this exercise is the
assessment of performance-based on the levels of production achieved. These
can be compared to targets and to previous years' production. The optimization
of the operation is reflected in the efficient use of all resource inputs, machines,
materials, human resources and money, and the ratio between these inputs and
the outputs.

C. Measuring Market and Service Performance

If a public enterprise operates in a truly competitive environment, the assessment
of its market performance is not difficult to make. It is related to the enterprise's
share of the market and whether this share has remained steady, has increased
or has declined. Market share is a reflection of consumer satisfaction where the
consumer has a range of choices or preferences. The problem of evaluating the
market performance of public enterprises in developing countries arises because
they generally do not operate in such a competitive environment. The great
majority of them are in monopoly or semi-monopoly positions and even where
there is a semblance (appearance) of domestic competition, there is likely to be
protection from foreign competition.

In general, as it was stated in the earlier chapters, public enterprises are required
to use a commercial type of accounting system known as "cost" or
"management" accounting, that will adequately show not only cash expenditures
and position, but also other elements of cost assignable to each function of an
enterprise. Therefore, management accounting is largely used as a major tool to
evaluate and measure the performance of public enterprises. The excellence of
management accounting is of great importance to determine the success or
failure of a public enterprise. In the first place, it is a tool of good internal
management because by any analysis of costs, it shows the efficiency and
inefficiency in the organization and the success or failure of a program. In the

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second place, management accounting is the basis for accurate analysis and
reporting on actual costs, so that the components of uneconomic programs,
services or methods or standards imposed by the government can be shown and
separated from the financial success or failure of the central operation. This would
help not only to show the financial status of the enterprise, but also provides
reliable and informative reports to the government for further decisions it will make
in the future.

Now, the question that follows will be that, "who evaluates the performance of a
public enterprise and how competent is the evaluator?" Many countries assign to
the government comptroller the function of overseeing the performance of the
commercial audits. In other case, a separate government agency is created to
conduct such audits, as exemplified by Ghana's State Enterprise Audit
Organization, Tanzania's Audit Corporation, and Ethiopia's Audit Service
Corporation. In still other cases, the comptroller's office may assign a private firm
to undertake the audit.

TOPIC II. FACTORS AFFECTING THE PERFORMANCE OF PUBLIC ENTERPRISES

All over Sub-Saharan Africa, public enterprises have not lived up to expectations
of governments or the public. Public enterprises have not generated the
anticipated rates of return on equity invested, nor have they attained their non-
commercial objectives with regard to employment generation, technology
transfers or regional development. The question that arises is why has this been
so? This legitimate question leads to an examination of the problems the public
enterprises are facing. The following could be considered as the main factors that
affect the performance of public enterprises, particularly with reference to the
poor conditions envisaged in Sub-Saharan African Countries.

DISTORTED PRICE REGIME (POLICY)

In almost all developing countries, public enterprises operate under regimes of
price control. The pricing policies of public enterprises were not guided solely by
the principle of profit maximization, but under the regulation and control of
governments. Most of the public enterprises produced products, which served as
inputs for other sectors of the economy. It is important to remember that the prices
were kept low even below costs. Such a faulty pricing regime exerted a negative
effect on their performance.

PAST MISTAKES (INAPPROPRIATE INVESTMENT DECISION)

This was perhaps one of the main causes of the current problems faced by the
public enterprise sector in Africa. African countries are known for their over-
investment, planning too far ahead of the reality or the demand, wrong technical
decisions or inadequate feasibility studies by experts. The feasibility repots of
public enterprises are often defective. Thus many developing countries’ public
enterprises were established without sufficient reflection, with unclear objectives
and few linkages to the rest of the economy. Consequently a good number of
Sub-Saharan African public enterprises are engaged in projects or activities not
sufficiently appraised in terms of technical, economic and financial viability due

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to the absence of rigorous pre-investment studies. A good illustrative example is
the case of Ethiopian States Farms. The Ethiopian Socialist Government was
notorious for making important decisions without sound economic and technical
feasibility studies. Accordingly, there were many state farms, for example,
Bebeka, Shekena, Wajiro and Wama State Farms, which were created without
prior proper economic and technical analysis. These defective investment
decisions led to wastage of scarce resources, without any commensurate
economic and social returns.

HEAVY BURDEN OF SOCIAL OVERHEADS

Heavy expenditures were incurred on social overheads, such as building of
townships, schools, hospitals and theatres. The prevalence of social objectives
greatly complicated the operation of the public enterprise in developing
countries by making commercial criteria almost inapplicable. In Ethiopia for
example, public enterprises were expected to provide many social infrastructure
services. For instance, State Farms were expected to provide clinics, health
centers, transportation, in-farm and off-farm roads, community centers, schools,
sport facilities etc. Obviously, provision of social benefits created other financial
burden, which in two Ethiopian State Farms (Bebeka and Limmu) alone the cost
exceeded Birr 20 million and Birr 7 million respectively (Itana, 1993).

UNDER CAPITALIATION
In present time, many developing countries’ public enterprises are found to be
under-capitalized in terms of insufficient equity capital, either because of erosion
of the capital base by chronic losses or inflation. To sustain their operation, public
enterprises have had to resort to heavy short and long term borrowing and
thereby boosting up interest expenses. This was especially true for farms in Ethiopia
that devoted 60% of their financial resources to cover overhead and
administrative costs. A drastic cut in government transfers to the public enterprises
as part of fulfilling the requirements of the Structural Adjustment Programs and
increasing accounts receivable worsened the problems of under-capitalization.
The attendant under capitalization led public enterprises to rely increasingly on
commercial borrowing to finance new investments and current operations, and
thereby building up huge arrears.

POLITICAL INTERFERENCE
Notwithstanding other external factors, it is the political pitfalls that played a
central role in aggravating the economic crises for public enterprises in Sub-
Saharan Africa. The argument is that it is the overarching role or the self-interest
of politically powerful leaders that created a situation where the whole economy
and the public enterprises in particular were run as if they were personal
properties of the leaders and their immediate circles. The tradition is still persisting.
In many instance, it has been found that political interference had influenced the
decisions concerning location of projects. In many developing Countries, the
appetite for political intervention is particularly high in crucial areas. Therefore, the
economic and negative effects of undue political intervention on performance
should be treated as one of the important problems.

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EXCESSIVE CONTROL AND INSUFFICIENCY OF AUTONOMY
Excessive control (formal and in-formal) over public enterprises also thwarted the
initiative of management and it affected their efficiency adversely. There are a
large number of agencies wielding control over them. There is the ministry
concerned, the secretariat officials, the parliament, the committee on public
enterprise supervising agency, the audit board, the consumer council; and other
committees, appointed to look into the affairs of some of these enterprises.
Besides, there are local politicians who also interfere in the day to day working of
these enterprises. The point is that all such controls stifle the initiative and make
the autonomy of the management of public enterprises nonsense in relation to
performance and efficiency considerably.

On the other hand, the organizational structures of public enterprises are highly
centralized and prone to excessive control. Consequently, important decisions
influencing the performances of public enterprises such as new investment,
pricing, employment, wages and location are made at top levels, leaving little or
no room for micro level managers. Such low leverage by the management in
dealing with important issues like redundant workers, stifling bureaucracy,
cumbersome labor laws, wage determination, placement, promotion and
transfer of workers, only result in increased cost, low morale and low productivity.

WORLD ECONOMIC PRESSURES

Extra national economic forces prevailing outside Africa usually affect public
enterprises in Sub-Saharan Africa. The increasing volatility of the international
economy and commodity prices that make the management of African
economies particularly difficult in the 1980s have severely affected the
performance of public enterprises in Sub-Saharan Africa. Prices of inputs, such as
spare parts, oil and capital equipment on do fluctuate from time to time.
Oscillations in foreign exchange affect the price of capital equipment and raw
materials. Therefore, since public enterprises in Sub-Saharan Africa are highly
dependent on foreign imported inputs, such heavy dependency poses
considerable implications on their performance.

ABSENCE OF CLEAR-CUT OBJECTIVES

Another important problem of public enterprises in Africa and perhaps all
developing countries is the fact that the political leadership in these countries is
unclear as to what their publicly run enterprises should accomplish. Thus in case
of public enterprises their objectives are quite ambiguous. This problem becomes
complicated due to the multiplicity of objectives, which are quite conflicting in
nature. Moreover, fulfillment of social objectives or safeguarding 'public interest'
is a vague term that is difficult to measure its attainment. Under such disarray, the
public enterprises of a country fail to capture neither the economic nor the non-
economic objectives.

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TOPIC III. MAJOR PROBLEMS

I. Lack of Initiative and Operational Autonomy

In almost all the forms of organizations, initiative and organizational autonomy are
very important for effective operations of private and public enterprises alike.
Successive conduct of public enterprises requires sufficient autonomy and a
great deal of initiative. This was hardly achieved for those enterprises under the
government ownership because of many factors such as reluctance of the
government to give sufficient autonomy and rather preferring to adopt close
monitoring and giving frequent guidance, lack of confidence and uncertainty of
tenure in managerial positions, absence or little recognition and encouragement
to enterprises' managers and employees for whatever achieved, etc.

II. Low Productivity

It has been argued that labor productivity is generally weak in the public sector.
Public sector enterprises are not in a position to provide all fringe benefits, fat
salary and benefit packages, welfare amenities that are provided by their private
counterparts. Thus, employees' morale had been low and therefore could not
fully concentrate on their jobs.

III. Overstaffing
This is especially acute in Sub-Sahara Africa. Almost every Sub-Saharan African
country has serious problem of overstaffing in public enterprises, Ethiopia being
cited as one of those countries having this typical problem. In the Ethiopian case,
the public enterprise sector has been said to employ more than 200,000 workers.
Nevertheless, almost half of them are redundant or surplus, which are beyond
what the jobs reasonably require (Meshesha 1997). The cost of overstaffing is
immense. According to Robinson (1990:15), although the wage bill for
government employees of developing countries has descended from 20.3% to
18.7% of the GDP during 1980 and 1987 respectively, this share in developing
countries has been growing instead drastically. Most public enterprises in Sub-
Saharan Africa seem to be overstaffed with administrators and clerical workers.
The main reasons for the overstaffing problems are, inter alia, the following:

 Lack of manpower planning on a scientific basis in the initial stages,

 Failure to lay down appropriate working standards and adoption of
traditional and uneconomic practices,
 The tendency on the part of managers and officers to use "safe play"
principles, and the motive of the government to use public enterprises as a
substitute for social security system
 Unlawful practices to favor people in getting employing on the basis of
kinship, blood relation, friendship, political/party membership, ethnicity,
and so on in excess of the tasks to be performed in the enterprise,

IV. Lack of Skilled Managers and Problems of Training

The most striking issue in connection with overstaffing is the composition of the
workforce in the public enterprise sector. Trained manpower is a critical factor in
economic development. With rapid expansion of the public enterprise sector,
getting skilled and well educated managers has been the biggest challenge for

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many developing countries especially those in Sub-Saharan Africa. There are
many reasons for lack of qualified and experienced managers in developing
countries while the following may disserve worth mentioning in particular
(Meshesha 1997:77-78):

 Hastily implemented localization or Africanization manpower policy that

led to the appointment of uneducated and inexperienced managers,
 Inappropriate recruitment policies, i.e. favoritism and nepotism in the
selection and appointment process,
 Lack of training institutes that would provide formal training in important
disciplines such as business administration, development administration,
accounting, marketing, corporate finance and economics,

V. Low Morale of Managers and Employees

Public enterprises have another critical problem - low morale of managers and
employees. They have serious problems of motivation in their managers and
employees when compared with their private counterparts. The main contention
is that since managers do not have financial stakes in the public enterprises, it is
unlikely that they devote their time and energy to bring about radical turn around
with respect to the performance of the enterprises they manage. They know that
there is absolutely no mechanism for rewarding them if their efforts bring good
results for the enterprise. Even if there are some forms of reward systems, they are
not commensurate with the level of performance. In this managerial culture,
successes are taken for granted and are treated as part of the normal function
of management.

VI. Chronic Brain Drain or Flight of Scarce Talent

Many recent studies, for example, Meshesha (1997) and Prakash et al (1997)
revealed that chronic exodus of scarce talent have posed serious challenge for
developing countries. Migration of qualified personnel to Europe and North
America has been generally more significant and being felt acute alarming in the
public enterprises sector than the private sector. Lack of proper incentive systems
(low remuneration packages), dissatisfaction with the political systems and unfair
governmental practices in their home countries, lack of opportunity for further
education and training are the major factors for the brain drain of the "cream"
individuals.

VII. Bad Labor Union Tradition

In many developing countries, many labor union leaders have received little or
no formal training in their vocation. Workers are still without clear idea of the
privileges and obligations of organized labor. The overall pattern of trade union
behavior in Sub Saharan Africa is a pronounced emphasis on what employees
can get from the enterprise and little on what the employees can give to their
employers. Very few unions take the concern to assess the efficiency and
productivity of the workforce as a basis for demanding higher pay and better
working conditions. This has not only led to financial loses but also sometimes
threatened industrial peace.

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VIII. Weak Overseeing (Supervising) Capacity
This has to do with the issue of boards. In developing countries, it is a common
experience to see politically appointed boards. The implication is that politically
appointed board members could feel too much freedom or too much constraint
to take bold decisions on important matters. The complicated picture that
emerges out of the analysis of the hitherto experience of board activities in public
enterprises especially those of Africa is two-fold. The most often exhibited pattern
is, the situation where the management of public enterprises had been
antagonized or frustrated by a board that tended towards too much
complacency or ignorance of entrepreneurial management. On the other
extreme, there existed a situation where, board members were very weak or had
very little knowledge of management and tended to rely too heavily on
management guidance, and this weakness was exploited by management to
pursue parochial interest.

TOPIC IV. REMEDIAL MEASURES

ORGANIZATION AND MANAGEMENT REFORM

No country in the world has invented a perfect way of managing its public
enterprises. Even if there were an "invention", the multitude of differences
concerning social heritage, culture and the level of economic development of
countries would make its blind replication utterly fruitless. Therefore, any
suggestion to solve the management and personnel related problems should
necessarily be adapted to the social, cultural and economic characteristics of
the country concerned. It is in line with this premise that the following suggestions
are made.

 Radical change in management approach in the public enterprises: To

that end, three approaches need special attention. These are efficiency-
oriented approach, market-oriented approach, and future-oriented
approach in the conduct of managerial practices in the public enterprise
sector.
 Clear demarcation of authorities of the three main actors in the operations
of public enterprises, namely, government (supervising agency), the
governing board, and the chief executive.
 Holding managers accountable for the performance of the enterprises
they are managing through contractual mechanism such as through
performance contract.
 Basic wages of employees should be linked with productivity.
 Institutionalization of training programs to improve managerial
competence. Managers should be exposed to further and periodic training
tailored to sharpen their knowledge and skills in keeping with new
developments. Training should be institutionalized by creating a human
resource development and career-planning unit.
 Mobility of management personnel between public enterprises should not
be discouraged.
 Political interference in industrial disputes and the leadership of trade
unions should be avoided

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PRIVATIZATION (OWNERSHIP REFORM)
According to Meier (1995), privatization can be defined as "the sale of
government owned corporations to private investors and the contracting out of
formerly governmental functions to private agents". Similarly, Hanke (1987)
defined privatization as "…the transfer of assets and service functions from the
public to the private hands".

The transfer of public ownership to private ownership takes direct and indirect
forms; i.e. direct transfer refers to a complete transfer of public ownership (both
assets and the management) to the private sector, while the indirect one is
privatization of the management aspect, most appropriately known as
"management contracting", the assets remaining under the ownership of the
public. "Management contracting" is often made mainly with two objectives: to
relieve administrative burdens of the government, and to ensure administrative
efficiency. In the developing countries, transfer of ownership of public enterprises
and government functions to private investors and agents began in the mid-
1980s.

This has been made as a result of the widely adopted structural adjustment
program in response to the problem of the generally poor financial and
economic performance of such public enterprises as well as to that of inefficient
public services. The widely articulated rationales for the movement toward
privatization have largely focused on the perception of waste, lethargy
(sluggishness), inefficiency, misappropriation, and poor quality of products of
public enterprises as compared to the privately owned ones. Public enterprises
also suffer from bureaucratic bottlenecks and rigidly applied procedures. Thus,
privatization is a sine qua non (an outcome) of such problems associated to
public enterprises.

The privatization literature is confusing, especially when the term privatization is

defined to mean contracting for services. Ducker (1968) defines it as the
reconstitution of the affected organizations from erstwhile (previous) fund
dependence to fund self-sufficiency. Others restrict the use of the word to mean
denationalization. Similarly, commercialization is used to mean the application of
private sector management philosophy to public sector organizations without
involving transfer of ownership. The terminologies are so confusing and
interchangeable. Thus, what we call privatization goes by other names in different
countries because privatization is deemed to be politically too delicate or
controversial. What can be understood from all the above, is that privatization
and/or commercialization refer to the reorganization of the public enterprise
sector so that they become less dependent on government funding while striving
to raise their efficiency levels.

The point is that "is privatization the 'necessary condition' or 'sufficient condition'
to break or eliminate bureaucratic controls?" The answer is certainly that
privatization is not a sufficient condition to overwhelm (overcome) the archaic
bureaucracy, rather is a necessary condition. It is a means to an end, not an end
by itself. Therefore, in order to achieve the end objectives, privatization requires

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active encouragement and strong support from the government. The support
could be through formulating integrated policies that address systematically the
range of constraints inhibiting the operations of privatized enterprises.

There are, however, important questions that need careful analysis and genuine
answers; are there contradictions between the ultimate goals of the government
(ensuring social welfare) and the implementation of privatization? There are
counter arguments in this regard. Among the frequently mentioned reasons that
deny the positive relationship between the ultimate goals of the government in
this regard and the privatization act, the following seem sensible.

1. As it has been discussed earlier, public enterprises are established with

mixed (commercial and non-commercial) objectives. While the
commercial objective is obviously about profit making, the diverse non-
commercial objectives may include income redistribution, subsidizing
particular regions or sectors, earning foreign exchange, generating
employment, correcting market failures and imperfections, as well as
maintaining public support (or increasing the probability that the party in
power will be reelected). From these lists of non-commercial objectives, we
can single out the welfare and equity motives like income redistribution,
employment generation, and subsidization or protection of the
disadvantaged sections, market stabilization and inflationary control. These
will not be achieved once public enterprises are sold out and transferred
into the private hands. This in turn implies that we cannot talk about the
fulfillment of the "goals and objectives of public enterprises in terms of their
public dimension" in the absence social welfare and equity.

2. Privatization in most developing countries has been implemented under

forced conditions, or under external pressures by international agencies as
part of their structural adjustment and economic reform agenda. For this
reason, governments of developing countries are still reluctant to let
privatized enterprises to operate with full autonomy, to free them from any
kind of control and suppression. This entails that governments tend to
privatize public enterprises unconvincingly and without full commitment,
rather to meet the preconditions imposed by donors. Besides, indirect
control of the government over privatized enterprises through regulatory
mechanisms and consequential mal-practices like corruption are apparent
cases in developing countries.

Since the underlying principles behind selling public enterprises are to ensure
economic efficiency, to increase productivity, and to relieve administrative
burdens from the government side, then the government will end up being
growth-oriented rather than being development-oriented, irresponsible and
unsympathetic to citizens' well-being. Thus, has no relevance to the motives and
intentions of welfare governments.

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Table 1. Pros and Cons of Privatization Proponents

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