Management of Public Enterpise Handout

Management of Public Enterprises (PADM3123)
CHAPTER ONE
1. MEANING, CHARACTERISTICS AND RATIONALES OF PUBLIC

ENTERPRISES
1.1. INTRODUCTION
Many countries have turned over substantial and even predominant responsibility for developing
and managing their economy to new kinds of public agencies. These new kinds of agencies
constitute the public enterprise sector. Particularly, one of the most significant features of the
Post World War is the exponential growth of public enterprises. The trend of such growth is
more pronounced in developing countries where organized private sector is limited and
consequently the major burden of industrialization has fallen on the shoulders of the public
sector. While this is the general scenario, the share of public enterprises varies from country to
country depending upon ideological preferences, historical, social and economic circumstances.
However, it is clear that even in the most "liberal" and private enterprise-oriented systems, public
enterprises not only exist but also play crucial roles (Fernandes, 1986:2).
Although the instruments and techniques of government owning property is not new and rather is
as old as human civilization itself, the increasing importance of public enterprises has been
related with the steady increases in the philosophy and functions of the state (a shift from laissez
fair to social welfare activities). It has generally become an accepted notion in modern states,
especially the developing ones that ownership of most of the natural resources and capital heavy
industries should increasingly rest in the hands of the state. In this regard, public enterprises
came to play an important role in terms of making major contribution to GDP as well as
providing a large amount of employment.
Public enterprises have been considered as key operational instruments to achieve economic and
social development and bring technological innovation in a number of developing countries.
Government intervention through public enterprises has been also intended to encourage and
strengthen economic development in the private sector. More commonly, governments
considered public enterprises to play crucial roles and fill the gaps when the private sector
1
demonstrated itself to be too weak or disinterested to undertake economic activities, but deemed
important to the objectives of the development programs of the government.
Therefore, regardless of ideology and policy, public enterprises are being used today the world
over as an instrument of state intervention in national development. Almost every country has
found it desirable and even necessary to establish public enterprises in order to meet the
requirements of its development programs. In addition to the creation of new public enterprises,
intense nationalist feelings of pride for self-sufficiency have led many nations, shortly after
independence, to nationalize foreign-owned enterprises, even when the goal in the long run has
been to sell them to indigenous investors. Such mutually supportive types of public enterprises
may include among others banking, transportation, communication, credit and marketing, water
and power agencies or institutions, applied research institutions and so on. For the purpose of
easier understanding of our discussions, the pattern of public enterprises can be viewed with
reference to three comparative periods; i.e. Pre-War Period, Post War Period until mid of the
1980s, and a Period after the mid of the 1980s.
The first period covers those years before the end of the Second World War (or contextually
known as the period of colonization. Prior to the end of the Second World War, public
enterprises were not known or were not directed towards serving the interests of the public in
most developing countries. The colonial administrations have created simple and small-scale
enterprises in developing countries aimed at extracting and evacuating raw materials and natural
resources that would serve as inputs for huge factories in their respective home countries. There
were no serious commitments on the part of those administrations for the development of
colonized countries and for the well being of the indigenous people.
The second period refers to those post-war years (equally known as the period of independence)
that range to the mid of the 1980s. Following the attainment of the independence of most
colonized countries, national governments have tried to adopt rational development
administration to redress previous situations and ensure rapid economic growth. Consequently,
the newly independent states determined themselves to intervene in major industry, mining and
other expansive and profitable ventures. One of the strategies adopted by governments of
developing countries, notably Africa, in the development effort is the use of public enterprises.
2
They incorporated the establishment, expansion, and operation of public enterprises in their
medium and long-term development plans assigned with diverse objectives. As a result, there has
been a proliferation of public enterprises in all African countries in terms of number, scope,
variety and complexity of operation as well as in terms of the amount of resources allocated to
them. Indeed the economic development through the process of industrialization and
commercialization had been of tremendous appeal to many developing countries during this
period.
The third period was marked as the period of "economic stabilization" or "economic recovery"
measures, a proposition made developed countries and multilateral donor agencies to developing
countries that took place since the mid1980s. Notwithstanding the vigorous measures of many
developing countries in terms of nationalizing foreign and private-owned enterprises,
establishing new ones, and expanding nationalized and newly created public enterprises, most of
them didn't secure the level of development they aspired. They rather got even worse than the
pre-independence situations. In other words, the realities after independence exhibited not only
highly vulnerable and dependent economies but also increased financial indebtedness and
persistence of mass poverty, which gave rise to political instability, social unrest and civil wars
in a number of developing, notably African, countries.
Donor countries and agencies associated the developmental problems and exacerbating poverty
situations envisaged in most developing countries to wrong policies and strategic myopias
employed by governments of developing countries. With such belief, donors propose the
economic stabilization and recovery programs notably the "Structural Adjustment Program-
SAP" to be implemented. Donors set these propositions as a prerequisite or precondition for
developing countries to fulfill in order to obtain loan or any form of assistance. Part of the SAP
is privatization and reforming of public enterprises. As a result, many developing countries have
been implementing massive privatization and various reform measures regarding public
enterprises since the 1980s.
3
1.2. The Meaning of Public Enterprise

1.2.1. Reasons that justify the need for a Definition of PE
Before attempting to define the term "public enterprise" or "state-owned enterprise", it would be
worthwhile to start with explaining why there is the need for a definition. There are at least three
reasons that justify the need obtaining a definition. First, we do require a definition for statistical
purposes. Researchers engaged in studying the public enterprise sector have had difficulties to
delimit the boundaries or the frontiers of the public enterprise sector, because the scope of
institutions termed as "public enterprises" are not demarcated along a "universal" definition. For
example, a study made by "African Association For Public Administration and Management -
AAPAM" (1987:5) indicated that exact and up-to-date figures of public enterprises in Africa are
hard to come by, as there is no consensus among African countries as to what constitutes a public
enterprise. Indeed, what may be considered as public enterprise in one country may not be so
regarded in another country.
Secondly, definition is becoming important for client or stake identification purposes.

Institutions such as that of a separate division of the World Bank, and the International Center
for Public Enterprises in Developing Countries, which are involved in providing training,
consultancy, information, loans and technical assistance to public enterprises as well as in
conducting researches on public enterprise need to identify clearly who their clients are before
they get into actual operations. Thirdly, we do require a definition for conceptual purposes. That
is, we need a definition to understand the rationale for and the objectives and goals of the public
enterprise to be able to analyze, the ramifications and implications of the concept - its
organization, style, strategy, and interface or relationship.
1.2.2. The Definition of Public Enterprise
All those points that justify the need for defining the term "public enterprise" would lead us to
overview the following lists of working/purposive and conceptual definitions provided by
different authors or institutions. There is no internationally accepted definition of a public
enterprise. Each country is thus able to establish its own definition of the term. Public enterprise
4
may be held to include a wide spectrum of institutions ranging from semi-government or purely
regulatory agencies to industrial and commercial undertakings. A variety of terminologies are
used when referring public enterprises. The use of a number of terminologies to describe these
institutions has been the sources of confusion. The terms that are used interchangeably may
include public corporations, public enterprises, public undertakings, public industries, state-
owned enterprises, state enterprises, government enterprises, government companies,
nationalized industries (used in UK), parastatal organizations (used in African countries), and so
forth.
George Gant (1979:104) described public enterprises as "government organizations established

for the purpose of engaging in defined commercial or business types of economic activities,
although they are occasionally established for non-business purposes (such as scientific research
foundations or technological institutions), to escape the shackles of the existing bureaucracy".
The definition given by the expert group and used on the training systems and curriculum
development for public enterprise management, (Common Wealth Secretariat, 1981:vi), could be
reads as:
"Any commercial, financial, industrial, agricultural, infrastructural, or promotional

undertaking owned by a public authority either wholly or through majority share-
holding, which is engaged in the sale of goods and services and whose affairs are
capable of being recorded in balance sheets and profit and loss accounts. Such
undertakings may have diverse legal and corporate forms, such as departmental
undertakings, public corporation, statutory agencies established by acts of
Parliament, or joint-stock companies registered under the company law"
This definition excludes government administrative or regulatory agencies, and obviously those
NGOs, civic society organizations, religious institutions and private enterprises. However, there
are different views, which define public enterprise as "a bureaucratic institution with corporate
form that is created or brought into existence by a general purpose government to perform a
specific or specialized public function". Mathur (1999:17) acknowledges the definition given by
Friedman as the most practical one and quoted him as saying:
5
"Public enterprise is an institution operating a service of economic or social

character on behalf of the government but as an independent legal entity, largely
autonomous in its management, though responsible to the public through
government and parliament and subject to some direction by the government,
equipped on the other hand with independent and separate fund of its own..."
The definition emphasizes the fact that public enterprises are engaged in an activity of
commercial nature on behalf of the government. It is this engagement of the government in
activities of commercial nature that gives public enterprises special characteristics as
distinguished from the traditional conception of governmental functions. In some literatures, the
term public enterprise is taken to comprise corporations, parastatals, councils, commissions or
other government agencies set up by specific acts of legislature, and companies over which
government has controlling interest. President Roosevelt described a public enterprise in the
most precise manner, as it is "an institution clothed with the power of the government but
possessed of the initiative and flexibility of private enterprise".
1.3 THE CHARACTERISTICS OF PUBLIC ENTERPRISES
Primarily, public enterprises manifest direct involvement of the government in the economic
sphere, and assume special responsibilities to the government. In other words, they represent
government's active intervention in economic development by engaging themselves in business
activities, which are beyond the provision of guidelines and the creation of an encouraging
environment to the private sector. Hence, they are distinguished from other conventional
government organizations by their functions of conducting economic and commercial activities.
The characteristics of public enterprises are highly influenced by several factors like ideology,
politics, history, level of economic development etc. For instance, in countries that operate
socialist type economies, the general characteristic of public enterprises is to stand against the
private sector and the trend appears to elimination or substantial reduction of the private sector.
In some of these countries, governments have embarked on nationalization or public ownership
of vital areas of production. On the other hand, in countries, which operate a mixed economy,
public enterprises appear to be concentrated in the traditional and well-established fields of
6
public utilities as well as the so-called "commanding heights" of the economy, leaving a
substantial proportion of activities in other fields to private entrepreneurs.
The core of the concept "public enterprise" suggests an organization, which has two dimensions
or characteristics: the enterprise dimension and the public dimension. If one of these dimensions
is missing, the body cannot be described as a "public enterprise". The implications of each
dimension will be examined in the following manner.
I. The Public Dimension
There are four basic elements in this dimension; i.e. public ownership, public purpose, public
control, and public accountability.
(a) Public Ownership: the assumption is that ownership vests in a public authority, which
could be central government, state government, or municipal government. While there is
no ambiguity when 100 percent of the ownership is vested in a public authority, it has got
also an increasing acceptance that if the public authority owns the majority shares (51 or
above percent) the enterprise would be classified as public.
(b) Public Purpose: in establishing a public enterprise, the government has in mind the
attainment of some public policy goals. The aim and purpose of the organization should
be fulfillment of public interest, it should be meant for achieving public interest. In
addition to the corporate objectives implicit in its enterprise dimension, the nature and
content of the public goals, which the enterprise is presumed to achieve, should be
identified. The net benefits of the activities undertaken by the enterprise do not go to the
enrichment of a private group of individuals, rather are directed toward fulfilling public
purposes. But, it is clear that private groups and individuals will have their own shares
from the net benefits of a public enterprise being part of the general public.
(c) Public Control: the government as the owner is likely to exercise managerial controls
over the enterprise it created or over which it has the majority share. The substance and
scope of control, however, has to be free from ambiguity. The specific areas of control
for which an enterprise will require government approval and the legitimate body that
will exercise control on behalf of the government need to be clearly stipulated.
7
(d) Public Accountability: a public enterprise has to be accountable in some way to a

legitimate organ representing the public. The question that entail on what matters and to
whom the public enterprise is accountable will depend on the precision of goals which
have been set for the enterprise, the agreed upon criteria of evaluation, and clarity of who
the evaluators are or to which agency is an enterprise reporting. All proceedings and
records of activities of the organization must be available for public (government)
scrutiny when demanded. Indeed, it is customary that performance reports of public
enterprises are regularly submitted to the government.
II. The Enterprise Dimension
The enterprise dimension implies the notion of a business firm. The following determine the
enterprise character in general:
(a) The organization is engaged in the production of goods or provision of services

(b) The goods and services so produced are marketed at a price
(c) The revenues so earned are adequate at least to cover costs
(d) The activity is based on the entrepreneurial idea of investment and return,
These being the general characteristics that describe the enterprise dimension.
1.4 REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES
As Gant (1979) pointed out, the principal reason for the emergence of the public enterprise sector
in a country is the government's decision to intervene directly and actively in the economy in
order to achieve the objectives of its development plan. Most frequently, decision on the creation
of public enterprises is based on the analysis and findings that show the institutional needs for
development, which the government believes the private sector will not meet, at least by itself. In
other words, the rationale for setting up public enterprises is that they are better instruments for
promoting developmental goals.
Nevertheless, it would be difficult to generalize the motives for the creation of public enterprises
in precise terms since the reasons may practically vary to encompass political, economic or
8
social drives, whilst others have mixed and even conflicting objectives combining social welfare
and economic motives. The degree and extent of government involvement in economic ventures
through public enterprises is generally determined by ideological considerations, historical
factors and the state of economic development.
Some countries, notably socialist countries, visualize a new role of the state as an agent for
change, for social transformation and economic development. Hence, they believed that the
economic functions of production and distribution should substantially be managed in the public
sector. In contrast, other countries prefer to remain away from engaging, or are loath (reluctant)
to engage, in any direct economic activity unless they are compelled to do so by some temporary
weaknesses or shortcomings envisaged in the private sector (Mathur, 1999:8). Generally, there
are many shades of belief and reasons that vary from country to country with regard to the
creation of public enterprises. The justifications for state intervention in industrial and
commercial activities and the use of public enterprises as a model of planned development
strategy could be summarized as follows:
(i) The inability or unwillingness of the private enterprise to be involved in the production of
certain goods and service that are not rewarding in view of financial profitability, but which
are considered socially desirable in view of the state; or the inability of the private
enterprise to engage in ventures with long term gestation periods, expecting long-term
benefits over investment,
(ii) Strong need of the government to intervene in those sectors that have decisive influence on
the structure of the economy, and are considered to be basic and strategic to national
development. In view of the fact that there is a need to guide economic development in the
light of national priorities, the private sector alone should not be allowed to venture in
sectors that are found to be crucial to over-all development.
(iii) The pressure of international competition in the home or external market that would
inevitably yield negative consequences like closure of infant private industries,
monopolistic trends by big companies or industries, and the resultant prices escalation upon
consumers.
Thus, over the years, the state had endeavored to intervene into, and/or control, some sectors of
the economy to bridge the gaps that the private sector failed to fulfill, and to lessen the negative
9
consequences resulted from external pressure. Consequently, the beliefs or ideas that surround
the argument are:
 Government ownership and control is essential in certain key sectors to ensure that the
country's economy partakes of high returns on investment in such sectors
 Government intervention is required to ensure the economic survival of a sector,
organization or industry of strategic importance, especially on which sufficient private
commitment to take the risk is not available
 The ownership and control of basic industries are essential pre-requisites to national
economic planning and development
 Certain services to the public constitute national, local or natural monopolies and,
therefore, require considerable regulation in order to ensure acceptable levels of service,
prices and safety
 The most equitable distribution of income is dependent upon common ownership of some
particular means of production, distribution and exchange, which in turn could be achieved
through the means of public enterprises.
Generally speaking, therefore, public enterprises exist primarily to represent the government's
interventionist objectives in the economy because of the aforementioned reasons. They exist as
distinctive institutions with the management capability to conduct business activities effectively
and efficiently. Although economic motives are important in explaining the reasons for setting
public enterprises, these alone are not adequate. Political and social expediencies are indeed
other justifications. Therefore, the motives for public ownership of enterprises that were
mentioned in the preceding discussions may be conveniently categorized under three headings:
economic, social and political/ideological (Barber, 1983).
(A) Economic:
In many countries, mainly the developing ones, the inspiration for public enterprises emanated
from the desire to achieve rapid economic development and to make frontal attack on poverty
(Mathur, 1999:10). The desire to achieve success in the economic sphere would be possible
through public ownership, and this model of economic development is backed by practical and
imaginative reasons such as:
10
(i) The "commanding heights" argument postulates that certain key industries, especially
those connected with the processing of natural resources, are so vital to the operation of the
national economy and are of strategic importance. To leave such economically key
industries in private hands might jeopardize the system. Therefore, the "commanding
heights" idea has been a major justification for public sector investment in many countries.
(ii) Control of monopoly power- it is accepted that monopoly firms are able to exert
undesirable pressure on the society, thus they need to be controlled. So, public ownership
may be considered as the ultimate form of control. It has become extremely important
today that essential infrastructural services such as public and road transport, railways,
electricity, water, etc. are state-owned even in industrialized countries.
So, whatever the reasons and motivations are, government intervention in the economy is a
general practice today allover the world, with in fact varying degrees.
(B) Social:
Public enterprises are also established with social objectives and the decision criterion for
establishment is social cost-benefit consideration, not simply economic cost-profitability like that
of the private sector. For example, a state railway company may operate "uneconomically", but
continue to exist because closure would impose many other "social costs" on the communities
such as shortage in the means of transportation and associated cost escalation. Another social
motive of the government in creating public enterprises is social security or social welfare. Many
governments have regarded employment generation as a motive for establishing public
enterprises. Developing countries, in particular have entrusted public industries with special
responsibilities in terms of contribution to improve income distribution. Employment generation
is one aspect of the equity measure of the government besides to other direct forms of social
welfare or income distributions schemes assured through the means of public enterprises.
(C) Political/ideological:
An important motive for the creation of public enterprises in this regard is the ideology of
socialism, born largely out of the inadequacy of the capitalist system. The Great Depression of
11
1929 had seriously exposed the deficiencies of the capitalist system, which assumes free play of
the market forces. Keynesian economics had also provided a sound theoretical basis for state
intervention in creating effective demand and generating employment.
However, the failure of socialist economies in almost all countries and the success of the
privatization drive have led many commentators to question the very reason of existence of
public enterprises today. The issue has got blurred with the ideological debate since the retreat
from the socialist ideology is beyond propensity, and rather is a real practice this time.
Galbraith (1990) commented in that "while socialism in economic terms worked well in the
initial stage, it has failed in today's context because of its inability to adjust to the new world of
the consumer society". This entails that the ideological motive of public ownership has become
an issue of contest and the thing of the past for many commentators.
On the other hand, regardless of the ideological consideration, the essentials of public ownership
are still valid and justifiable. In an era of globalization and liberalization, although state-owned
enterprises may not provide the commanding heights of the economy, their importance in
national economic activity cannot be underrated. For this reason, economies of a number of
countries such as China, Korea and Taiwan opted not to give top priority to privatization, but to
allow the private sector to develop around the public sector (Mathur, 1999:15). In summary,
most developing countries suffer from acute lack of capital, entrepreneurial skills and regional
imbalances. The immensity of the socioeconomic problems of these countries makes state
intervention inevitable and in fact desirable. Therefore, the state becomes a vital partner in the
promotion of industrial enterprises to ensure public control over certain sectors of the economy.
1.5 OBJECTIVES AND ROLES OF PUBLIC ENTERPRISESS

There are immense objectives, which lead governments to engage actively in the economy
through the means of public enterprises such as; to gain control of the economic monopoly, to
ensure equitable distribution of wealth, to capture profits for investments or development
programs, to manage foreign trade, to create yardstick of performance for the private sector and
so on. Some of the explicit objectives of public enterprises assigned by the government as a
means of achieving macro-level objectives may fall under those three major reasons for public
12
ownership (economic, social, and political) mentioned in section 2.3 above, and may include
among others, the following:
(a) To generate revenue to the government through various means such as dividends, interest
on loans, taxes etc.
(b) To save scarce foreign exchange or broaden foreign exchange base either by exporting
foreign exchange earning goods and services or by substituting imported products.
(c) To reduce dependence of the economy on a narrow range of activities domestically, and on
foreign importation
(d) To create an even distribution of income and wealth among individuals and groups by
preventing the concentration of economic wealth in the hands of the few
(e) To develop and provide infrastructure services that will foster the proliferation of the
private sector and accelerate the pace of national economic development.
(f) To ensure balanced development among different sectors of the economy and reduce
regional disparities through a fair dispersal of industries in various geographical areas of a
given country
(g) To create job opportunities for citizens or to reduce the level of unemployment, and
provide various welfare benefits such as housing, medical services, transport, and other
social services in order to serve as a model for private entrepreneurs in the sphere of labor-
management relations and thereby maintain stable social security system
(h) To safeguard the interest of consumers by offering a basket of essential goods and services
at a fairly low prices to low-income groups.
(i) To stimulate research and development, which may lead to the building of indigenous
technology and optimum self-reliance
(j) To capture the advantages of increased participation by citizens in the ownership and
management of the productive enterprises
(k) To serve as a regulatory agent of the government in ensuring compliance to law by
organizations within its area of jurisdiction. Examples include the National Bank of
Ethiopia that monitors and controls the activities of private banks;
These are, inter alia, the national/macro level objectives that the government intends to achieve
through the means of public enterprises, which fall under the economic, social and political
13
motives. In addition to macro/national objectives, public enterprises do have also

corporate/micro objectives that would contribute for the accomplishment of such macro-level
objectives. Hence, we need to examine the specific identification and articulation of the
corporate goals of each public enterprise. Corporate objectives may be classified into as many as
at least four types, namely; financial and commercial objectives, production and productivity
objectives, marketing and service objectives, and developmental objectives. A brief discussion of
these objectives is presented as follows.
(A) Financial and commercial objectives

As Fernandez (1986:52) noted, the early history of public enterprises in developing countries
reveals a cloud of uncertainty and ambiguity about their financial goals. The idea of "profit" was
associated with private enterprises. The goals of public enterprises were mainly seen in terms of
the nation-building posture or attitude. Profitability in purely financial accounting terms seemed
an irrelevant thing. Public enterprises were considered to be pioneers of social and economic
changes and the engines of growth. Although this has been the initial intent behind the
establishment of public enterprises, financial and commercial soundness became an important
consideration eventually. The case for financial stability, commercial viability and adequate
return on investment rests on the following compulsions.
(i) Public enterprise's investment is generally based on feasibility studies and project reports.
(ii) Since the source of funding of public enterprises could be from borrowing, they will
obviously be required for debt-servicing, and this in turn is possible only if they are
financially viable by generating surplus
Therefore, the creation of public enterprises should be associated with the declaration of intent
that they are expected to be financially viable, appraised in terms of their capacity to yield a
reasonable rate of return on total capital employed. What is the reasonable rate of return then? In
terms of pure financial logic, the answer is simple and clear in that, the rate of return should not
be less than the opportunity cost of capital.
(B) Production and productivity objectives
14
Production planning is an integrated managerial discipline, which takes into account productive
capability or installed capacity, availability of inputs and market situations. What is suggested in
line with this is that the determination of production goals and strategies of production should be
essentially an integral managerial exercise. The focus should be on productivity goals rather than
production targets, a shift from a static concept of absolute levels of production to a more
dynamic concept of productive use of assets and resources.
This in turn implies "capacity utilization", to mean, the major productivity goal should be to step
up the utilization of capacity (for example machine) until it reaches the optimum level. Another
and equally important aspect of productivity is "consumption coefficients"- the ratio of usage of
raw materials to outputs. "Labor productivity" is a far more sensitive area of setting productivity
goals, which will depend on many other factors such as training, work norm, and so on. "Total
factor productivity" is the most rational and sensible measure of productivity. The productivity
of machines, materials, workforce, and money is a highly integrated network-each of which
influencing the other. Because of this, sophisticated methodologies have been designed to
calculate "total factor productivity". Multiple inputs and outputs can be weighed at factor costs
so as to determine whether a public enterprise has met its productivity objectives or not.
(C) Marketing and service objectives
The real effectiveness of the enterprise can also be assessed in light of its performance vis-à-vis
its main constituency- customers, consumers or clients. Designing marketing and service goals
can be better understood by determining the marketing position of each enterprise.
(D) Developmental and social objectives

Achievement of financial viability and generation of surplus and thereby contributing to resource
mobilization is by itself a major developmental responsibility. Besides, the productive use of
assets and the optimized use of resources is a matter of both economic and social concern of
public enterprises. However, the accomplishment of social objectives is an obscure (unclear) and
often misunderstood subject. Public enterprises are expected to be, for example, model
employers, to take long-term developmental views of research by investing in such areas, to
support the environment, and so on. Consumer satisfaction is also considered as the discharge of
an important social obligation. The conclusion one might arrive at could be that public
15
enterprises, which are financially successful, are good performers in terms of achieving
development and social objectives.
CHAPTER TWO
2. ORGANIZATIONAL AND MANAGEMENT FORMS OF PUBLIC

ENTERPRISES
2.1 MAJOR MANAGEMENT FORMS OF PUBLIC ENTERPRISES
Besides to its economic functions, the public enterprise sector is distinguished prominently and
importantly by its management characteristics. In other words, the public enterprise sector exists
as an identifiable and separate segment of the public establishment because of its special
management features. It is this aspect that makes it especially significant in the study of public
and development administration.
The administrative systems devised to satisfy the requirements of traditional government

activities are not adequate to the requirements of industrial and commercial enterprises. They
were not set up to serve the needs of business (flexibility and economic efficiency), but to serve
expectations of political responsiveness and bureaucratic conformity. Whatever improvement of
efficiency might exist in the conventional public administration system, it wouldn't meet the
requirements of business management since the needs of such efficiency improvement are
justifiably different and tailor-made. Public enterprises cannot be dependent upon annual
appropriations for the continuity or flexibility of its operations. The accounting, audit and
personnel systems needed in traditional government do not satisfy the management system of
16
commerce. Hence, public enterprises need a different form of management, which is flexible,
adaptable and autonomous.
On the basis of this logic, public enterprises have been established separate and different from
the existing public bureaucracy and are endowed with the management systems uniquely
necessary to their success. There are, however, very few public enterprises still remain in the
administrative system of the older government departments. There are different kinds of public
enterprises, which can be classified according to the source and nature of their legal authority
and management, the nature of their function, and their location and position in the government
structure.
Three types of public enterprises; i.e. Government Departments or Department management,

Government Companies, and Public Corporations, can be identified in terms their categorization
according to their legal bases and major forms of management, the major features of which will
be discussed separately below.
A) Department Management: under this pattern, public enterprises are owned and managed
just like government departments that are staffed by career personnel and headed by ministers.
Notable examples of which could be railways, posts and telegraphs though these could also
transform to a public corporation type. Department undertakings display the following
characteristics:
(i) It is financed by annual appropriations from the treasury and all or a major share of its
revenue is paid to the treasury
(ii) It is required to work out financial results, determined through accounts maintained on
commercial principles
(iii) It is subject to the budget, accounting and audit controls applicable to other
government departments
(iv) The permanent staff comprises civil servants recruited under terms and conditions similar to
those other civil servants. In this case, the minister is directly responsible for all aspects of
policy and administration.
(v) It possesses the sovereign immunity of the state and cannot sue and be sued without the
consent of the government
17
The departmental system of management has generally been adopted in the following cases:
(i) Where the need for security or strategic importance make them difficult to be operated by
other forms of management, e.g., defense industry
(ii) In administration of national services, for instance postal, telegraph and telephone services
and railways
The main advantages of this system are that it assures maximum government control in vital
public services. Secondly, it helps in bringing about greater coordination by establishing a clear
relationship between a public enterprise and concerned government departments. This form of
management, however, suffers from obvious disadvantages. The bureaucratic form of
administration is likely to lead to inevitable inefficiency, red tape, and delay. The danger is that
the administration may be subjected to excessive fiscal and personnel restrictions and
interferences leading to inadequate departmental autonomy in vital matters such as capital
expansion, finance, technical improvement, purchasing and personnel administration.
B) Government Company: it is a registered joint stock company form of management, which

has been increasingly used by most governments in respect of manufacturing industries. This
type is also known as mixed ownership company. The company form amounts to running purely
commercial and industrial enterprises. Its capital is contributed by the government and
shareholders, and the management is headed by the board of directors appointed by government
either from amongst its own officials or from outside. This form includes various joint
enterprises, shared between the state and private interests. Its principal features (characteristics)
are:
(i) The whole of the capital stock or 51 per cent or over is owned by the government,
(ii) It is a corporate body created under the general provisions of the Company Law of the
country
(iii) It can sue and be sued, enter into contract and acquire property in its own name,
(iv) The majority of the directors are appointed by the government, depending on the share of
private capital in the enterprise
(v) Unlike public corporations, it is created by an executive order of the government without
parliament's specific approval
18
(vi) Its funds are obtained from the government and in some cases from private shareholders and
through revenue derived from the sale of its goods and services
(vii) It has almost the feature of a private limited company
(viii) It is generally exempted from the personnel, budget accounting, and audit laws and
procedures applicable to government departments
(ix) Its employees are not civil servants
The company form of public enterprise is chiefly used by the government in industries where it
has to rely on foreign (financial and technical) aid and assistance.
C) PUBLIC CORPORATION: public corporation is a relatively new concept of administrative

organization. Although it has been occasionally employed in earlier periods, it is essentially the
twentieth-century creation to meet certain emergencies as a result of the Great Economic
Depression. The public corporation method is a sort of compromise between the policy of laissez
fair and strict bureaucratic control in public administration and is generally adopted in the
revenue producing enterprises. Public corporation has become an important area of study in
public administration as it represents a conscious attempt to unite the advantages of public and
private administration in one enterprise. It has been also described in the following manner;
Public corporation is a corporate body created by public authority with defined

powers and functions and is financially independent. It is administered by a
board appointed by public authority to which it is answerable. Its capital structure
and financial operations are similar to that of a government company."
The emergence of the public corporation is a phenomenon of great importance to modern

administrative organization. It is run and administered by the board responsible for overall
policy, but not for day-to-day administration. Public corporations were meant to combine
democratic control over major policy with commercial freedom in organization and
management. In other words, the method is based on the desirability of combining commercial
freedom with public accountability, and to protect such freedom of operation from an excessive
centralized ministerial control. Some of the important characteristics of public corporations are
described as follows:
19
(i) It is wholly owned by the state

(ii) It is a separate legal entity and is distinct from the government, which created it. It has a
corporate character or franchise, which confers power upon it. It can do only what the
charter authorizes.
(iii) It is incorporated under a special statute of the parliament (statutorily created by a special
law) outside the ambit of an ordinary company law, which lays down public purpose and
defines its powers, duties, and immunities and prescribes the form of management and its
relationship with ministers.
(iv) It is managed by a board, which has a self-contained financial structure. It is, at least in
theory, independently financed through its revenue and capital borrowing.
(v) It is a corporation in the sense that it has flexibility and initiative of a private enterprise,
has freedom of administration and finance, accounting and purchasing, and has power to
recruit its own personnel.
(vi) It is a legal person entering into contracts, which can sue and be sued and acquire and
own property in its own name.
(vii) Though the primary objective of a corporation is not profit, but public service, it is run on
business lines and not in accordance with bureaucratic procedures and practices.
(viii) It holds funds in its own name, and is generally exempted from most regulatory and
prohibitory statutes and enjoys “complete” autonomy in the management of funds.
(ix) It operates within the broad outline of government policy, while the day-to-day
administration is the exclusive responsibility of the managing directors of the
corporation.
(x) The personnel (employees) of public corporations are not civil servants, and recruited
independently in the pattern of business executives under terms and conditions
determined by the corporation itself.
The major advantage of this type of organization is that it has the flexibility and initiative of a
private enterprise combined with minimum public regulation of its major policies. However,
there are major operational problems in this type of organization. Difficulties arise in reconciling
autonomy of the corporation with public accountability. The theory of corporate autonomy
demands the largest measure of operational freedom, which however, may be abused by
20
administrative elite in the organization. On the other hand, too much government interference
defeats the very purpose for which they are established. Reconciling "democracy" with
"efficiency" is, therefore, the crux (core) of the problem of public corporations.
The second way to categorize public enterprises is according to the nature of their functions. One
group of such categorization may include production and trading companies, industrial and
commercial enterprises that are expected to operate at profit such as mines, wholesale and retail
stores, rubber and tea estates, and steel and pharmaceutical plants. Other groups of enterprises in
accordance to the nature of functions are composed of public utilities and services, which are
supportive infrastructure types such as power, water communication, railways, and ports. There
are also other groups of enterprises in this categorization, which are created explicitly for the
purpose of development that is for the purpose of giving encouragement, credit assistance under
special terms, and support to other institutions both public and private. Such enterprises may
include industrial development authorities, river basin development agencies, etc.
A third way to categorize public enterprises is according to their location and position in the
governmental structure. In many countries, central and state (regional) governments have
established more or less systematic networks of public enterprises. Such enterprises are created
to develop a particular region or location. Another growing trend in the third categorization is the
emergence of a hierarchical relationship among public enterprises, such as trading companies
that often have branches in districts and towns.
2.2 ORGANIZATION OF PUBLIC ENTERPRISES
In countries where the public enterprise sector is very large, public enterprises are shaped or
organized into a hierarchical form similar to the conventional government bureaucracy. This
trend, together with its distinctive management characteristics, is converting the public enterprise
sector into a "third bureaucracy" form, approaching the dimensions and importance of those of
traditional public administration and the private sector (Gant 1979:125).
Grouping of public companies operating in a particular field under a central holding company is
a more or less typical pattern. Holding companies or corporations have been consciously
21
adopted in many countries for management functions of different public enterprises. They are
established to provide for more expert and rational management and for better co-ordination of
public sector companies as well as to enhance the autonomy of management. In Ghana, for
example, there are separate holding companies for industrial, mining, trading, and financial
enterprises. The Nigerian National Petroleum Corporation (NNPC) is another typical example of
the holding company, which now manages the activities of other eleven subsidiary companies.
This pattern obviously forms hierarchical relationships between subsidiary and holding
companies. In other countries also, large holding companies notably trading companies, have set
up operating branches to serve regions and districts. Generally, public enterprises are related or
organized horizontally and vertically in a bureaucratic hierarchy. The holding company concept
is often suggested as a desirable option for public enterprises for its notable advantages, such as:
 The subsidiaries pursue common policies, and helps for uniform information and reporting
systems. Government policies are more effectively communicated and implemented by
subsidiary companies through the holding company
 Cross subsidization or inter-transfer of funds: In the event of financial distress or severe
economic downturn, the holding company may provide financial assistance to subsidiary
companies or vice versa. By the same token, subsidiary companies may help one another or
among each other in the case of emergencies through the mediation of the holding
company.
 It helps for interchange of experiences when facing common problems
Nevertheless, holding companies of monopolistic nature may pose demerits of the following
sorts:
 It is likely to curb operational freedom of the subsidiaries in matters of major policy-
making decisions
 The subsidiaries, even though belonging to the same line of activities, may have
differences which require discrete handling
 The holding companies involve costs of establishment, personnel and functions, which
may duplicate the work of subsidiaries
22
 For successful operation, the holding company may need to delegate powers, which would
deviate from the necessity of its establishment in the first place.
 Monopoly and centralization: They foster monopoly in particular sphere of activity.
 Create time-consuming bureaucratic procedure: Holding companies create another
organizational layer in already inappropriate and time consuming bureaucratic procedures.
Thus, it hinders efficient and prompt decision-making.
Like any government agency, public enterprises have formal organizational structures depicting
their intra and inter-relationships and their internal functional arrangements. Broadly speaking,
organizational structure can be described as a pattern of responsibilities, that is, a framework
within which the process of management can be effectively carried out. The organizational
structure of a public enterprise is, therefore, the framework for carrying out the responsibilities
for the co-ordination of activities or operations and for the motivation of members.
Although the framework varies from enterprise to enterprise depending on the aims and
objectives of the individual bodies, general observation shows that a pattern is common to most
of them, i.e. the public enterprise is so structured in a manner that the Head of
Government/Cabinet is on the top followed by the Supervisory Ministry, the Board of Directors,
and the Management (Chief Executive) in order of their presentation. The holding corporation is
adjacent to the board. All public enterprises adopt this structure, which is aimed at achieving an
effective policy formulation and execution in line with government policy directives. All the
bodies that feature in the structure are supposed to see themselves as parts of an organism and
not as competitors for power.
Regarding their internal arrangement or organization, all public enterprises, regardless of their
size or mission, establish various segments or units that make up the organization structure. This
is done by dividing the overall operations into sub-activities and then by combining these sub-
activities into specialized functional units. This process of grouping specialized activities in a
logical manner is called "departmentation". Public enterprises do have different bases for
departmentation since they are different in their activities, objectives and areas in which they
operate. The most common bases of departmentation are function, territory, product, customer,
and process.
23
(i) Departmentation by Function: It is the grouping together of activities in accordance

with the functions of an enterprise - on the basis of similarities of expertise, skills or work
activities. In other words, jobs that call for certain skills or the use of similar working methods
will be put together. It is probably the most common base for departmentation and is present in
almost every enterprise at some level in the organization structure. It asks the question “what
does or what kind of activities typically the enterprise do”? Example of which a single enterprise
would have different departments arranged on the bases of function are Engineering, production,
marketing, Finance, etc
(ii) Departmentation by Territory/ Geography: Departmentation in this consideration

implies arranging a group of business activities on the basis of geographic location or territory. It
is common in enterprises that operate over wide geographic areas; i.e. it is attractive to large-
scale firms or other enterprises whose activities are physically or geographically dispersed. The
logic is that all activities in a particular area or region should be assigned to a manager who will
be in charge of operations in that geographic area. Geographic departmentalization works best
also when different laws, currencies, languages and traditions exist that have a direct impact on
the ways in which business activities must be conducted.
(iii) Departmentation by Product (Product Line): It is the grouping and arrangement

of activities around products or product groups. Departmentation by product is considered when
attention, energy, and efforts are needed to be directed to an organization’s particular products.
This can be better used if each product requires a unique strategy, production process,
distribution system, or capital sources. This approach works well for an enterprise, which
engaged in very different types of products. For example:
 Textile products - Nylon products, woolen products, silk products, cotton products
 Petroleum refining - kerosene, diesel,
 Electronics - Radios, TVs, Computers
(iv) Departmentation by Customer: It is a grouping of activities around customers, in

response to the primary interests of customers.. This makes economic sense when the customers
of a given enterprise are distinct enough in their demands, preferences, and needs. It helps
organizations to meet the special and widely varying needs of customers. It can be used, for
24
example, in retail stores segregated in departments based on customers as men's clothing,

women's clothing, children's clothing.
(v) Departmentation by Process: Manufacturing firms often group activities around a

process or type of equipment they use. The final product of a single enterprise may be obtained
after passing through several processes and stages. In this case, the output of a given process or
department may be used as an input for the other until the final product is produced.
2.3 MANAGING THE INTER-LINKAGES
The idea of inter-linkages lies at the heart of all development planning. Viewed from the
perspectives of the public enterprise, inter-linkages take on a managerial face. Managers are
consistently faced with external influences, pressures and demands-from the government,
consumers, suppliers, trade unions, the physical environment, the private sector, and other public
enterprises. The fundamental premise is that inter-linkages are not merely phenomenon to be
analyzed and recorded as they occur, but to be planned and managed. The "constraints" must be
converted into managerial challenges. Indeed there is an organic connection between the manner
in which the inter-linkages are managed and the scope and intensity of influences of those
intervening organs or elements.
The first task is to identify the inter-linkages, to locate all the points of external contact, which an
enterprise has as part of managing the situation. While managers are actually conscious of their
external relations, there is rarely an attempt to draw up a planned network and to view the
interrelationships as a system at work. Since the character of enterprises differ considerably, the
framework of inter-linkages and the intensity of the contact will equally differ. In designing its
corporate plan, each enterprise will have to draw up its own model of inter-linkages, depicting
the scenario of its external relationships and the nature and content of contacts. The following are
the inter-linkages that a public enterprise would have for its success.
(i) Inter-linkage With The Government
25
The most powerful influence affecting public enterprises comes from the government. Indeed,
public enterprises' managers are so pre-occupied with the task of establishing an adequate
relationship with the public authorities that control, monitor, and evaluate them. Hence, mangers
tend to view the inter-linkage with government as the only one that matters. The relationship
between governments and their enterprises create immense problems of adjustment and could
even develop into a situation of tension. As it was mentioned earlier, although there are common
areas for government interventions, the specific nature of this relationship differs widely from
country to country and even from enterprise to enterprise.
(ii) Other Public Enterprises
There are empirical reasons for the existence of interdependencies among various public
enterprises. The activity of one public enterprise will be determined or significantly affected by
the activity of the other. The horizontal linkages among the family of public enterprises are as
crucial as the vertical linkage with the government. In a free market economy where enterprises
have choices of clients and suppliers, problems of interdependence may not perhaps be quite
serious. However, the situation in developing countries calls for the management of horizontal
inter-linkages among public enterprises. There are at least four sets of inter-linkages namely,
investment, production, pricing, and marketing.
(iii) The Private Sector
Most of the developing countries have adopted a "mixed economy" pattern. This creates inter-
linkages between private and public enterprises. The private- public enterprises inter-linkages are
conditioned by the rules established by the government. The various inter-linkages could be
established for designed mutual benefits or may happen as a result of the natural courses of
activities, both as collaborators and competitors.
(iv) The Workers
These days, most workers are organizing themselves into associations to protect their interests.
A fundamental aspect of the enterprises' inter-linkages is, therefore, the relationship established
26
with the organized labor. The objective is clear enough; i.e. to create industrial peace and
tranquility, involvement and motivation, and thereby high productivity.
(v) The Consumers
Marketing establishes a relationship between the producer and the purchaser of the goods and
services. The technique of marketing has been developed in order to understand and satisfy
consumer demand and taste. What is special with the situations of public enterprises is that they
assume heavy responsibility to provide protections to the consumer, which the market place
doesn't offer. Consumers have their own ways of evaluating the performance of public
enterprises. Their criteria are related to their own benefits, including price, quality, service, and
after-sales facilities. Public enterprises would have to make a major effort to understand
consumers' needs through market research. This can be possible by maintaining effective inter-
linkage with consumers.
(vi) The Physical Environment
Public enterprises assumed to take appropriate steps to prevent ill effects of their respective
operations and such effects caused by other family enterprises and enterprises of the private
sector on the environment. This concern of the physical environment is expressed in many ways
such as sponsoring and funding research projects aimed at studying the causes and effects of
environmental problems, as well as by employing appropriate devices to protect the environment
from possible hazards. Viewing the relationship more constructively, one can say that public
enterprises should not only prevent social dislocations on the environment, but also should make
active contributions to the healthy growth of the environment. This shouldn't rest only with the
cosmetics of parks and gardens created around industrial units, rather of great importance is the
infrastructure support that public enterprises can provide to local communities and the
environment. The problem of public enterprises with regard to their inter-linkages with
environment is that the contributions they make are not adequately reflected in their profit-loss
accounts.
(vii) Foreign Contacts
27
Public enterprises develop contacts abroad; arising from imports of technology, equipment and
machinery, raw materials, spare parts and components; export of goods and consulting,
contracting and other services; hiring of expatriate managers and consulting firms, international
shipping and insurances etc. Since most public enterprises are exposed to such foreign
influences, they are supposed to develop their own "foreign policy" which defines their inter-
linkages within the provisions of the government in this regard. Foreign Inter-linkages of public
enterprises may focus, among others, in developing information networks on the availability of
goods and services from each other's side, skill and technology transfers, understanding and
exploration of market situation and possibilities, assessing the availability and comparative
advantages of establishing joint ventures and selection of the right partners.
CHAPTER THREE
3. THE INTERFACE OF GOVERNMENT AND PUBLIC ENTERPRISES
Once the government created a public enterprise, there is a pressing need to specify its
relationship and define the interface. Nevertheless, the government often has a problem in
determining such relationship in definite terms. One of the most difficult questions in the field of
public enterprise is, therefore, to determine the degree and character of its relationship with the
government. In developing countries in particular, the relationship is not formal and definite.
Actually, public enterprises in these countries are not treated very differently from government
departments and they are tightly controlled. On the other end, one may find some instances in
developing countries where public enterprises are enjoying almost total independence and where
government monitoring and control is not effective enough. Neither of the two extremes is
justifiable or consistent with the rationale of creating public enterprises.
Too much or total control denies the corporate status of the enterprise, defeating the very purpose
for which they were created. To the contrary, too little control will place public enterprises
outside the democratic regime; hence the demand for complete autonomy of enterprises is not
fully acceptable. Whatever the government is willing to provide autonomy of public enterprises,
it still holds, and should do so, certain prerogative and power over enterprises. What is required
28
is therefore to maintain the right balance between the level of interventions and control of the
government in the affairs of public enterprises and the operational autonomy or freedom of such
enterprises. Although fixing the extent and aspects of the relationship is the problem that lies at
the heart of public enterprises' management, optimization of the linkage can provide a sound
foundation for the success of an enterprise.
3.1PUBLIC ENTERPRISE-REGULATORY AGENCIES RELATIONSHIPS
We can use an elementary model of governmental structure to depict the various points of
contacts between the public enterprise and different government constituents as indicated in
figure-2 that follows.
Figure-2: An Elementary Model of Government Structure and Public Enterprises'

Relationship
Auditor Public Enterprise Parliament or
Unlike the traditional hierarchical model, the government and the enterprise are not placed only
in a vertical juxtaposition (arrangement), but also in a more constructive horizontal relationship.
Public enterprises do have relations with one or more constituents of the government in different
29
aspects. Some of the relationships between each government organization represented in the
chart and the public enterprise could simply be expressed in the following exemplary stakes:
A) Supervisory (Technical and Sectoral Ministry)
The increasing complexity of modern governments has led to the creation of a number of
ministries, which are industry-specific, technology specific, sectoral in character, and specialized
in certain areas. These technical ministries make policies for the sector, design sectoral plans,
study markets and prices and guide public enterprises functioning in the sector. The involvement
of public enterprises with the technical ministries is quite simple. It is these ministries, which
perform supervisory function over public enterprises.
B) Ministry of Finance
Behaviorally, the attitude of the Ministry of Finance flows out of its national responsibilities.
Since it is vitally responsible for national financial stability and solvency, it is natural that its
prime concern is that public enterprises should be financially viable, should provide returns from
invested capital, should pay dividends to government, should be a major means of resource
mobilization. The voice of the ministry of finance is that of government as a shareholder. So far
as public enterprises are concerned, the ministry of finance exercises interventionist power in
areas such as:
 It has a major say in public enterprises' investment decisions
 It provides capital funds and long-term loans
 It determines the expected rate of return on investments
 It may intervene in pricing, wage and salary policies with the view of monitoring their
national impacts
C) Ministry of Planning
The Ministry of planning, sometimes organized as "Planning Commission" or "National

Planning Board", has the overall responsibility of designing the national development plan;
preparing a gigantic national input-output table, and a national matrix of economic activity.
Therefore, the role and performance of public enterprises is a matter of great concern to the
ministry of planning as they are the major, perhaps the dominant, sources and instruments for the
30
successful execution of the national plan. In practical terms, the influence of the ministry of
planning over public enterprises would be the following:
 Inclusion of public sector projects in the national plan
 Resource allocations for this purpose (in collaboration with the ministry of finance)
 Monitoring of project implementation/production to ensure successful implementation of
the plan and the validity of the national input-output table
Behaviorally, the ministry of planning wouldn't see public enterprises as autonomous business
firms. Rather, it views them as the building blocks of the national plan, and looks at their
investments with frame of reference of social or economic profitability at the national level,
instead of at single enterprise level.
D) Ministry of Industry
The responsibility of this ministry is to promote industrialization in the country. Since the
substantive numbers of public enterprises are in the industrial sector, the ministry is deeply
concerned about them as factors of industrialization. It affects public enterprises in the following
areas:
 Determines areas suitable for public sector investment

 It encourages or opposes new investments on public enterprises on the basis of its
assessment of domestic and international demand-supply conditions
 It approves foreign technical collaboration and importation of technology
 It protects public enterprises against the encroachments of large-scale foreign industries
Behaviorally, the ministry of industry may not differentiate between the public and domestic
private enterprises, rather threats both of them as instruments of industrialization.
E) Ministry of Labor
The main concern of the ministry of labor is the welfare of workers. Hence it promotes
legislation for the protection of workers' rights covering issues like job protection, working
hours, hazardous employment conditions, labor disputes and labor unions. While this ministry
has no direct control over public enterprises, its policies have major impacts on enterprises in
matters such as:
31
 Wage negotiations and determinations

 Welfare measures, bonuses and incentives
 Disciplinary procedures and industrial disputes
Behaviorally, as champion of workers' rights, the ministry doesn't differentiate between public
and private enterprises, rather threats both as employers. But it has a legitimate expectation that
public enterprises should be a good example by being "model employers".
F) Ministry of Commerce
This ministry, sometimes called "Ministry of Foreign Trade", is responsible to preside over the
country's foreign commercial transactions, to stabilize the balance of payments position by
promoting exports and controlling imports. Although policies of the ministry of commerce do
not distinguish between the public and private sectors, public enterprises are generally affected
by the ministry's control over:
 Import licensing
 Foreign exchange releases
 Export promotion and quotas
 Tariff protection
In general, Figure-2 simply portrays the various points of contact between the public enterprises
and the government represented by its ministries, and implies the multiplicity of signals coming
to the enterprise from the government agencies in various issues. In other words, a public
enterprise could have relations with one or more of the ministries in addition to the supervising
agency. Each organ has its own stake with public enterprises and demands certain requirements
from its own perspectives. Now, one can be able to see the complex situations that public
enterprises are facing with in terms of responding to this multiplicity of demands, in terms of
interpreting what the government really wants, and in terms of striving to survive in this maze
(confusion). Although relations with such agencies could have their own effects on the success
or failure of public enterprise, the most decisive influence comes from supervising agencies.
Therefore, it would be more important to explain the roles and functions of the supervising
agencies and the aspects of interventions in the affairs of public enterprises.
32
3.2 THE ROLE OF THE SUPERVISORY MINISTRY (AGENCY)
What are supervisory ministries or agencies, and why do we need them vis-à-vis the activities of
public enterprises in the first place? What are the fundamental functions of these agencies? What
are the major areas of supervision? These questions need genuine answers free from any unfair
bias, but with reference to the effectiveness of public enterprises. A supervisory ministry or
agency is a controlling body or as it is sometimes described, a parent ministry. Decisions
involving government interest over public enterprises such as those of financial, personnel,
operational, and procedural policies are expressed through the supervisory agency. This ministry
or agency is commonly called upon to give formal approval to certain kinds of decisions such as
new investments or expansion projects, prices, dividends, personnel recruitments, wages and
salaries, labor relations, and so on.
The administrative or supervisory ministry has the responsibility for monitoring and coordinating
the public enterprise attached to it. A supervisory ministry or agency is expected to make
decisions, not only to express the government's supervisory responsibility but also to assure the
consonance and harmony of the public enterprise's activities with those of the development plans
and the overall public purpose for which it is created. Two models of the supervisory ministry
have emerged in the developing world (Praxy Fernandes 1986:41). Some countries have
attempted to establish one or a single ministry to supervise the functions of all public enterprises
like The Ministry of Production in Pakistan, The Ministry of Public Enterprises in Malaysia, The
Ministry of Industry in Egypt, and Public Enterprises' Controlling Authority in Ethiopia.
However, this model is criticized as being impractical or ineffective to place all public enterprise
under the control of a single agency.
The other model, which is more commonly found, is to entrust the affairs of public enterprises to
different technical or sectoral ministries. This pattern has three major advantages:
(i) First, it is managerially containable. The number of enterprises to be supervised is

small enough to satisfy the management concept of "span of control"
(ii) Since the ministries are "technical", they are familiar with the technological, production,
marketing and management problems of the enterprises they control.
33
(iii) Since the ministry sets government policy for the sector, it is in a position to guide
far more effectively the corporate strategies of the enterprises under its control.
The effectiveness of the system will of course depend on the nature of the relationship between
the supervisory ministry and the enterprise, the demarcation of the roles of the two parties, the
nature and content of the inter-linkage, and above all, the ability of the supervisory ministry to
function as the enterprises' intermediary with the rest of the system. The following are generally
recommended as the guiding principles for ministerial powers in relation to public enterprises
(Mathur, 1999:83-85):
(i) The authority of the minister or officer of the government who exercises power over public
enterprises should be clearly defined. It is generally agreed that day-to-day operations
should be protected against political interrogations and interferences.
(ii) Ministers should be concerned with securing that enterprises operate in the public interest.
(iii) Ministers should seek to ensure the efficiency of enterprises by exercising a board
oversight of them, but should not involve in management.
(iv) The methods of ministerial control or supervision should be mainly strategic rather than
tactical; the industries can have clear idea of what the government requires of them if they
are not subject to frequent tactical control. In other words, the supervisory ministry should
be responsible for the formulation of policy and the management should be for the
implementation of that policy, and the interaction between them should be to facilitate the
overall governmental supervision without impairing the efficiency of the operations of an
enterprise and promote decentralized decision-making within the enterprise.
(v) The proper and fruitful supervisory control depends on the attitude and ability of both
ministers and members of the board.
These being the general guiding principles, a straightforward proposition regarding the roles and
functions of the supervisory ministry is the management of government's reserved powers in
decision-making. The range of duties or principal functions, the scope of intervention and the
points of contact of the supervisory ministry with the public enterprise would, among others,
normally include:
(i) Sponsoring the creation of a public enterprise through new investment proposals
34
(ii) Screening and piloting investment proposals for expansion and diversification made by an
existing public enterprise, foreign exchange expenditure, borrowing, and distribution of
profits
(iii) Approving major foreign technology contracts and joint venture proposals
(iv) Appointing the board of directors and the chief executive
(v) Approving the salary and wage structure and the system of recruitment
(vi) Defining the corporate objectives, screening and approving corporate plans of the
enterprise, ratifying the deployment of surpluses
(vii) Conveying directives on matters of public policy or public interest
(viii) Approving, in sensitive cases and particularly in monopoly situations, pricing policy
(ix) Monitoring periodically the progress of enterprises
The execution of some of these functions may be beyond the competence and authority of the
supervisory ministry and may involve the jurisdiction of other ministries or government
agencies. In this case, the supervisory ministry is called upon to play an intermediary role.
Managers of public enterprises are well aware of the limitations and competence problems of
supervisory agencies. Unfortunately, even the theoretical concept of the autonomy of public
enterprises doesn't seem to have been followed in spirit in developing countries. The supervising
or controlling agency normally issues numerous instructions on matters, which could be
considered "unimportant" or even "trivial" and should legitimately fall within the domain of the
enterprise's decision-making jurisdictions.
3.3 AREAS OF GOVERNMENT INTERVENTION
Despite differences in the magnitude of the relationship between public enterprises and the
government from one environment to another, the hardcore of government's involvement will be
found in the following rightful areas or matters (Fernandes, 1986:23-29).
Figure-3 Basic Model of Government-Public Enterprise relations
Defining Corporate Objectives
35
Approval of Investments
Approval of corporate Plans
Nomination of Board of directors
Appointment of Chief Executive
Directives on Security Matters
GOVERNMENT Directives on Public Interest
PUBLIC
Obtaining Information, monitoring and Audit
ENTERPRISE
Performance evaluation
Wages and Salary Policies
Pricing and Marketing Policies
The above model of relationship can be further explained as the government has the right and
prerogative to:
 Area-1: define the "mission" of the enterprise and to specify its goals and objectives
 Area-2; determine and approve the enterprise's investment plans, decisions, and major
capital expenditures
 Area-3: approve, endorse and sanction the corporate plans of the enterprise
 Area-4: nominate the board of directors of the enterprise
 Area-5: appoint the chief executive of the enterprise
 Area-6: issue directives to the enterprise on matters relating to the national security
 Area-7: issue instructions to the enterprise on matters affecting the public interest
 Area-8: being fully informed about the activities of the enterprise, monitor and review its
progress and audit its transactions and accounts
 Area-9: evaluate the performance of the enterprise.
Each area of government intervention is discussed separately as follows.
(i) Defining Corporate Objectives
The starting point of the relationship between the government and the enterprise lies in the
formulation of goals. An agreement on objectives is multi-purpose in character. For example:
36
 It indicates to the enterprise why it has been established and what

it is expected to achieve
 It provides a sense of direction and a base on which corporate
strategies and operational approaches can be designed
 It gives notice to the enterprise about the focus of public control
 It provides yardsticks for the evaluation of performances
(ii) Approval of Investments
Since the funds required for investments of public enterprises come from the public exchequer
(treasury), it is reasonable to assume that the government will determine how and where the
investment will be made. Indeed many of the investment decisions are taken even before the
enterprise comes into existence. The prudence (carefulness) with which public investments are
made has a determining influence on the subsequent viability and performance of public
enterprises. The failure of many public enterprises is often traceable to a disastrous investment
decisions, and the trouble with such mistakes is that they are not remediable in most cases.
The existing practices of developing countries reveal that while some of them tend to make
public investment decisions unwisely without critically and thoughtfully assessing the existing
reality and the possible consequences, many others do so such decisions astutely, practice high
degree of sophistication in investment planning, prioritization and analysis. Figure-4 depicts the
sequences of processes, which the investment cycle demands. In general, government approval
of investments on public enterprises follows rigorous application of the normative investment
cycle portrayed in Fuger-4.
Figure-4: The Investment Cycle

National Development
Feedback and Development Strategies
Review Goals
Choice of
Project
Instruments
Implementation
37
Screening and Investment

Approval Criteria
Feasibility Mobilization
Studies and of Resources
Project Reports
(iii) Approval of corporate Plans
The practice of corporate planning has been gaining ground among large public enterprises
public enterprises in many countries. A corporate plan starts on the premise that it is made for an
organization, which has a corporate status and personality. It implies that the enterprise, though
linked to the state, has a life of its own. Generally, two propositions can be made in this regard.
(i) Corporate planning provides an instrument for promoting the effectiveness and efficiency
of public enterprises and upgrading their performance levels
(ii) Corporate planning is the most pragmatic way of establishing a bridge between the
government and the enterprise
Corporate planning sometimes described as strategic planning, is viewed as a prime instrument

for the survival, growth and profitability of mainly large enterprises. It has been designed for
public enterprises in the business environment of highly industrialized countries, not in
developing countries and expressly for the private sector. The fundamental approaches of
corporate planning can be effectively transferred to the public sector. Corporate strategies
constitute a bridge between enterprise goals and performance. The discipline of corporate
planning involves the following elements:
(i) Defining the mission: seeking for answers for the classical questions such as "what
business are we in?" and "what do we want to achieve in the long-run?"
(ii) Designing long-term strategies: in developing a cohesive corporate strategy, we need to

determine first the life cycle of the activity and the timeframe of our thinking. When we make
investments and take decisions with long-term implications, we make assumptions about prices,
markets, technology, world trade, and government policies. The timeframe of corporate plans is
related to the nature of the investments and their natural life cycle. Within the timeframe, the
enterprise has to develop the political and economic scenarios.
38
(iii) Developing functional plans: for practical purposes corporate strategies are designed on
a functional basis with different perspectives in mind. A series of plans are thus created in the
main functional areas including investment, finance, production, marketing, materials and human
resources, each of which is critical to the enterprise. For example, investment planning is the
heart of corporate planning that determines the profile of the enterprise, while financial plan is a
corporate goal to produce financial surpluses and provide a return on invested capital. To achieve
this desirable result, the enterprise would need to look into the elements such as capital structure,
planned levels of profitability, pricing policy, cost-effectiveness, and utilization of surplus when
making financial planning.
(iv) Dealing with inter-linkages: the enterprise has relationships and inter-linkages with
external organizations, agencies and interests although corporate plan is mainly internal to the
enterprise. Indeed the health, success, and image of the enterprise will largely depend on the
optimization of these external relationships, managing the inter-linkages.
(v) Articulating the performance evaluation criteria: perhaps one of the unresolved
questions in the organization and management of public enterprises is how to fairly evaluate their
performances. Therefore, the widely acceptable proposition is that the designing of corporate
plans is the most effective way of resolving the question of performance evaluation of public
enterprises. Embodied in the plan are the needs to develop evaluation criteria. However,
performance evaluation is so complex, which entails the need to analyze them in detail in a
separate operational exercise.
(iv) Nomination of Board of Directors
As it will be discussed in Chapter Five in detail, nomination or appointment of board members of

public enterprises is the prerogative of the government as one of the nine intervention areas.
Perhaps, the whole issue of public enterprises' success will largely depend on the manner of the
appointment of the board of directors. Studies show that the composition of boards of public
enterprises in developing countries reflects that political compulsion outweighs managerial
necessities. The success or failure of a public enterprise may rest on the strengths or weaknesses
of the board of directors. In other words, the commitment and capacity of the board of directors
will determine principally the fate of public enterprises.
39
(v) Appointment of Chief Executive
As important as, and perhaps even more critical than selection of board members, is the
appointment of the chief executive of the enterprise. For this reason, the government is very
curious designating individuals to the post of chief executive. If the prerogative of the
government in appointing the chief executive is not exercised with due care and professional
integrity, the sad state of affairs in public enterprises will be imminent.
(vi) Directives on Security Matters
Directives on security matters are one of the nine areas of reserved for government decision-
making; the right to issue directives on matters relating to national security and the right to issue
instructions on matters affecting public interest is unquestionably left to the government.
Government may instruct a public enterprise, for example, to produce certain goods vital to the
country's security. Directives or instructions could take in both formal and informal or unofficial
manner. For example, directive to a public enterprise may come from the government not to
retrench surplus staff, not to fire a particular individual, to purchase machinery from a particular
country, to make contract with a particular company, and so on. As a whole,
(vii) Directives on Public Interest
The most ambiguous area is the right to issue directives on matters of public interest. The term
"public interest" is so elastic that in practice it could mean anything, enabling the government to
intervene continuously and comprehensively in the affairs of public enterprises. No matter,
however, how much directives in the name of public interest might be unnecessarily flexible;
government does it often and it still affects public enterprises significantly.
(viii) Obtaining Information, Monitoring and Audit
The persistent cry of public enterprises' managers that they are unable to function because of
constant inquisitions and interrogations by the government may perhaps point to a situation of
over-control and inadequate managerial autonomy. Whatever managers of public enterprises
might say, the government needs to obtain adequate information from them, monitors their
40
operations and performance, and undertakes different types of audits upon them such as statutory
audit, transaction audit, propriety audit, and performance audit.
(ix) Performance Evaluation
Government always wants to make sure that public enterprises are doing right by evaluating their
performances, and this is in fact the ultimate concern that lies at the very objectives and motives
of creating them. As it will be discussed in Chapter Seven latter, performance evaluation of
public enterprises is another problematic area of government's involvement. In other words,
although governments do have common practices in terms of evaluating the performance of
public enterprises, the problem of how to assess such performances seems to defy solutions.
There are very few countries, which set yardsticks by which performance of public enterprises
would be measured, develop criteria of evaluation, and employ methodologies and mechanisms.
Hence, public enterprises are hemmed in by a multiplicity of judgments. Furthermore, regardless
of the universal interest and practice of the government in evaluating the performance of public
enterprises, there can be little hope of improving their performances unless there is an agreement
on what constitutes "good performance".
3.4 MAJOR ISSUES IN GOVERNMENT AND PUBLIC

ENTERPRISE RELATIONSHIPS
The core issues, which concern the government and a public enterprise may include policy,
financial and personnel management issues. These issues are determinant in many respects for
which reasons require government decisions and complete understanding on the public
enterprise's side.
A) Policy Issues
There are, for example, policy issues of "purpose", which should be decided by the government
for each of its enterprise and which then become the basis for evaluation. There are also other
important policy issues with respect to the conditions and methods of the operations of public
enterprises, which influence their performances as well as issues of setting standards by which it
41
should be judged. Policy determinations about privileges or advantages not available to

comparable private enterprises affect the operation of a public enterprise and are factors in
judging its relative success.
Moreover, a typical policy issue is that, governments impose special obligations upon public
enterprises to prescribe standards of operation, which have implications on their efficiency and
effectiveness measured in terms of profitability as practiced by the private sector, although those
standards are perhaps well justified in public purpose. The enterprise might be expected for
example to serve as a model employer by providing comparatively high standard housing,
healthcare, educational facilities and services to its employees. It might be also required to give
priority of employment for selected groups, to establish worker's unions having weights in
management and program decisions, to follow ponderous procedures in the termination of
employment, to operate plants and branches at sites not feasible from the production and
distribution points of views, etc.
Often, these policy issues do affect the productivity and efficiency of public enterprises, but need
to be clearly indicated in government decisions and communicated to the respective enterprises.
It is important that these major policy issues of public enterprise purpose and operating method
be resolved because they are crucial to the efficiency and effectiveness of each enterprise and are
basic to the judgment of relative success. It is imperative that the establishing instrument
(charter) be clear as to the purposes and operating conditions of enterprises. However, any
founding charter must necessarily be relatively general in its terms so as to allow desirable
flexibility in the conduct of designated activities, which permit adjustment to changing
circumstances as time goes on. Unfortunately, it has been evidently seen that the bureaucratic
and political involvement in the affairs of public enterprises is not limited to the major policy
issues but extends to authorized program activities of management. For the successful conduct of
public enterprises, therefore, the sound resolution of major management issues (financial and
personnel management) are in the same category of importance as the solution of major program
policy issues.
B) Financial Management Issues
42
One of the fundamental needs of public enterprises is the issue of financial management, access
to funds and freedom to expend, as they are required in operation, maintenance, expansion and
investment. The annual appropriation procedures and the tight financial controls of the
traditional bureaucracy make it virtually incapable of performing effectively in the business
world. It is, therefore, important that public enterprises be authorized to use their revenues and to
borrow money from different sources, which is a major decision issue on the part of the
government. Nevertheless, public enterprises cannot be left out of government sight and control
in absolute terms. Even for those enterprises, which earn profit it would be reasonable for the
government to put a limit on both borrowing and the use of revenues and on the size of the debt,
either by amount or by purpose or both as long as financial capability to discharge the
enterprise's basic responsibility is preserves. Limits can also be placed on public corporations in
terms of length of amortization and rate of new investment, as distinct from normal operations,
maintenance, and replacement.
In a large number of cases, public enterprises operate at loss because they are required to
perform services, which are uneconomic even though in the public interest, or to sell products or
provide services at a price below their cost. In such circumstances government subsidies are
inevitable; the government must make periodic appropriations or grants to sustain the enterprise.
These processes involve the treasury/budget and planning agencies because of their concerns
with the size and justifications of subsidies, though they are not directly related to the operations
of public enterprises.
The underlying assumption of public enterprises is that they will use money effectively and
efficiently to achieve stated purposes provided that they have autonomy of financial
management. The realization of this assumption requires the kind of accounting system that will
show not only cash expenditures but also allowances for interest, depreciation, and all other
elements of cost assignable to each function. The kind of accounting system, which is not usually
found in traditional bureaucracies but in public enterprises, is often called "cost" or
"management" accounting. Public enterprises are, therefore, usually exempted from the
requirements of government accounting but are required to install a commercial type of system.
43
In addition, public enterprises are most commonly exempted from the regular government audit
system including pre-audit.
All these reflect financial management issues in public enterprises, which in most cases require
government blessing or decision. Generally, adoption of an appropriate financial management
system is a very critical decisional issue and will largely determine the success or failure of
public enterprises. In other words, good financial management system including optimal use of
financial autonomy on the part of enterprises and appropriate level of control on the part of the
government, adoption of relevant accounting and audit systems are critical financial management
issues.
C) Personnel Management Issues
Control of its own personnel system is another distinguishing administrative feature of public
enterprises from other customary government agencies, which goes along with the relative
financial independence. The primary purpose or reason of putting a public enterprise in charge of
its own personnel; i.e. to give it the right to hire and fire, promote and demote, and to exercises
all other personnel management/administration activities is to give it the capacity to perform the
functions for which it is to be held accountable. There are additional reasons for granting
autonomy in personnel matters to public enterprises. One of such reasons is to permit the
establishment of salary scales and other conditions of employment competitive to the scale and
amenities in private industries, and higher than those usually prevailing in government services.
Such conditions are particularly relevant because public enterprises typically require specialized
personnel, industrial engineers, and business managers, which are not often found in significant
numbers in traditional government employment.
In practice, however, only few public enterprises have been able to sustain their independence in
personnel matters. The public enterprise sector, by and large in developing countries, has not
acted as vigorously, imaginatively, or effectively as it might have done in setting up personnel
systems justifiable by public standards. The main reasons for most of them to fail in exercising
autonomy in personnel matters are abuses, which are both internal and external such as:
44
 Internal weakness to create their own distinctive systems having personnel standards and
procedures, not only sufficient to their needs but also that can be explained and justified to
the skeptical public,
 An apparently inevitable external bureaucratic and political pressures,
 Poor judgment in making appointments,
 Too permissive supervision with respect to assignments and tenures
Such abuses in the personnel systems of public enterprises have brought about external
intervention in their personnel policies and actions. These external interventions in personnel
autonomy are a threat for enterprises from the beginning. For this reason, some countries have
made to establish central industrial management pools to serve the public enterprise sector. It is
common now to find countries setting up "public enterprise commissions", comparable to
"public service commission" of the civil service, to regulate the personnel practice of public
enterprises, and even to pass upon personnel appointments.
Another kind of government intrusion into the personnel independence of its public enterprises is
the imposition upon them certain standards or conditions of employment, such as provision of
housing and health services, allowing the participation of workers' councils. These impositions
have social, doctrinal, political, and exemplary objectives, which all have a direct bearing not
only in the autonomy but also in the performance of public enterprises as discussed in Chapter
seven in details. In general, those three major issues discussed above represent the points of
relationships of the public enterprise with a number of government agencies, which distinguish
their management characteristics.
3.5 ACCOUNTABILITY AND CONTROL OF PUBLIC ENTERPRISES
A distinction has to be made between control and accountability in order to understand well
what they imply in the context of public enterprises management and operation. Accountability
and control in public enterprises have conceptual and practical differences and have their own
purposes, and they involve a number of issues that will be discussed as follows.
45
A) CONTROL
"Control" is an active function, a purposeful activity that involve directing, restraining, and
stimulating a person or an organization to a certain action or end (Prakash et al 1997:367). In
short, control over management encompasses certain activities undertaken with a view of
compelling to conform to pre-arranged plans. It is thus, the measurement and correction of
activities of subordinates to ensure the accomplishment of plans. Since one element of the
"public dimension" of a public enterprise, which was discussed in chapter two (2.2) earlier, is
"public control", the government exercises control over its entities. The question that needs clear
answer is that, how tight or loose should be the degree or extent of control? Too much control
will reduce public enterprises to the status of a government department, defeating the very
purpose of for which they were created, and too little control will place the state-owned
industries outside the democratic regime.
The United Nations identified the following as the purposes of control over public enterprises.
 Promotion of efficiency: Control is geared towards promoting and maximizing the
efficiency of public enterprises.
 Implementation of government policies and targets: It enables the government to
ascertain that its development policies and targets as regards to output, profit or rewards
have been achieved or implemented.
 To ensure financial responsibility: To ensure whether scarce public funds have been
utilized in accordance with the intended purpose and in the best interest of the enterprise
and the public. Thus control facilitates accountability of management to some higher
public authority so that the misuse of funds may be precluded and appeased, if not totally
avoided.
 To ensure achievement of social objectives: On top of the commercial objectives, public
enterprises are expected to achieve or facilitate achievement of social goals as defined by
the government. Hence, control enables the government to ensure the achievement of
social objectives assigned to public enterprises.
 To restrain undue power of management: Most of the public enterprises are big both
physically and financially. Consequently, mangers in the public sector have more powers
46
and influence in their respective organizations. Thus, if uncontrolled, they may misuse
such power to unnecessarily advance their personal interests.
 To take corrective measures before things get worse: effective control enables to take
an up-to-date corrective measures before mistakes could cause an irreversible or adverse
effects in the operation of public enterprises.
There are various agencies that are empowered to exercise control over the public enterprises.
Their nature, composition and functions differ from country to country on account of political
and ideological orientations. Besides, the extent of power vested in each agency also differs
substantially by virtue of political and ideological differences and legal tradition prevailing in
different countries. Therefore, there is no uniformity as regards to the ways of exercising such
controls. Nevertheless, the international experiences suggest the following as the common and
main agencies of control over public enterprises in different aspects.
(i) Parliament: Basically, in any democratic society, the function of control and
ensuring the accountability of public enterprises has been assigned to parliament, which is the
legal representative of the public. The parliament uses different methods so as to exercise control
over public enterprises such as: parliamentary questions, discussions, debates regarding related
matters, and through parliamentary committee for in-depth examination of the working of the
public enterprises.
(II) Minister: The minister refers to the supervisory body whose roles and areas of interventions
on the affairs of public enterprises are discussed in Chapter Four (Section 4.2) below. This is the
common way of controlling the operation of public enterprises. In general, a minister can
exercise control through a number of combination methods
(III) Auditor General: In many countries audit control is vested in an auditor general. The
power of auditor general varies from country to country depending on the legal frameworks.
Basically, the audit control by Auditor-General covers the following: Audit against provision of
funds, audit against regularity, audit against sanctions to expenditure, audit against propriety,
efficiency Audit
(vi) Special agencies of control: Countries may form special agencies to perform control over
their enterprises, directly or indirectly. These special agencies could be consumers' councils,
47
advisory committees, public relation, press, published information, and experts' committees and
review etc.
B) Accountability
"Accountability" means to give an account of one's action and to report on the achievements and
failures together with explanations on their declared objectives. According to Dele Olowu
(1993), accountability is the requirement that those who hold public trust should account for the
use of that trust to citizens or their representatives. Accountability signifies the superiority of the
public desire (choice) over private interests, and indicates a state of being obliged to render full
and truthful reports to a superior level of authority concerning one's activities and actions. In
other words, accountability in the case of our subject is the provision of genuine reports of
actions to the people or legally authorized body by public enterprises. Finally, accountability
suggests answerability and requires clarity about on what matters and for whom an organization
is supposed to be accountable. Therefore, for accountability to be effective there must be an
enforcing mechanism, to have a watchdog organization responsible for carrying out conformance
and performance auditing.
The autonomy given, or suggested to be given as a matter of principle, to public enterprises

immediately raises the question of accountability. Since a public enterprise is established as an
instrument to execute government policy and program, it must be accountable and thus subject to
some kind of monitoring and some degree of control. It is the tug of war between the degree of
autonomy on the one hand, and accountability and degree of control or supervision on the other
that creates the major management issues regarding the public enterprise sector. The pulling and
hauling in this conflict between autonomy and accountability produces a variety of solutions in
the balance of management. Report requirement from public enterprises is one aspect of
exercising accountability. A complete report provides the parliament and the public with
information to use their political judgments about the success and relative value of the enterprise.
Such reports avoid the suspicion aroused by the mystery of secrecy and silence.
It is generally recognized that when the government gives power to a public enterprise to operate
outside its minute legislative, financial and executive control, it should have certain safeguards.
48
A study conducted by the United Nations recommends the following guiding principles of
government and public enterprise regarding the practice of control and accountability:
(i) The field of activity and functions of public corporations should be clearly defined for any
act of acceptable level of control and accountability to exist
(ii) The government should retain powers of supervision, including the right to audit, inspect
and criticize, the right to appoint, and with good reasons, remove directors
(iii) Government's power should be broad but relevant to its function; though informality
has its own dangers, the nature of government control need not be wholly formal and
informal relationship cannot be completely avoided and is even beneficial
(iv) The enterprise should be held strictly accountable for their performance in relation to the
goals set by the government, and there should be an appropriate mechanism for evaluation
of their performance. In view of this, enterprises are required to make complete annual
reports accessible to the government, the press and the public
CHAPTER FOUR
4. THE STRUCURE AND ROLE OF BORDS
The principal governing authority of an enterprise is its board of directors. The board is the top
management organ responsible for implementing the objectives of an enterprise. One aspect of
the managerial and operational autonomy of a public enterprise is its insulation from political
and bureaucratic interference in its day-to-day activities and administration. The governing board
is the body typically entrusted with the function of protecting its enterprise from such
interference, as well as with the function of representing the government in the management of
that enterprise.
Governing boards differ in their ability both to preserve the integrity of the enterprise and to give
administrative leadership according to the length and conditions of appointment. They do vary
widely in their structure, appointment/selection, character, role, powers and responsibilities.
Boards also have numerous problems in many respects like: uncertainty of tenure, inadequacy in
49
power and authority definition, lack of confidence and innovativeness. As a result of these,
boards may find themselves helpless, sandwiched between the political power of the state and
the managerial power of the enterprise's professionals.
For these and many other reasons, they remain weak and inefficient in most instances. This in
turn has an implication and reflection in the performance of public enterprises. The principal
proposition is that effective boards make effective enterprises and weak boards will produce
weak enterprises. In general, boards are in effect trustees, and the effectiveness with which the
trust is fulfilled will depend on the standing and credibility of the board vis-à-vis the professional
managers and the confidence placed in it by the government.
4.1 TYPES AND STRUCTURES OF THE BOARD OF DIRECTORS
The first issue, which needs careful examination is the type of board to be set up- its structure
and composition. There are five possible options in the setup of a board; namely no board, a
wholly external board, a wholly internal board, a two-tier board, and a composite board.
A) No Board
In this option, the top management of the enterprise is entrusted to a single individual. Although
this option may suit more to the needs of a parastatal, which has a regulatory or promotional
function of a non-public enterprise character, there are some instances of public enterprises
functioning under such arrangement. Prima facie, this option may appear attractive. Its
advantages are:
 It allows for speedy decisions, unhindered by laborious discussions and delays involved in
board meetings,
 It pinpoints responsibility and eases accountability
This option has also several disadvantages such as:
 It has the danger of placing too much authority and responsibility in one person
 It leaves the fate of the enterprise entirely dependent in that person's competence and
integrity
 It doesn't allow for participation of top management
50
 It makes no provisions for the leavening influence of outside opinion

 It makes the sole controller vulnerable to illegitimate pressure
Therefore, this option doesn't commend itself as a long-term arrangement. It can at best be
employed in a transitional basis.
B) A Wholly External Board
Many developing countries have adopted this pattern. Under this pattern, all members of the
board, except the managing director of the enterprise, are "outsiders". They are not employees of
the enterprise, nor are they directly responsible for specific management functions. It has some
obvious plus points or advantages such as:
 It provides for the nomination of external professionals with mature experiences who can
provide a "second option" and who can guide professional managers within the enterprise
 It allows for the nomination of interest groups such as consumer councils, trade unions,
environmental groups and academics
 It provides rooms for representatives of relevant government ministries and agencies
 Such external groups are unbiased by day to day problems of management, hence provides
an objective assessment of performance
The major drawbacks of this model are:
 The board members bear no direct responsibility for management
 It is possible that board members can be "manipulated" by an aggressive and skilful
chief executive
 Even worse is that the model excludes the top management from the highest policy-
making body
 It doesn't consequently provide for participative management and cadre building
C) A Wholly Internal Board
This is the obverse situation - the setting up of a board composed entirely of fulltime directors,
who are holding senior staff positions in the enterprise. Generally, they include the major
department heads such as the finance, production, marketing, and personnel managers. The chief
51
executive who holds the posts of chairperson and managing director preside. The advantages of
this option (model) are:
 It ensures professional competence

 It establishes a direct linkage between authority and responsibility
 It provides room for participative management
 It provides an atmosphere of incentive, involvement and motivation
 It opens up opportunities for senior managers to reach the top in terms of management and
career development and planning. It creates, for example, a pool of top management
capability from which the chief executive of public enterprises can be drawn
The major drawbacks of this option are:

 It is too "inbred", and doesn't provide exposure to a second opinion
 It makes no room for representation of relevant interest groups
 It shuts out the participation of the concerned government agencies
This pattern is seldom applied in the public sector and it may not be desirable, in the long run, to
encourage its emergence.
D )A Two-Tier Board
This model is an attempt to combine option "B" and "C" above. It has got a growing popularity
in many countries like Germany and USA. In effect two boards are set up:
(1) At the higher policy-making level, a supervisory board composed of outsiders
(2) At the operational level, a management board composed of the enterprise managers
The chief executive presides over the management board and is a member of the supervisory
board, thus providing a link between the two bodies. This option is attractive in that it has
advantages such s:
 It combines the advantages of options "B" and "C" and avoids the drawbacks.
 It provides a balance between participative management and the rigors of external control
 It has a particular validity in the case of public corporations servicing the general public
such as public transportation, electricity, and water supply systems
Problems do, however, arise when this model is put into operation such as:
52
 Difficulty in the demarcation of the authority and responsibility between the two boards
 The filtration of decisions through two levels might also create bureaucratic delays
 In practice, it is likely that one of the boards will "usurp" power making the other board
only a nominal body
 The possibility of the management board will run the enterprise, converting the
supervisory board into a sort of advisory or auditing council
E) A composite Board
This pattern would appear to provide most of the answers and perhaps for this reason it is being
increasingly adopted in many developing countries. The board is composed of a judicious blend
of "insiders" and "outsiders". From within the enterprise, the board includes the chief executive
and the senior managers controlling various operations. From the outside, the board includes
experts chosen for their professional experience and familiarity with the problems of the
enterprise, selected representatives of interest groups and concerned government ministries or
agencies. This model has all the advantages of option "D" with the additional merit that it secures
cohesion and unity of command.
4.2 SELECTION AND TENURE OF BOARD MEMBERS
Once the structure of the board is decided, the government will be faced with the question of
selecting appropriate board members. In the case of the internal members of the board, no
particular problem arises since they secure their seats in an ex-officio capacity as heads of
various management functions in the enterprise. The board of directors of a public enterprise is
nominated by the government as part of those areas proposed for state intervention in the affairs
of public enterprises. The manner in which this prerogative is exercised by the sate could well
determine the health and performance of the enterprise. For example, as studies reveal in
developing countries, political compulsion often outweigh managerial necessities in the
assignment of board members to an enterprise.
Many boards, perhaps most of them, are appointed by the minister of the administrative ministry,
and include some ex-officio members such as representatives of relevant bureaus. Boards are
typically composed of government officials, at least in the majority. Sometimes the ministers
53
themselves are also members of the governing boards of major public enterprises such as those,
which are in the holding companies of large number of development operations. Moreover, in
some countries like Zambia and South Korea, the presidents themselves were the board chairmen
of the paramount public enterprises. Governments need to be careful in deciding on the status of
their nominees. The real issue of selectivity arises in the nomination of non-officials. It would be
wise to keep the following guidelines in mind:
 They must have an awareness of government policies and development strategies,

 They must have adequate familiarity with the problems of the enterprise,
 Their credibility as professional experts must be recognized and respected by the in-
house professionals,
 They should have the time and interest to devote to regular attendance at and preparation
for board meetings,
 There should be no conflict of interest,
Some countries are building data banks of suitable candidates for appointment to the board of
public enterprises. The most common available source is the group of retired government
officials and public enterprise managers who have had proven success during their careers. With
regard to the their tenures, their members may serve sometimes full-time and in other cases part-
time, they sometimes tenures of specified time and in other instances may have none at all,
serving at will. The life of the board is entirely at the will of the government, a prerogative
derived from the right to appoint. Available evidences appear to reveal a high state of fluidity
and uncertainty in the tenure of office. There is no universal rule concerning the optimum
tenure. There are two considerations to bear in mind:
 The tenure should be long enough to provide the board members adequate time and
opportunity to familiarize themselves with the problems of the enterprise and to develop
and implement medium-term strategies,
 The tenure should not be so long as to create a state of stagnation of ideas or vested
interest. Fresh blood brings in fresh idea.
These two factors or considerations seem to point the tenure of the board members to be a
minimum of four and maximum of six years
54
4.3 POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS
Finally, one needs to determine the precise role of the board and the range of its authority. The
board's function may be generally said to be "trusteeship" and "entrepreneurial" as distinguished
from the "executive". The board acts as a trustee for efficient operation of the enterprise. The
entrepreneurial role of the board implies innovation in a constantly changing environment. Thus,
the most important function of the board is risk assessment and risk bearing, and an enterprise
cannot be successful if entrepreneurial skill doesn't provide innovative efficiency (Mathur,
1999:95). Theoretically, all powers of the enterprise, subject to the reservations of authority
made by the government would vest in the board, while in practice this has been little possible.
The board has interface relationships with the government for what needs government approval
and with the operating management for what needs board approval. In other words, the board's
function is to support the enterprise for which it is responsible and to determine its policy within
the limits of the controlling statute and guidelines from government. It would be impractical to
draw up a standard list of items to be reserved for board decisions and items to be delegated to
the management. However some examples will clarify the point:
 Enterprises in sensitive areas exposed to public opinion such as utilities, public transport,
water supply, electricity, telephones will require strong board guidance,
 Labor intensive enterprises may require greater board attention than capital intensive
enterprises,
 Monopolies need more intensive supervision than competitive enterprises, since the
market takes over many of the board's responsibilities in the latter case,
 The degree of board control over the managers is likely to be in direct control proportion
to the degree of government control over the enterprise.
Given these variables, which give rise to different patterns of control, a list of common items that
would normally come to the board for decision are suggested as follows (Fernandes, 1986:129-
130):
55
(1) All matters, which constitute the statutory responsibilities of the board of directors specified
in the enactment creating the enterprise,
(2) All matters, which require government approval,
(3) The annual capital and operating budget,
(4) The annual financial statements - balance sheet and profit and loss accounts,
(5) Audit reports
(6) The corporate plan
(7) Investment proposals above prescribed financial limits,
(8) Proposals for expansion and diversification,
(9) Raising of capital and long-term borrowing,
(10) Pricing policy,
(11) Utilization of financial surplus,
(12) Appointments of senior managers
(13) Wages and salary structure
(14) Recruitment and promotion regulations,
(15) Incentive schemes and benefit packages
The above listed decisional mandates of the board could be simply categorized under four groups
of functions, Namely:
(i) Establishment of basic policies and general strategy of operation

(ii) Decision on major financial matters
(iii) Selection of key personnel and approval of wage and salary structure as well as other
benefits
(iv) Monitoring performance and passing judgment on them
These being the general and detail functions of the board, all other powers should be delegated to
the chief executive and operating managers.
56
CHAPTER FIVE
5. COMPARISON OF PUBLIC AND PRIVATE ENTERPRISES

MANAGEMENT
The coexistence of public and private enterprises is evident in countries that adopt a "mixed
economy" pattern with quite visible comparative roles in the national economy. Though mixed
economy pattern involves policy questions, which can be decided at the country level, the
comparative roles of public and private enterprises may be defined by law or public policy in
some countries, while in others may evolve out of convention. In addition, the two sectors are
viewed differently in various countries as competitors and collaborators. Whichever form is the
57
case, they coexist by maintaining meaningful relationships in various spheres of operations.

More significantly, public and private enterprises differ in many respects such as in their
respective purposes, structures, orientations, scopes, responsibilities and so forth.
5.1 DIFFERENCES AND SIMILARITIES
The major characteristic of public enterprise that distinguishes it from a private firm is the
multidimensionality of its objectives. The objectives of public enterprises are always complex
and even conflicting as compared to private sector enterprises. Criteria of performance are
correspondingly more complex and less clear-cut in the case of public enterprises. They have
special responsibilities to the government than the private ones. They are expected to set
standards in all their activities.
A far-reaching distinguishing characteristic of a public enterprise from that of a private one is the
managerial environment, in that a public enterprise is not a self-contained decision-making
entity. In a private enterprise, all management decisions are taken internally within the firm by
its own board of directors. Subject to the state's laws and regulations in general terms, there is no
authority outside the firm to make decisions in the case of private enterprises. This is not the case
in the public enterprise. Critical management decisions, particularly those of a strategic kind, are
not within the competence of the enterprise, and rather are taken at the government level.
Whatever may be pronounced about the "autonomy" of the enterprise, certain decisions will be
taken, and by their very nature, must be taken by the government in its capacity as the owner or
shareholder (Fernandes, 1986:4-5).
Public and private enterprises also vary in their investment considerations; i.e. private
entrepreneurs invest their funds in ventures only where there will be maximum possible gains in
terms of financial returns, while investment in the public sector takes other considerations in
addition to financial profitability. Hence, the performance of private enterprises will be measured
purely on financial returns, while that of a public enterprise will include the achievement of
social goals in addition to their economic returns or profitability. Generally, public and private
enterprises differ at many points-vary in form and purposes, which can simply be summarized in
terms of the following factors:
58
A. The Political environment: public enterprises are generally working with the intent of
implementing political decisions since their very establishment is the result of political decisions
system. Therefore, public enterprises operate within the general framework of the political
system and are much influenced by the system. Activities of public enterprises take place against
the background of public criticism-supposedly to balance conflicting social interests. On the
other hand, private industry is essentially guided by the principles of profit maximization and
doesn't act as an arbitrator or intermediary between conflicting social interests. Moreover, unlike
public enterprises, the private sector is not within the direct political seen or public criticism in
most of its affairs.
B. Social costs: public administration decision-making varies from that of private business in
that where private business is primarily concerned with questions of financial (economic) costs
and benefits, public administration is intimately concerned with the concepts of social costs and
benefits in addition to those of a mere financial nature.
C. Public interest: The performance of public administration is often evaluated by its ability to
operate in a manner so as to maximize and integrate public interest, whereas private business is
evaluated on the basis of profit maximization. In other words, although efficiency is axiom
number one in the value scale of both public and private enterprises, in private business it has to
do with the minimization of cost and maximization of profits, while in the context of public
enterprises the aims are more complex to include other concepts like public service, public
accountability, and social responsibility. Therefore, the multidimensionality of objectives
requires efficiency to be redefined in connection to public enterprises.
As far as similarities of the public and private enterprises are concerned, all of them are
controlled by their owners; i.e. the shareholders. Public enterprises do have a natural similarity of
characteristics with private enterprises in basic patterns of operations, management techniques,
and motives in their "enterprise dimension". The principal governing authority of both public and
private enterprises is their board of directors. In both cases, it is the shareholders who exercise
the right of nominating or appointing board members.
5.2 RELATIONSHIPS AND PARTNERSHIPS
59
The relationships and partnerships between public and private enterprises are revealed in many
ways, but the following aspects may hold interest of paramount importance:
I. As suppliers and purchasers of inputs and of outputs: The outputs of one of these two
sectors may be used as the inputs for the production of the other and the vice versa. This
transaction often takes place both with intentional arrangements and in the normal market
operation. In the economic sense, these transactions are not different from those, which could
exist among public enterprises themselves.
II. Private enterprises as competitors of public enterprises: In some developing countries the
pattern of the mixed economy permits and even encourages the entry of the private and public
enterprises in the same field of endeavor on a competitive basis. This competition creates a rather
interesting relationship, which has two consequences, namely: it acts as a spur to efficiency in
public enterprises, and it provides the possibility of making inter-firm comparisons.
III. Public enterprises as promoters of small-scale private industries or enterprises: One of

the frequently declared national objectives of developing countries is the widening of the
entrepreneurial base and the promotion of the small-scale. In many countries large public
enterprises act as catalysts for the development of small-scale industries in the private sector.
They provide small-scale private enterprises with technical guidance and specifications, install
quality control systems, and development finance.
IV. Other forms of collaborations: There are various other relationships established between
the public and private enterprises such as consultancy, contracting/sub-contracting and joint
ventures:
60
CHAPTER SIX
61
6. ISSUES IN THE PERFORMANCE OF PUBLIC ENTERPRISES
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.
The question that is seemingly naive is that, why do we need to evaluate the performances of
public enterprises? But the answer for this question will determine the style and content of the
evaluation. The traditional view is that government has entrusted certain responsibilities to the
enterprises. The enterprise, therefore, should be held accountable for the discharge of these
responsibilities. A judgment of performance will reveal how well or how poorly the enterprise
has done, which in turn can be used for a variety of purposes such as for reward and punishment
systems. It can signal whether an enterprise deserves additional investment and additional
responsibilities. This traditional approach or view is essentially judgmental in character. Another
functionally positive approach to the need for undertaking performance evaluation is the view as
an ongoing diagnostic instrument of performance improvement. This view is managerial, not
judgmental. The important implication resulting from this approach is that the most effective
evaluation is not by outside agency, but is an internal matter of self-evaluation.
While these are the reasons and approaches for performance evaluation, the questions that follow
again are "what are the criteria used for performance evaluation or appraisal and who are and
how capable are the evaluators to determine the success or failure of a public enterprise?" "What
are the factors that affect the performances of public enterprises?" These are the most imperative
62
and debatable issues that need careful analysis so as to speak something about the performance
of public enterprises.
6.1 CRITERIA AND THE COMPETENCE DEBATES IN THE EVALUATION OF

PERFORMANCES
The problem of how to assess the performance of a public enterprise fairly seems to defy
solutions. There are very few countries, which set the criteria of evaluation, which define the
yardsticks by which the performances of public enterprises could be measured, and which
indicate the methodologies and mechanisms that will be employed. In general there is what is
known as the "evaluation dilemma". Public enterprises are hemmed by a multiplicity of
judgments. If they are profitable, they may be questioned about their social relevance and may
even be asked at whose cost they made their profits. If they make losses, they may be
condemned as parasites on the nations.
The trouble is that everybody sits in judgment on the performance of enterprises and each
interest group has its own expectations, and consequently its own criteria of what good
performance means. This is where public enterprises pay the price for the multidimensionality of
their responsibilities. Yet, whatever the problems may be, government must be clear about the
fact that there can be little hope of improving the performance of public enterprises unless there
is an agreement on what constitutes good performance. Further, whatever criteria are considered
to be valid, they must be known and accepted in advance by both parties; i.e. the government and
the enterprise.
It is obvious that since public enterprises represent government's intervention in the economy,
the first question usually asked about its performance is whether it is making a profit or whether
it is operating at loss, particularly in comparison with private enterprises in the field. It would be
equally important to note here that this question is legitimate only if the market is free and
competitive, and if no constraints or advantages are given to the public enterprise that are not
also given to private enterprises. Such privileges and constraints or obligations may appear also
in the process, although might not be stated in the establishment provision of the enterprise.
Therefore, consideration of these implicitly or explicitly stated situations should be the general
63
and governing criteria upon which particular tools of performance measurement could safely be
based.
As it has been touched upon in the previous chapters, public enterprises are often created with
multi-purposes, which make difficult evaluation of performance in precise terms. Even in those
enterprises for which government has no purpose other than financial success in the form of
profit, questions arise as to the size of profit. Once again the empirical questions that would
come into picture in this connection may include: if the enterprise enjoys a monopoly, what
measures of economic viability will be applied? Should prices and rates be related to investment
and operation costs plus a larger or smaller margin, or should prices be related to the costs of
hypothetical market prices of comparable imported goods, or both?
Hence, the size of the profit of a public enterprise and the form of its measurement is not a fully
satisfactory base of evaluating the success even for those enterprises, which have no other
stipulated goals or intentions than to be economically viable. Nigeria's marketing boards, for
example, buy farm products such as cocoa from farmers at a fixed price low enough to assure a
handsome of profit from sales of the same product on the international market. This profit is not
however generated from the operation in a free and competitive market. Thus, judgment about
the performance and effectiveness of the enterprises should be made from this wider view.
A larger number of enterprises have been given stipulations of purpose and method of operation,
which make evaluation on the basis of overall profit and loss difficult and misleading-even
irrelevant. There are public enterprises, like water, electric, public transport, and other utility
services, whose motives are conceived as public service first and moneymaking operation only
second. Malaysia's Mara Bus Transport Service, for instance, is required to serve routes and to
operate on schedules to serve some special social or development purpose, even though it is
known that the Company will loose money.
Development authorities and development banks are another kind of public enterprises where the
purposes are not making the highest possible profit in comparison with the private enterprise.
The development authority, for example, is often created to assist a depressed region where the
opportunity for large economic return is low but the need for poverty alleviation is high.
Likewise, development banks are created to give loans with lower rates of interest for longer
64
periods of time and often for higher risk investments (like agriculture) than the commercial
banks. Such enterprises are required to serve a particular sector of the economy or segment of
population, which are deemed significant to the national purpose but not best investment of
money from the limited view of profit and loss. It is not, therefore, easy to measure the success
or failure of such enterprises simply by referring to their financial contributions alone, and an
attempt to do so on the basis of profit and loss statements alone would be unfair and inaccurate.
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 Chapter Two (2.4) 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.
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 principles 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.
65
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
measure 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 earlier in Chapter Four, 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 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
66
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.
6.2 FACTORS AFFECTING THE PERFORMANCE OF PUBLIC ENTERPRISES
All over Sub-Saharan Africa, he 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.
6.2.1 DISTORTED PRICE REGIME (POLICY)
In almost all African 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.
6.2.2 PAST MISTAKES (INAPPROPRIATE INVESTMENT DECISION)
67
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 Sub-Saharan African
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 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.
6.2.3 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 Sub-Saharan Africa 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).
6.2.4 UNDER CAPITALIATION
In present time, many Sub-Saharan African 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 specially true for
68
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.
6.2.5 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 African 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.
6.2.6 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
(Prakash et al, 1997:271). 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
69
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.
6.2.7 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.
6.2.8 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.
70
CHAPTER SEVEN
7. PROBLEMS AND REMEDIAL MEASURES OF PUBLIC

ENTERPRISES
7.1 MAJOR PROBLEMS
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 that African 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)
71
over the main organizational and managerial problems that explain the daunting performance
records of public enterprises. A few central problems in this sphere are discussed below:
(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 serous 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 Sub-Saharan Africa 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,
72
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 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.
73
(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 Sub-Saharan African 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.
(Viii) Weak Overseeing (Supervising) Capacity: This has to do with the issue of boards. In
Sub-Saharan Africa, 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.
7.2 REMEDIAL MEASURES
74
7.2.1 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
(Prakash et al: 1997:581)
Participation of the private sector in part (joint) ownership, financing, operation and management
of public enterprises through leasing, concession, twining and management contract should be
encouraged. Most developing countries resorted to the usage of public enterprises; partly out of
the desperation to step up the pace of planned development and partly by the evident inability of
the private enterprise to respond to some felt needs of the society. There has also been the notion
that the civil service lacks the capability to respond adequately to the entrepreneurial
requirements for managing development- oriented organizations. It was argued that:
75
The normal government machine does not lend itself to speedy decisions so essential for
commercial operation;
The government system of accounts is so designed to facilitate close expenditure control by
legislature and not necessarily to promote operational efficiency;
Commercial undertakings tend to generate an atmosphere of initiative and greater release of
energy on the part of operational personnel;
It is necessary to minimize political pressure and partisan influence in their policies and
programs;
It is doubtful whether the private enterprise could sustain the magnitude of investment needed in
certain strategic and profitable areas;
Harsh economic realities convinced several of such countries that the days were gone forever
when various forms of subsidies must continuously prop up inefficient public enterprises.
Proponents of that concept opened the floodgate to the concept of privatization and
commercialization.
7.2.2 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.
76
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 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.
77
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
78
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.
Table-1: Pros and Cons of Privatization Proponents

ARGUMENT IN SUPPORT ARGUMENT OPPOSING
1. Reduction in public sector spending (in Instantaneous price hike for goods and
form of subsidy, loan arrears or default of services (consumers will now pay fully for
loans, and unpaid taxes) goods & services)
2. Promotion of macro - economic efficiency Break up of public sector influenced
(competition, innovation and quality networking and cross subsidization
management methods) The emergence of money bags who may be
3. Promotion of consumer satisfaction (value difficult to control by the government.
for money and freedom of choice on Reduced job opportunities.
purchases)
Appropriate pricing mechanism
7.2.3 FORMS OF PRIVATIZATION
It is often assumed that privatization consists solely the selling of public enterprises to investors.
This is only one form of privatization. Taken in its broadest sense, privatization refers to the
transfer of ownership or functions (management, operation and financing), previously performed
exclusively by government or public authorities to the private sector. This means, privatization
encompasses apart from transferring ownership rights:
Transfer of management control over public enterprises to private managers by management

contract;
Contracting out services usually those previously reserved for or supplied by public enterprises
service contract;
Transfer of operational activities to private entrepreneurs by lease or concession contracts;
79
Involving private sector in operation, management, and financing of the activities of public
enterprises through joint ventures.
Three major strategies or forms have been generally established for the purpose of privatizing the
public enterprise. These are illustrated in the table below:
Table-2: privatization strategies

STRATEGIES (FORMS) OF
PRIVATISATON MODALITIES
Privatization by divestment Private placement
1.1 Privatization by sale Public sale
Management buyout
Employee buyout
Users or Customers buyout
Outright sale of assets to the public where
1.2 Privatization by liquidation there is no buyer for the ailing public
enterprise
1.3 Privatization by donation Donation to employees
Donation to users or customers
Donation to the public
2. Privatization by delegation Contract
Franchise
Grant
Voucher
3. Privatization by displacement Withdrawal
Deregulation
(Adapted from Savas: 1989)
I. Privatization by Divestment
Divestment means shedding off an enterprise asset. The enterprise or asset is either sold or given
away as an on going business, or an enterprise may be liquidated (i. e. closed down and the
80
remaining assets sold). In many countries, the term 'denationalization' is frequently used to mean
divestment (Savas, 1989: 345).
A) Privatization by Sale: Privatization by sale can be carried out in five ways:
(i) Selling the enterprise (or assets) to a single buyer in a negotiated sale. This modality was
employed in the Ethiopian Privatization Program.
(ii) Selling to the public by issuing and selling shares. This approach was used in Great Britain
to sell 0the British Telecommunication, jaguar, Britoil, British Gas, Cable and Wireless, and
other state owned enterprises.
(iii) Selling the enterprise to the mangers, called management buy out.
(iv) Selling the enterprise to the employees, called employee buy-out
(v) Selling the enterprise (or assets) to its users or its customers. This can be done in areas like
state owned land, rural electricity, water, or transportation enterprise to a cooperative of local
users.
Privatization can be made in two ways: complete privatization or partial privatization. In the
case of complete privatization, the disposal of the enterprise is total, both in terms of ownership
and management. In the case of partial privatization, the disposal can be carried out in stages,
where the government sells only apportion of its holdings at any one time.
B) Privatization by liquidation
Divestment can be carried out by liquidating a poorly performing enterprise, that is selling its
assets, if no buyer can be found for it as a going concern and if the prospects are dim for turning
it around to achieve profitability.
C) Privatization by Donation
In this model, Public Enterprises or assets can be given away, for example to employees, to users
or customers, or the public at large. An instance of giving away enterprise to the employees took
place in the united kingdom when the English Channel hovercraft ferry service formerly owned
by the British Rail, was given to its management. According to Pirie (1988), this action ended
the drain on public purse, as it went from a loss of 3.3 million pounds to a profit of 625, 000
pounds. Another instance of giving away (or donation) of public enterprise took place in Canada
81
when the British Columbia Resources investment Corporation was given away to the public by
issuing shares. A somewhat similar action was considered in Israel for Bezique, the state owned
telecommunication monopoly (Savas, 1989:347)
II. Privatization by Delegation
The second broad privatization strategy is privatization by delegation, where the government
delegates to the private sector, part or all of the functions or activities such as management,
operation financing and producing goods or services. However, as with any delegation of
authority, government retains the responsibility to oversee the result, hence its ongoing role.
Contract franchise, grant, voucher, or mandate carries out delegation.
A) Delegation by Contract
The responsibility of operating, financing and managing public enterprises may be entrusted
either to the public manager or any private party through different contractual agreement.
Activities to be carried out could be management, operation, regulation, production of goods and
services, and financing. Accordingly, we do have the following forms of contractual
mechamism:
Functions to be contracted Type of contract

Management Management contract
Regulation Regulatory contract
Operation Lease and concession
Production of goods and services Service contract
B) Delegation by Franchise
Franchising is another method of privatization. Under a franchise, government awards a private

organization the right often the exclusive right to sell a service or product to the public. The
private firm usually pays the government a fee, usually on annual scheme.
82
Two forms of franchising exist. One involves the use of public domain airwaves, airspace,
streets, underground space etc. For example, broadcasters, airlines, bus and taxi companies and
utilities (electricity, gas, water and telephone) use the public domain in the course of carrying out
their commercial activities. This arrangement is called a concession. In this model, the
government retains ultimate ownership of either the physical assets, or the right to supply, but
grants exploitation rights to a concessionaire (Shaw et al, 1996). This means, the private operator
(concessionaire), manage the public facility, operates it as its own commercial risk, and accepts
investment obligations, whether to build a new facility or to expand or rehabilitate an existing
facility. Thus a concession contract embodies all characteristics of a lease, but with the
contractor having the additional responsibility for financing certain specified extension or
replacement to fixed assets.
The second form is a lease agreement, in which tangible government- owned property, is used by
a private renter to engage in a commercial enterprise (Meshesha, 1997: 200-201, and Savas,
1989:348). Leasing involves a private contractor paying the public owner for exclusive right to
operate facilities for specified period, and bearing full commercial risks (Kessides, 1993). Under
a lease contract, a private firm operates and maintains the public enterprise as its own
commercial risk, with income directly derived from tariffs (Kerf and Smith, 1996). Thus, leasing
requires the government to commit to tariffs that cover at least operating and maintenance costs,
and give the operator incentives to ensure tariffs are collected and operating costs are minimized.
C) Delegation by Grant
Awarding grant can be by delegation. In this form of delegation, instead of government itself
carrying out an activity, it arranges for a private entity to do the work and provide a subsidy.
Customary grants are given for mass transit, low-income housing, maritime shipping, agriculture
and research activities,
D) Delegation by Voucher
Another model of delegation is issuing voucher to eligible recipients of formerly state run
services. Vouchers are used for food, housing, education, health, day care and transportation.
Recipients use the vouchers to purchase these services in the marketplace where they have to pay
the difference if their purchase exceeds the value of the vouchers they received. If one compares
83
grants with vouchers, grants subsidize producers, whereas vouchers subsidize eligible
consumers.
III. PRIVATIZATION BY DISPLACEMENT
In addition to delegation and divestment, privatization can also proceed by displacement. As

opposed to the first two methods, displacement is somewhat a passive process that leads to the
government being displaced gradually by the private sector, withering away of the state.
A) Displacement Withdrawal: Government can deliberately pull out or withdraw its activities
simply by shutting down a failing enterprise, or it can accommodate private sector expansion
into that field. It may restrict or shrinks the size and resources of the private sector to grow and
out-pace their public counterparts.
Displacement by Deregulation
This modality is sometimes referred to de-monopolization. It enables the private sector to enter
into the sectors previously restricted for public domain or public enterprise. Examples include
postal services, telecommunications, and agricultural and marketing boards.
OVERVIEWING THE PRIVATIZATION PROGRAMME IN ETHIOPIA 1995 -1997
The formal steps towards privatization took place in February 1994, when the Ethiopian
Privatization Agency was established by proclamation No. 87/1994. The office started its full
operation in February 1995 by selling retail trade shops and stores as well as medium-size hotels
through tenders. The experience so far suggested that the program involved two phases, each
divided along specific time horizon. Below is an attempt to review the phases by drawing some
light on what was planned and what was achieved.
The First Phase
The first phase of the program was launched in February 1995. In this phase, it was envisaged to
divest 185 public business undertakings and state owned enterprises. At the end of the Ethiopian
budget year, 135 public undertakings and state owned enterprises were divested. From the table
below, it is evident that 65% of the planned privatization transactions had been carried out. Even
though the level of achievement seemed moderate, at least by African standard, it should be
84
stressed that similar to other African countries, the privatization program involved only the
insignificant portion of the state owned enterprise sector while those in the manufacturing
industries and infrastructure remained untouched by the process.
Table-3: Planned and Completed Privatization Transaction During the First Phase.
Competed Privatization by Not
Sector Planned Modalities Privatized
Employee Total
By Tender Buyout
Retail Shops and Stores 126 69 39 108 18
Hotels and Recusants 30 10 04 14 16
Factories 16 13 - 13 03
Agro-Industries and Agriculture 13 - - - 13
Total 185 92 43 135 50
Source: Ethiopian privatization Authority (1997) and Meshesha (1997).
The Second Phase
The second round of the programmer was designed to last from the middle of the 1996 to the end
of the 1997 Ethiopian Fiscal Year. On the program implementation, valuation and privatization
modalities were completed for 26 factories selected for divestiture during the designated period.
Out of these, 16 were put for sale 8 were privatized. However, valuation and privatization
techniques for 16 state farms and state farm related ventures were completed. For the remaining
10 large state farms, 98% of the pre- privatization procedures were undertaken in readiness for
the divestiture during the period under reference. The Table below displays the transaction.
85
Table-4: privatization planned for the second phase (1996- January 1997).
Planned Completed
Economic Sector Privatization Privatization
Factories 26 8
State Farms and Farm-Related Undertakings 26 0
Total 52 08
Source: Ethiopian privatization Authority (1997) and Meshesha (1997)
In conclusion, from February 1995 to January 1997, out of 201 earmarked organizations for
privatization, 143 public business undertakings and state owned enterprises were transferred to
private owners or to employees who were organized under the safety-net scheme. This implied
that around 71% of planned transactions were successively implemented.
Additional information also indicated that from January 1997 up to August 1997, nine
privatization transactions, including the Legedembi Gold Mine Factory, were completed in
Ethiopia. Thus the total number of state owned enterprises privatized up to the end of August
1997, was 152 comprising retail shops, storehouses, hotels, restaurants, and factories (Addis
Ababa Tribune, 1997).Further more, information from the Ethiopian privatization Agency
indicated that revenue up to the end of August 1999, was about Birr 1.7 billion including $ 172
million (about Birr 1.16 billion) proceeds from the privatization of Legedembi Gold Mine
Factory. Of these proceeds, Birr 530 million were collected from the buyers within the period
under consideration.
Table-5: Summary of completed privatization in Ethiopia (February 1995 to August, 1997)

Economic Sector Completed Privatization
Retail Stores and Shops 108
Hotels and Restaurants 14
Factories 21
Gold Mines 01
Sectors Unknown 08
Total 152
Source: Ethiopian Privatization Authority and Meshesha (1997)
86
By the latest information obtained from the Ethiopian Privatization Authority, about 170
enterprises had so far been privatized, and more than Birr 2.5 billion revenue paid to the public
treasury. Indeed, the bulk of the enterprises so far privatized were composed of mainly retail
shops, warehouses and restaurants. The break down is illustrated in the table below.
Table-6: Summary of Privatization Transactions in Ethiopia Agency

Categories of Public Enterprises No. of Proceeds of
Enterprises Privatization
in Birr '000
I. Ethiopian retail shop corporation

Food and general merchandise enterprise 22 11,819.5
Shoe and leather enterprise 17 19,372.7
Building material enterprise 9 15,262.2
Stationery material enterprise 5 4,177.9
Textile and leather product enterprise 7 7,845.1
Automotive and spare parts enterprise 8 86,236.2
Meat retail shop 2 492.9
35 13,031.0
II. Kuraz Publishing Agency
1 8,752.2
Ill. Central Food, Storage and Distribution Enterprise
16 38,204.9
IV. Ethiopian Housing and Office Furniture 14 16, 856.1
35 2,293,885.4
V. Hotels and Restaurants
87
Total 170 2, 515,885.4

Source: Ethiopian privatization Agency
From the above table, it is apparent that retail shops and warehouses dominated the Ethiopian
privatization process. Thus, large and medium-size public enterprises were waiting to their
transfer to the private hands during the period under review. The larger enterprise so far
privatized is Legedembi Mining Enterprise. Nevertheless, as it had been argued elsewhere, both
in Ethiopia and other African countries that bigger state owned enterprises, both in financial and
employment size remained intact.In the Ethiopian case, those privatized public business
undertakings (retail shops and stores, hotels and restaurants) were negligible when compared
with the economic significance of those state owned enterprises not privatized, particularly those
in infrastructure and manufacturing industries.
88
REFERENCES
African Association For Public Administration and Management (1987), Public Enterprises
Performance and the Privatization Debate: A Review of the Options For Africa. Vikas publishing
House, New Delhi.
B. P. Mathur (1999), Public Enterprises management (Second Edition). Macmillan India Ltd.
Barber P. Michael, Public Administration (Third edition); Macdonald &Evan Ltd, 1983
Basu Rumki, Public Administration: Concepts and Theories (Third Edition); Sterling Publishers
Ltd, 1994
Cole B. Graham, Managing the Public organization, 1986
Common Wealth Secretariat (1981), Training For Public Enterprise Management: A Directory
of Common Wealth Resources; Marlborough House, London SWIY 5HX
Fernandes Praxy (1986), Managing Relations Between Government and Public Enterprises: A
Handbook For Administrators and Managers. ILO, Geneva.
Gant F. George (1979), Development administration: Concepts, Goals and Methods. The
University of Wisconsin Press.
89
90

Management of Public Enterpise Handout

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management of Public Enterpise Handout

Uploaded by

Copyright:

Available Formats

Management of Public Enterprises (PADM3123)

1. MEANING, CHARACTERISTICS AND RATIONALES OF PUBLIC

1.2. The Meaning of Public Enterprise

Secondly, definition is becoming important for client or stake identification purposes.

1.2.2. The Definition of Public Enterprise

George Gant (1979:104) described public enterprises as "government organizations established

"Any commercial, financial, industrial, agricultural, infrastructural, or promotional

"Public enterprise is an institution operating a service of economic or social

1.3 THE CHARACTERISTICS OF PUBLIC ENTERPRISES

I. The Public Dimension

(d) Public Accountability: a public enterprise has to be accountable in some way to a

II. The Enterprise Dimension

(a) The organization is engaged in the production of goods or provision of services

1.4 REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES

1.5 OBJECTIVES AND ROLES OF PUBLIC ENTERPRISESS

motives. In addition to macro/national objectives, public enterprises do have also

(A) Financial and commercial objectives

(B) Production and productivity objectives

(C) Marketing and service objectives

(D) Developmental and social objectives

2. ORGANIZATIONAL AND MANAGEMENT FORMS OF PUBLIC

2.1 MAJOR MANAGEMENT FORMS OF PUBLIC ENTERPRISES

The administrative systems devised to satisfy the requirements of traditional government

Three types of public enterprises; i.e. Government Departments or Department management,

B) Government Company: it is a registered joint stock company form of management, which

C) PUBLIC CORPORATION: public corporation is a relatively new concept of administrative

Public corporation is a corporate body created by public authority with defined

The emergence of the public corporation is a phenomenon of great importance to modern

(i) It is wholly owned by the state

2.2 ORGANIZATION OF PUBLIC ENTERPRISES

(i) Departmentation by Function: It is the grouping together of activities in accordance

(ii) Departmentation by Territory/ Geography: Departmentation in this consideration

(iii) Departmentation by Product (Product Line): It is the grouping and arrangement

(iv) Departmentation by Customer: It is a grouping of activities around customers, in

example, in retail stores segregated in departments based on customers as men's clothing,

(v) Departmentation by Process: Manufacturing firms often group activities around a

2.3 MANAGING THE INTER-LINKAGES

(i) Inter-linkage With The Government

(ii) Other Public Enterprises

(iii) The Private Sector

(iv) The Workers

(v) The Consumers

(vi) The Physical Environment

(vii) Foreign Contacts

3. THE INTERFACE OF GOVERNMENT AND PUBLIC ENTERPRISES

3.1PUBLIC ENTERPRISE-REGULATORY AGENCIES RELATIONSHIPS

Figure-2: An Elementary Model of Government Structure and Public Enterprises'

Auditor Public Enterprise Parliament or

A) Supervisory (Technical and Sectoral Ministry)

The Ministry of planning, sometimes organized as "Planning Commission" or "National

 Determines areas suitable for public sector investment

 Wage negotiations and determinations

3.2 THE ROLE OF THE SUPERVISORY MINISTRY (AGENCY)

(i) First, it is managerially containable. The number of enterprises to be supervised is

3.3 AREAS OF GOVERNMENT INTERVENTION

Figure-3 Basic Model of Government-Public Enterprise relations

Defining Corporate Objectives

Each area of government intervention is discussed separately as follows.

(i) Defining Corporate Objectives

 It indicates to the enterprise why it has been established and what

(ii) Approval of Investments

Figure-4: The Investment Cycle

Screening and Investment