Public Enterprise Module

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Public Enterprise Lecture
Bachelor of Arts in Communication (Holy Cross of Davao College)
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The Samal Island City College
Public Administration
Program
Peñaplata, IGACOS
Self-Instructional Module for Self-Engaged Learning
Module for PAEC 301 Public Enterprise
Disclaimer: This learning module is a self-paced instructional learning

material for flexible learning. This module is a draft version only, not for
quotation and not for commercial reproduction. The module contains
various topics obtained and copied from various learning
materials/sources from the internet and solely intended for the use of
enrolled students of the Samal Island City College

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Table of Contents
Page Number
Preliminaries Table of Contents 2
Course Information 4
Chapter I
Introduction to Public Enterprise 5
Weeks 1 to 2
Introduction to Public Enterprise 5
Evolution of Public Enterprise 7
Working Concepts of Public Enterprise 9
Public Vs. Private Enterprise 11
The Changing Role of GOCCs in the Philippines 13
The Growth of GOCCs 17
Sources 20
Let’s Analyze 20
Chapter II
Forms of Public Enterprise 22
Weeks 3 to 4
Introduction 22
Forms of Public Enterprises 23
Summary 33
Sources 33
Let’s Analyze 34
Chapter III
Characteristics and Objectives of Public Enterprise 35
Weeks 5 to 6
Characteristics of Public Enterprise 35
Main Objectives of State Enterprise 38
Summary 41
Let’s Analyze 41
Chapter IV
Legal and Operational Framework of Public Enterprise 42
Weeks 7 to 8
Legal Framework of Public Enterprise 42
Summary 49
Source 49
Let’s Analyze 49
Chapter V
Challenges Faced by Public Enterprise 50
Weeks 9 to 10
Situationer of Public Enterprise 50
Summary 57
Sources 57
Let’s Analyze
57
Chapter VI
Proposed Reform Packages for Public Enterprises 59
Weeks 11 to 12
Reform Packages 59
Macro Policy – Addressing Sector Wide Concerns 61
Summary 68
Let’s Analyze 68

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Table of Contents Page Number

Chapter VII
Privatization or Public Enterprise Reform 70
Weeks 13 to 14
Key Reasons for Privatization 71
Key Issues of Public Enterprise 74
Summary 75
Let’s Analyze 76
List of References 77

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Course Information
Welcome to this PAEC 301: Public Enterprise Module.

This module is in lieu and in view of the vision of the institution becoming
a premier and sustainable City College of Samal, transforming lives and
communities through quality education. Even despite the foregoing world-wide
spread of the COVID19, the SICC is committed to provide access to affordable
and quality higher learning education with the main aim of becoming drivers of
change for growth and sustainable development of the community and of Samal
in particular.
Our physical classes are, however, constrained to be scheduled as
pursuant to the policy guidelines as provided for by the state, the local
government unit, and by the City College. Hence, most of your time will be
devoted to this module for self-paced learning module.
In this modular course, you will personally deal with the basic principles
on how the public enterprises work and its key roles to development. Moreover,
you will also deal with Working Concepts of Public Enterprises Government,
Owned or Controlled Corporations (GOCCs), and Role of GOCCs in
Development, challenges and changes in the public sector, the need for
enterprise management strategy – privatization of public service. The course
will likewise discuss the power shifting and organizational empowerment and
responsibilities of organizations.
This module has specific and limited topics/information as compiled by
the coordinator of the course. Therefore, as a student, you are encouraged to
explore other textbooks, online references or through multimedia (e.g. Youtube)
or any means to further augment your learning and understanding.
Limit NOT yourself in learning! All the BEST and ENJOY!

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CHAPTER 1
Introduction to Public Enterprise
Development which is not sustainable is not development at all.
Essay: In a one whole yellow/bond paper sheet, what is the importance of public
enterprises to growth and development? Is there a direct relationship between
public enterprise and development? What is the relevance of this course to
your degree program in Public Administration?
Learning Objectives (FOR Weeks 1-2)

At the end of this chapter, the learners (the students of the public
administration) should be able to:
1) Trace the evolution of public enterprise
2) Understand the importance of public enterprise for growth and
development
3) Critically define public enterprise
4) Familiarize the roles and functions of public enterprise towards
development
Introduction to Public Enterprise
The International Centre of Public Enterprises (ICPE)1 defines public

enterprises as:
<Any commercial, financial, industrial, agricultural or promotional

undertaking – owned by 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 corporations, statutory agencies, established by Acts of
Parliament or Joint Stock Companies registered under the Company Law (Basu, 2005,
p. 3).=
Based on this definition, public corporations are entities which

undertake 8commercial9 activities like private firms, but are owned and/or run
by the government. However, this definition does not quite give justice to the
theoretical complications presented by the concept of public enterprises.

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Mendoza (1990) elaborates more on the classical, dualistic

definition of public enterprises by elaborating on the 8public9 and 8enterprise9
dimensions. Citing Fernandes and Sicherl (1981), Mendoza explains that the
public dimension of the nature of state-owned enterprises consists of their
embodiment of public interest, public ownership, public control, public
management, and public accountability. Their enterprise dimension
meanwhile involves their organization, their decision-making identity, their
provision of goods and services, the 8marketing factor9, the presence of
investments and returns, and the presence of a commercial accounting system
which lends itself to economic calculation.
Theoretically then, public enterprises constitute an overlap between

private firms and public bureaucracies. On one hand public enterprises9 assets
are similar to bureaucracies in that they are organs of the state, they take at least
part of their income from state subsidies, and their employees are civil servants.
Distinguishing them pure bureaucracies are their participation in 8commercial9
activities which involve the pursuit of income and revenues and which are
typically undertaken by private firms, and the autonomy which their
organizational theoretically provides them.
There are several rationales for the establishment of public enterprises:
First governments may deem it necessary to establish public

enterprises in order to introduce economic activities that the private sector is
either unwilling or unable to undertake. Industries involving high upstart cost,
and long-term capital investments may be desirable for economic development
and the state9s interest, but may not be within the capabilities or the interest of
the private sector to establish. In such cases the government may sometimes
take it upon itself to make the necessary investments to establish the industry
win the country9s economy.
Second, public enterprises may be established in pursuit of national

and social interests. This is typically the case with regard to strategic industries
within national economies such as electrical generation, defense, banking, etc.
In the case of nationalization, the government wishes to exert national
sovereignty over particular industries and avoid domination by foreign firms.
In fact in the Philippines early forays into public enterprises were intended to
increase Filipino control over the domestic economy (Corpuz, 1994). Public
enterprise may also be established to check the power of private firms involved

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in the <commanding heights= of a national economy (Shepherd, 1991).
Third, there may be a need to provide of public goods and services

that would be best undertaken by the government, either because the private
sector does not provide a sufficient supply (Shepherd, 1991) or because their
nature means that it would be more efficient if they were provided by the state
(such as in the case of natural monopolies).
Fourth, governments may set up public enterprises as a means of

generating revenues through their commercial functions. Because of their
proprietary objectives public enterprises are usually expected to be financially
independent and viable enough to fund their own activities, or even able to
contribute to the national coffers. Public enterprises can therefore be used to
provide the state with an alternate source of steady revenue besides traditional
taxation.
Lastly, there are those public enterprises that arise out of the
government9s efforts the save <sick= units (Gouri, et. al, 1991). Private
companies that are deemed either politically or economically important may
be nationalized by the government in order to prevent them from shutting
down. An example of which is General Motors (GM) in which majority
ownership was acquired by the United States government in 2009 in order to
prevent the company from going bankrupt.
With the exception of the nationalization of <sick= companies, the

adoption of the public enterprise form of organization typically involves the
perception that creating a state entity infused with the entrepreneurial nature
of a private firm will lead to better outcomes than what would occur with a
traditional bureaucracy.
The autonomy of public enterprises is perceived to allow for greater

flexibility in the implementation of policy as well as being conducive to greater
initiative on the part of the public enterprise9s managers. The hybrid nature of
public enterprises is also perceived to be more accountable to the public than
normal private firms, due to their being subject to various state controls and
regulations.
Evolution of Public Enterprise

The public enterprises came into existence as a result of the expanding
scope of public administration. The advent of the concept of welfare state after

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the Second World War and the increasing developmental initiative undertaken
by Government across the world, the system of public enterprises was
developed. The government sells goods and services to the common people
through the means of a state-owned enterprise system which incorporates the
characteristics of both public and private enterprises. For e.g. the metro train
facility for commuting in big cities, developed, managed and run by the
government.
The government operates in the areas which are of basic or strategic

importance and also the areas that require huge investments beyond the scope
of private enterprises. The public enterprises in the Philippines have been on a
steady rise since their inception and have engaged themselves in a number of
economic activities like advancing loans, regulating trade and commerce,
heavy machine manufacturing, gaming, state universities and local colleges
and fertilizers, oil drilling etc. In the Philippines, public enterprises which are
engaged in myriad of economic and developmental activities in the country,
e.g. PCSO, PAGCOR, GSIS, SSS PhilHealth, PAG-IBIG and etc.
The state-owned enterprises play an important political, economic and

developmental role in their respective countries. The growth of public
enterprises also has its roots in the colonial pasts of the countries of Asia and
Africa. The Government sector, the public administration and ultimately the
public enterprises in these countries have been greatly influenced by the
colonial powers that ruled them. India is a good example of this trend where
even today the Railways are the biggest example of a successful public
enterprise. Even the countries with no colonial history like Iran and Turkey, the
public enterprise was used a tool to bring about economic, political and social
changes, particularly in Turkey after the demise of the Ottoman Empire and
formation of the modern Turkey.
The history of public enterprises in the USA dates back in the nineteenth
century and was characterized by the state chartered banks in which the
Federal Government has significant portion of the stocks. The formation of the
Panama Railroad Company in 1904 was another victory of the public enterprise
system. The growth of public administration and enterprises reached its peak
under Franklin D Roosevelt and the Tennessee Valley Authority became the
most emulated model of public corporation.
There are several factors that have contributed the growth of public
enterprises in the recent times. The governments have used it to guide and
command the economy; they own the strategic industries, functions and
agriculture and also try to fill the inadequacies of the private sector. Public

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enterprises are also essential in bringing about national development. They are
also used as political instrument to maintain political stability, prevent unrest
and provide employment. Public enterprises have also helped the earlier
colonized and now developing economies of the world to decrease their
dependency on other nations and become self-sufficient. Monopoly, freedom
to choose profitable projects; no taxes etc are other factors that have led to their
growth.
Working Concepts of Public Enterprise

By Leonor Briones
In the Philippine setting, public corporations have been called many names:
government corporation, public corporation, public enterprise, state-owned
enterprise, parastatal corporation, The official nomenclature is "Government
Owned or Controlled Corporations" (GOCCs) as stated in the 1973
Constitution. This is the 'term used in the study. The international term is
"public enterprise."
Likewise, the definitions differ. An effort was made by the Expert Group
Meeting convened by the International Center for Public Enterprise ~ICPE) in
Tangiers in 1981 to come up with internationally accepted definition of "public
enterprise." The final definition described public enterprise as an organization
which
- is owned by public authorities including central state or local
authorities, to the extent of 50 percent or more;
- is under the top managerial control of the owning public authorities,
such public control including, inter alia, the right to appoint top
management and to formulate critical policy decisions;
- is established for the achievement of a defined set of public purposes,
which may be multi-dimensional in character and is consequently
placed under a system of public accountability;
- engages in activities of a business character;
- involves the basic idea of investment and returns; and
- markets its outputs in the shape of goods and services.
The various government monitoring agencies have their own definitions, lists
and statistics on the GOCCs. In 1984, another exercise at definition was
'initiated by an ad hoc committee created by the Cabinet, which was composed
of the Minister of Justice, the Chairman of the Commission on Audit, and the
Chairman of the Presidential Commission on Reorganization. The Committee's
definition which is used in this paper is:

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A government-owned or controlled corporation is a stock or non-stock

corporation, whether performing governmental or proprietary functions,
which is directly chartered by special law or, if organized under the .general
corporation law, is owned or controlled by the government directly, or
indirectly through apparent corporation or subsidiary corporation, to the
extent of at least a majority of its outstanding capital stock or of its
outstanding voting capital stock.
There is general agreement and acceptance of this definition to date. On the

other hand, concepts of development are just as many and varied. Ideas of
development have evolved from the original focus on economic development
to what Todaro describes as a "multidimensional process involving major
changes in social structures, popular attitudes, and national institutions, as well
as the acceleration of economic growth, the reduction of inequality and of
absolute poverty. Development represents the entire gamut of change by which
an entire social system tuned to the divers the basic needs and desires of
individuals and social groups within that system, moves away from a condition
of life perceived as unsatisfactory towards a situation or condition of life
regarded as materially and spiritually better. "Todaro continues with three
objectives of development:
- To increase the availability and widen the distribution of basic life-

sustaining, goods such as food, shelter, health and protection;
- To raise levels of living including, in addition to higher incomes, the
provision of more jobs, better education and greater attention to cultural
and humanistic values, all of which will serve not only to enhance
material well-being but also to generate greater individual and national
self-esteem; and,
- To expand the range of economic and social choice to individuals and
nations. by freeing them-from servitude and dependence, not only in
relation to other people and nation-states" but also to the forces of
ignorance and human misery
The above concepts are echoed in the Philippines' major national development
goals ·which are contained in the Philippine Development Plan, namely,
sustained economic growth, more equitable distribution of the fruits of
development, and total human development; The principal targets of the plan
are the common tao, the farmers, the fixed-income earners and other low-
income groups most vulnerable to economic and social difficulties.

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Given these concepts, the role of the GOCCs should be examined in relation to
their contributions toward sustainable economic growth, equitable distribution
of wealth and total human development especially of the common tao. This role
can be examined from three different levels. The first is at the theoretical level
which discusses the ideal type of public corporation and the basic ideas
governing public corporate activity under different economic and social
conditions. The second level is at the normative level which analyzes the set of
norms with respect to the role and position of public enterprise. The third level
focuses on what is the achieved role, position and impact of public
corporations. This study examines the role of public corporations using the
normative approach. The problems and issues which affect the actual
performance of the role of public corporations are likewise examined
Public Vs Private Enterprise

Source: https://www.managementstudyguide.com/public-and-private-
administration.htm
The expansion of public sector into industrial enterprises has been into
practice for quite some time, a little over half a century now. The public sector
organizations in order to function efficiently are borrowing heavily from the
business knowledge, administration and process orientation of the private
organizations. However, there still remains a considerable difference between
these two administrative practices.
It would be interesting to learn about both similarities and differences

between these two to arrive at a better understanding. Let us first understand
the differences and see what the authors and subject matter experts have to say
about it.
According to Paul H. Appleby the public administration is different

from private administration in three important aspects, the first is the
political character, secondly the breadth of scope, impact and consideration
and public accountability. These differences seem very fundamental and very
valid in the light of our own exploration of the subject in previous articles.
Josia Stamp went a step further and identified four aspects of difference
of which the only one similar to that of Appleby9s is that of public
accountability or public responsibility as Stamp identifies it. The other three
are:

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 Principle of uniformity
 Principle of external financial control
 Principle of service motive
Herbert Simon cited very practical and easy to understand differences

based on popular beliefs and imagination and therefore might seem more
appealing. He said that public administration is bureaucratic while private
administration is business like. Public administration is political while private
administration is apolitical. And finally; the aspect most of us would swear by
that public administration is characterized by red tape while the private
administration is free of it.
The management Guru Peter Drucker sums up the difference in more

comprehensive manner. He says that the very intuition which governs both
kinds of administration is different from each other. While the public
administration functions on service intuition the private administration follows
the business intuition. They also have different purposes to serve, with
different needs, values and objectives. Both of them make different kind of
contribution to the society as well. The way the performance and results are
measured is different in a public administration than that of private one.
Let us now understand the similarities between the two and see to what
extent and in which areas are they similar. You would be surprised to know
that there are many similarities between the ways in which a public and a
private administration functions. The similarities are so much that some
subject matter experts and authors like Henry Fayol, M P Follet, Lyndall Urvick
do not treat them as different. Fayol said that all kinds of administration
function on some general principle irrespective of them being public or private.
The planning, organizing, commanding and controlling are similar for all
administrations.
The above arguments and several other points suggested and illustrated
by other authors as well clearly point out that there are more similarities
between the two administrations than what we see and understand.
 The managerial aspects of planning, organizing, coordinating and

controlling are the same for public and private administration
 The accounting aspects like maintenance of accounts, filing, statistics
and stocking are the same
 Both of them have a hierarchical chain of command or reporting as the
organizational structure

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 Both get influenced, adopt and reform their own practices in the light of
best practices of the other. They also share the same pool of manpower
 And lastly they share similar kinds of personnel and financial problems
The Changing Role of GOCCs in the Philippine Landscape
The extent of the role that GOCCs play in national development is influenced
by many factors, the most important of which are the legal and policy
framework, the "development" impetus, the political economy of the country
and political change, and the motives and rationale for establishing a GOCC.
The state may, in the interest of national welfare or defense, establish and
operate industries and means of transportation and communication, and, upon
payment of just compensation, transfer to public ownership utilities and other
private enterprises to be operated by the government.
The immediate impression that one gets from the provision is that the
Constitution intended a limited 'role for GOCCs, in consonance with the
avowed private enterprise orientation of the country. Nevertheless, this legal
provision has at various times in Philippine history been interpreted either
literally or liberally, depending on "the exigencies of the times" and "in the
interest of national welfare." General policy declarations of various Presidents
have been fairly consistent with the Constitution. However, these have not
gone beyond generalities and rhetoric9s, thus giving the government wide
latitude, or even license in the actual creation of GOCCs.
The development impetus. The dramatic proliferation of GOCCs

coincided with the aggressive push towards development." GOCCs were
utilized as a major tool for the attainment of development goals, as indicated
by the huge magnitude of government investment in the sector. This
phenomenon is not exclusive to the Philippines.
Political economy, political change and the nature of the state:

Undoubtedly, the aggressive development thrust of the country significantly
contributed to the: expansion of the government corporate sector. However,
scholars studying the public enterprise phenomenon in many less developed
countries (LDCs) have repeatedly underscored the need to examine the
political economy of and the distribution of power in a country. There have
been pronounced shifts in the role and importance of public corporations

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following an important change in a country's political condition, as in the case

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of Algeria, Tanzania, Bangladesh, Somalia and Peru. A similar pattern is

observed in the Philippine GOCCs. The Martial Law period which facilitated
the consolidation of legislative, executive and judicial powers in the hands of
the President resulted to the increase of GOCCs. A full two-thirds or 61 of 93
enterprises listed by the Cabinet Working Group were created by presidential
action, either by presidential decree, executive order, letter of instruction, or
letter of implementation.
Muzzafer Ahmad points out that:
Contrary to the economists' assumptions, public enterprises come into being

not only because of market failure but also because of socio-political exigency
and interest group activity. It makes more sense to think of interactive
systems in which social forces, political power and economic policy are
related. State policies reflect the efforts of contending social forces, to promote
use of resources in a manner that benefits the controlling social class. In
developing countries, authority is represented very strongly in the state and
the government because other institutions of modernization and mobilization
are weak. Hence, the dominant social force is also dominant in government,
and this allows the utilization of public enterprise for consolidation of its
power
Local scholars have likewise observed that "those entities have only
become a venue to enhance local and foreign monopolistic interests. Public
enterprises have contributed to the entrenchment of private capitalistic interest
by the formulation of policies to protect them and by the privatization of
resources that were drawn from the people's pocket.?" In other words, in
countries where effective political and economic power is consolidated in a
small group, excessive state power can be wielded to transfer public resources
to the "ruling elite" through public corporations.
Motives and rationale for establishing a GOCC, Leroy Jones classified

the motives for establishing public enterprises into ideological and pragmatic
motives. Ideological motives include ideological predilection and acquisition
or consolidation of economic and political power. Pragmatic motives include
historical heritage and inertia, institutional responses to economic problems,
developmental objectives and others, "Pavle Sicherle writes about general
motives and specific motives. Motives of a general nature are those which cut
across economic sectors or economic characteristics of enterprises, e.g, the
political goal of a socialist society, sovereignty over national resources (partial

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or complete nationalization of foreign enterprises), more equitable distribution

(among regions, ethnic, social and economic groups), defense (defense
industry, strategic location). Specific motives are related to specific sectors,
characteristics or cases like filling the gaps left by the private sector, breaking
monopoly situations in certain branches, taking direct control over individual
strategic sectors, or developing infrastructure and research activities.
Off hand, the Philippine experience tends to indicate that the

government was impelled by pragmatic considerations rather than ideological
motives in creating GOCCs. These would include sovereignty over national
interest and phrase, "development." However, such glorious and lofty motives
present only part of the picture. Rather, these could be viewed in terms of overt
and covert motives. Overt motives would refer to the legal justification and the
official objectives of the GOCCs. These are similar to the official rationale
adopted by countries all over the world. Covert motives would be unstated
objectives which never the less are just as compelling.
A covert objective would be the desire to get away from government

regulation. GOCCs have the relative advantage of flexibility and autonomy and
a certain degree of "differential treatment" with regards to. rules and
regulations. This is exemplified by the level of compensation which is the most
attractive feature of the GOCC. It is a long-standing joke that the elevator boys
of financial institutions earn much higher salaries than the public school
teachers. Thus, even agencies performing regular functions endlessly exert
efforts to have themselves converted into GOCCs. If this is not legally feasible
even with political support, these agencies happily go ahead and create their
own GOCCs or subsidiaries. These corporations perform "laundry services"
wherein contracts and additional compensation packages are processed
beyond the pale of close scrutiny that ministries are normally subjected to. This
is illustrated by the following cases. The largest government ministry had its
own development bank chaired by no less than its top official. Fortunately, this
bank went bankrupt and had to be reorganized. A ministry overseeing a
strategic industry is administered, under a management contract, by the
subsidiary of the very GOCC it is supervising. This ministry has only one
employee: the minister. All others are considered "employees" of this
subsidiary corporation which pays them higher rates of salaries. Another very
large ministry incorporated its own printing press services. Still another
converted its Electronic Data Processing (EDP) unit in to a corporation. A

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leading and highly respected office in the government regularly gives research
grants to a GOCC in order to launder additional compensation for its staff. If a
brave soul will make a survey of the leading ministries, he might discover that
most of them have their very own "laundry units" disguised as GOCCs with a
noble-sounding objective of development.
Another covert and even more alarming motive which emerges is the
use of GOCCs to transfer public resources to a private few. One scholar
describes it succinctly:
There is a narrow line here between the legitimate and the illegitimate. A
major function of government is to transfer income from one group to
another. The difficulty with public enterprises is that the transfers can be so
readily hidden from those who pay the freight in terms of increased taxes,
higher inflation, or lower government expenditures on health, education, or
welfare
This phenomenon is discussed in the case of the coconut industry,

the sugar industry and the National Development Corporation (NDC).
These cases showed that one painless approach to transfer resources is for
financial institutions to lend huge loans. to especially favored private
sector individuals. Thus, criteria for the granting of loans may not
necessarily be on the basis of financial viability but of political access.
Another is for government officials who sit in the boards of directors of
GaCCs to set up private corporations which either have, contracts with the
GaCC or borrow massive amounts from the latter. Lamberte, for example,
considers the issue of "political consideration" as weighing more heavily
than viability in deciding which projects to initiate. Still another is for
private sector tycoons to control GaCCs by sitting in the boards of
directors and using their positions as leverage to transfer resources. ather
scholars have gone even farther by pointing out not only the intimate
intermeshing of interests between GaCCs and powerful private groups,
but also the tie-ups of the latter with transnational corporations (TNCs).
Corollary to the matter of overt or covert motives is the issue of which of

these two types of motives is dominant. If covert motives, particularly the
transfer of resources to private groups, are considered as more dominant,
then the original roles of GacCs are subverted. A situation arises where
GaCCs would serve private purposes and not public purposes. The
powerful few would benefit from the combined resources of the many an

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aberration of the goals of development. At worse, foreign domination of

key sectors of the economy would been couraged, resulting in a horrible
mutation of one of the fundamental motives for setting up GaCCs which
is Filipino control of natural resources.
The Growth of GOCCs
The growth of the GaCC sector is traced through the various

periods of Philippine history. As will be noted, the role of GaCCs has
changed in response to the factors identified in the preceding section.
The GOCCs before political independence. Available documents

indicate that the pre-war governments scrupulously limited the role of
GaCCs to a few sectors, e.g., financing, public utilities and agricultural
development. GaCCs created during the American colonial period were
engaged in public transportation and financing, e.g., the Manila Rail road
Company (MRC) and the Philippine National Bank (PNB). The report of
the last American Governor General noted profitable returns from the
GaCCs then existing, with the exception of MRC which suffered losses in
the tradition of all railway companies.
The Commonwealth period saw the expansion of the role of GaCCs

to agricultural development. The PNB played an important role in the
mobilization of capital for agricultural activities, particularly sugar. Since
agriculture dominated economic activity during this period, the GaCCs
created were specifically for agriculture and trading, e.g., National Rice
and Corn Corporation (1936), National Abaca and other Fibers
Corporation(1938), National Coconut Corporation (1940), and the
National Trading Corporation (1940).
At this point, a single financial institution was found inadequate,

especially since PNB catered almost exclusively to the sugar industry. The
Agricultural and Industrial Bank which was absorbed later by the
Rehabilitation Finance Corporation (RFC), now Development Bank of the
Philippines (DBP), was thus established in 1938.
With the outbreak of World War II, a GOCC was created with
duties unique to the crisis at that time. The Emergency Control

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Administration was created in December 1941 to execute all government

welfare policies and programs as a consequence of the war effort.
The Post-War Period. The period immediately following the war

years has been described as the reconstruction period. "Relief and
rehabilitation" was the by-word of that era. During this period, there was
a significant spurt in the growth of the GOCC sector. There were about
thirty GOCCs created from 1945 to 1950. The RFC replaced the
Agricultural and Industrial Bank to provide financial assistance to
destroyed business establishments. GOCC expansion notwithstanding,
the activities of the sector still adhered to the "traditional" areas for
GOCCs. Thus, a number of them were in public utility/infrastructure, e.g.,
Manila Railroad Company (MRC), Metropolitan Water District (MWD),
National Power Corporation (NPC). A few were in agricultural
production and trading, e.g., National Tobacco Corporation and National
Food Products Corporation. The rest were in financing, e.g., PNB, RFC,
Agricultural Credit and Cooperative Administration (ACCA) and the
Government Service Insurance System (GSIS). At this time, regulatory
GOCCs were setup ,e.g., the National Land Settlement Corporation and
the Rural Progress Administration.
While the number of GOCCs expanded during the post-war

period, their role did not change substantially. Nonetheless, their impact
and participation in the economy increased because of the significant
increase in their actual number, size and resources. Consequently, alarm
was expressed over their proliferation and duplication of activities, e.g.,
two GOCCs for tobacco, several in agricultural credit and a growing
group of GOCCs in housing. When the Government was reorganized in
1950, a reorganization committee was created specifically for GOCCs.
The Committee recommended reduction of the GOCC sector to 13.
Nevertheless, the push towards expansion was irresistible because of the
obvious advantages of the corporation structure
for carrying out governmental functions. GOCCs became a major arena
for the consolidation of economic and political power by various political
leaderships. As of 1956, total assets of all government corporations
amounted to more than 1 billion pesos. By 1967, when the rounds of
government reorganization activities were initiated, the numberhad again
gone up to 44.

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The Martial Law Period and the 1980s.The Martial Law period ushered in

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dramatic political changes for the Philippines which impacted heavily on the
GaCC sector. The consolidation of effective political and economic power,
combined with the tremendous push toward development, and the interplay
of overt and covert motives resulted in the unprecedented growth of GACCs.
Massive flows of loans and other forms of financing from private banks and
the international financing institutions further encouraged·the expansion of
GaCcs. Given this momentum, GaCCs proliferated rapidly. From a total of 65,
consisting of 47parentcorporationsand 18 subsidiaries in 1970, their number
rose to an unprecedented 303 corporations composed of 93 parent
corporations, 153 subsidiaries and 57 acquired assets.
During the Martial Law period and the early 1980s, the GaCC grew not
only in number, size and resources but also in political clout. A high- ranking
government official has raised this query: <Are government- owned and
controlled corporations still controlled by the government or is the
government controlled by government-owned and controlled corporations?
Another way of expressing this query is:' Have the, government-owned and
controlled corporations gone out of control? If the roles of the GaCCs were
assessed during this period, the government corporate sector practically took
over the government system.
As vanguards of the develop merit crusade, they entered nearly all
fields of government activity, and sometimes, even beyond. Aside from
expanding to un-paralleled levels in traditional activities like financing,
agricultural production, public utilities/ infrastructure, manufacturing and
industry, GaCCs were preoccupied with raising cocks, breeding horses,
managing gambling casinos, canning sardines, producing tomatoes, making
handicrafts, selling plants and performing the ubiquitous laundry services
mentioned earlier. To balance their activities, they also dabbled in culture,
cinema, hospitals, and convention centers. One corporation was even created
by leading financial institutions to look into the meaning of life.
The role of the corporate sector in development was so all-

encompassing that when the economic crisis hit the country, they were
the'hardest hit. No less than Prime Minister Cesar Virata admitted that "the
government corporate sector had laid claim in recent years to up to one-fifth
of the annual government budget, about a third of the outstanding domestic
public debt, and about three-fourths of the outstanding external public debt.

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Summary
To summarize, the role of GOCCs in the Philippines has changed throughout
various periods, concomitant with changes in size and activity. Before the
independence period, the sector was relatively small and was engaged in activities
traditionally identified with public enterprises in mixed economies. The grant of
Philippine independence; the rehabilitation efforts and the thrust towards
economic development rapidly expanded the corporate sector during the post-war
period. However, the Martial Law period and the acceleration of developmental
activity resulted in an' unparalleled in-crease in number and size as well as in the
unprecedented expansion of the role of the corporate sector
Sources
https://www.officialgazette.gov.ph/2011/06/06/republic-act-no-10149/
https://www.managementstudyguide.com/public-enterprises.htm
https://defenseph.net/drp/index.php?topic=4815.0
Let’s Analyze
1. List down the major contributions of public enterprises to country9s
growth and development. Give at least 10 major contributions and
discuss in your own words.
2. Give at least 10 public enterprises for social sector and discuss its
roles
3. Give at least 10 public enterprises for economic sector and discuss
its roles
4. Public enterprises are prone to corruption and inefficient delivery
of services. Do you think privatization or selling of public
enterprises to private entity is a way to avoid or minimize said
problems? Explain profoundly. Use premise-conclusion method.
CHAPTER 2

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Forms of Public Enterprise

At the end of this chapter, the students of public administration are
expected and should be able to:
a) Know the different forms of public enterprise
b) Distinguish the characteristics and the coupled advantages and
disadvantages of these forms of public enterprise
Introduction
Public enterprise is created to address a specific problem found by the
government (or of the people) hindering growth and development. Hence, it is
intended to address a specific lacuna in the development of the country.
Moreover, public enterprises are created not with the aim of profit maximizing.
Instead, creation of public enterprise is ought to maximize the WELFARE of
the people. When we say welfare, it is relating to, or concerned with the
improvement of the disadvantaged social groups. This definition is the basis of
a normative economic theory of public enterprises. "Normative" means that the
application of the respective pricing rules can be justified by some higher-order
value judgement s as formally expressed by social welfare functions.
Secondly, public enterprises aim to maximize particular managerial or
political objectives. Such objectives are the basis of a positive economic theory
of public enterprises. "Positive" means that the respective objective functions
are meant as an actual description of economic reality.
In the succeeding discussion, we will learn the various forms of public
enterprises and its functions in the development of the country. Likewise, we
will discuss the coupled advantages and disadvantages of these forms of public
enterprise.

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3 Forms of Public Enterprises

An important question arises as to what should be the form of
organization for running state enterprises, suitable form of organization will
increase the efficiency of the concern. Excessive dependence on government or
finances will increase government interference in the day to day working.

These enterprises should be run on business lines and necessary autonomy
should be allowed to them. Following forms of organization are generally used
for state enterprises.
A. Departmental Management:
Departmental form of organization of managing state enterprises is the
oldest form of organization. In this form, the enterprise works as a part of
government department. The finances are provided by the government and
management is in the hands of civil servants. The Minister of the department

is the ultimate in-charge of the enterprise.
The enterprise is subjected to legislative security. Departmental management
is suitable for public utility services and strategic industries. In India, railways,
post and telegraph, radio and television are working as government

departments. In the same way, strategic industries like defence and atomic
power are under government.
Characteristics:
(i) The undertakings are wholly dependent on government for finances. State
treasury provides finances and surplus money (profits) is deposited in

treasury.
(ii) The management is in the hands of the government. The enterprise is

managed and controlled by the civil servants of the department.

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(iii) The budget of the department is passed by the Parliament and/or by the
state legislature.
(iv) The accounting and audit control applicable to other government
departments are applicable to state enterprises also.
(v) The department enjoys legal immunity. Governmental sanction is necessary
for using the undertakings.
Advantages:
(i) Useful for Specific Industries:
Departmental form of organisation is necessary for public utility services. The
motive of these industries is not to earn profits but to provide services at cheap
rates. Strategic industries like defence and atomic power cannot be better
managed than under government departments.
(ii) Help in Implementing Government Policies:
Government policies and programmes are better implemented by the
enterprises under direct government control.
(iii) Complete Government Control:
Departmental undertakings are completely under government control. These
undertakings are associated with one of the government departments.

Government can regulate their working in a proper way.
(iv) Legislative Control:
These undertakings are under the control of legislatures. Government is
answerable to the legislature for the working of departmental undertakings.

Legislative control acts as a check on these undertakings.

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(v) Source of Income for Government:
These undertakings are run on commercial lines. They earn profits like private
enterprises. They provide finances to the government for initiating other social
and development activities.
(vi) Secrecy:
Department undertakings can maintain secrecy in their workings. Secrecy is
especially necessary for undertakings like defence.
(vii) Useful for Developing Enterprises:
Departmental form of organisation is necessary for those undertakings which

are in a developing stage. They are suitable for enterprises where gestation
period is long.
Disadvantages:
(i) Excessive Government Interference:
There is excessive government interference in departmental organisation.
These undertakings are not given freedom to decide their own policies.
(ii) Shortage of Competent Staff:
Departmental undertakings are like administrative departments. Civil servants
are given control of these undertakings. There is a shortage of competent

persons who have commercial experience. Civil servants are not suitable for
running commercial organisations.
(iii) Centralisation of Powers:
All policies are decided at the ministerial level. The powers are centralised at
the higher level. It adversely affects the efficiency of the concerns.

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(iv) Red Tapism:
There is delay in taking important decisions. Red tapism is prevalent as in other
government departments. Commercial organisations cannot afford delay in
taking decisions.
(v) Inefficiency:
Losses in departmental undertakings are not taken seriously. No efficiency
standards are set for these undertakings. They are run as government
departments and not as commercial undertakings.
(vi) Political Changes affect their Working:
The change in government involves shift in policies of departmental
undertakings. Every political party tries to manage departmental undertakings

according to its election manifesto. This adversely affects the working of these
undertakings.
B. Public Corporations:
Public Corporations are created by a special stature of a state or central
government. A legislative act is passed by defining the sphere of work and

mode of management of the undertakings. A public corporation is a separate
legal entity created for a specific purpose.
According to President Roosevelt, <A public corporation is clothed with the

powers of the government but possessed of the flexibility and initiative of
private enterprise.= <Public Corporation is a continuation of public ownership,
public accountability and business management for public ends.=
An exhaustive definition is given by Earnest Davis, <Public Corporation is a

corporate body, created by public authority with defined powers and functions

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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 those of public company, but its stock holders retain
no equity interests and are deprived of voting rights and power of appointment
of the board.=
Characteristics:
(i) Separate Legal Entity:
A public corporation is created by a separate legislative act. It is a separate legal
entity. It can sue or be sued without any government approval.
(ii) Government Investment:
These corporations are financed by the government. In some cases private
capital may also be associated, but at least 51% of the shares are held by the
government.
(iii) Financial Autonomy:
Corporations are not dependent on the state exchequer for its day-to-day
financial requirements. Legislatures do not pass their budgets. They can also
raise loans separately.
(iv) Government Appointed Management:
The management of the corporation is appointed by the Government.

Generally a board is nominated to manage these undertakings.
(v) Service Motive:
The motive of public corporations is to provide service to the public at a

reasonable price.

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(vi) Independent Recruitment of Employees:
These corporations recruit their own employees. They can appoint capable
persons to manage the corporations on commercial lines.
(vii) No Government Interference:
Public corporations are free from government interference. They execute their
independent policies. They do not depend upon government departments for
determining their policies.
Advantages:
(i) Internal Autonomy:

Public corporations have internal freedom. They can devise their own policies
and programmes. They can set their own goals and can decide their own line
of action.
(ii) Flexibility:
There is no rigidity in their working as in case of departmental undertakings.
The flexibility is necessary for the success of a business concern. The
management is free to take decisions in the interest of the organisation.
(iii) Free from Government Interference:
Public corporations are free from government interference. They are not
dependent on government departments. Various policies are decided

independently. Management is free to manage these undertakings.
(iv) Employment of Competent Persons:

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These corporations utilise the services of competent persons. They are free to
employ persons according to their requirements. All important positions are
given to capable persons. They have their own cadres of employees.
(v) Run on Business Lines:
These undertakings are run on commercial lines. They also earn profits like
private concerns. It helps these undertakings to finance their schemes and
undertake expansion plans.
(vi) Accountability:
These undertakings are accountable to the legislature for their performance.

They try to increase their efficiency, otherwise they are criticised in the
Parliament or state legislature.
(vii) Service to Society:
Public corporations provide commodities and services to the people at
reasonable prices. Though they also earn profits, their primary aim is to help
the society in getting various services.
Disadvantages:
(i) Limited Autonomy:
Though public corporations enjoy internal autonomy, still government9s

interference is there. Concerned government department exercises direct or
indirect control over these bodies. All important policies are decided with
government approval. Management is also appointed by the government. So,
limited autonomy is exercised by these corporations.
(ii) Difficulty in making Changes:

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Any change in the sphere of activities of the corporation involves a change in
the statute of the corporation. The statute can be amended only by a legislature.
It is a difficult process and takes much more time.
(iii) Misuse of Financial Autonomy:
Financial autonomy of the corporation is sometimes misused by the
management. Public money may be wasted on unnecessary projects.
(iv) Lack of Personal Touch:
Corporations are managed by the salaried employees. Top managerial
personnel are also paid employees. There is lack of personal touch. Everything
is managed in a routine way.
(v) Government Control:
Though these corporations are autonomous bodies, still there are many
controls exercised by the government. Public Accounts Committee and Auditor
and Comptroller General of India exercise control on these corporations.
C. Government Company Organization:
A company owned by central and/or state government is called a government
company. Either whole of the capital or majority of the shares are owned by the
government. In some cases, private investment is also encouraged but at least
51% shares are held by the government. Management of these companies is
under the control of the government. Subsidiary companies of government
companies are also covered under government companies.
Government companies are registered both as public limited and private

limited companies but the management remains with the government in both

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the cases. Government companies enjoy some privileges which are not
available to non-government companies. No special statute is required to form
government companies.
Government companies enter those fields where private investment is not
forthcoming. Sometimes, government has to take over sick units in private
sector. These companies are also useful where joint ventures are to be taken up.
Nationalised industries can also be run up by government companies. Some of
the examples of government companies in India are Coal Mines Authority Ltd.,
Steel Authority of India Ltd.
Advantages:
(i) Flexibility in management:
There is a freedom and flexibility in the management of government
companies. Companies can organise their working according to the necessity

of the situation.
(ii) Run on commercial lines:
Government companies are run on sound business lines. They earn surpluses
to finance their own expansion plans.
(iii) Healthy competition:
Government companies provide healthy competition to the private sector.

Private businessmen will have to be careful in fixing their prices. The consumer
is not at the mercy of the private businessmen.
(iv) Financial autonomy:

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These companies are dependent on the government only for their initial
investments. They can plan their own capital structure. The companies earn
profits and these profits can be used for further investments.
(v) Helpful in developing neglected sectors:
There are certain sectors which are important from the national point of view.
Private sector may not be coming forth to invest in such sectors. Government
companies can enter all the neglected areas and can help all-round growth.
(vi) Providing industrial environment:
An industrial infrastructure is provided by the government companies. They

help the growth of ancillary units.
Disadvantages:
(i) Slackness in management:
The management of government companies is slackened under the garb of
public service. These companies are not generally as efficient as units in the
private sector.
(ii) Political interference:
There is a lot of political interference in government companies. Every
government tries to nominate directors from its own political party and the
companies are run on political considerations.
(iii) Red tapism:
These companies are dependent on the government for taking important policy
decisions. Red-tapism in government departments affects the working of these
companies.

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(iv) Limited autonomy:
Theoretically, these companies are free from government control but in reality
they are dependent on various government departments. They have to get
permission from government departments regarding loans, capital and

managerial appointments.
(v) Official domination:
Civil servants are appointed on important managerial posts of these
companies. They are not capable of running these undertakings on sound
business lines.
Summary
This chapter discusses the various forms of public enterprises, its unique
characteristics, and the advantages and disadvantages coupled with these
forms. We learned that these three forms have specific uses for the Deparmental
Management, for the Public Corporations, for Government Company
Organization. It is highlighted that these forms have specific uses and roles
played in the generation of resources and the services delivered in the society.
The need to know the forms these public enterprises is important for
managers/decision makers for strategic management and maximum utilization
of said enterprises for development and growth of the different sectors
Sources
https://www.yourarticlelibrary.com/enterprises/3-forms-of-public-enterprises-
explained/42065
Let’s Analyze
1. Differentiate the forms of public enterprises and provided

advantages and disadvantages. Also, provide examples of
Philippine GOCCs per forms of public enterprise.

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Example of
Forms of Public
Advantages Disadvantages Philippine
Enterprise
GOCC
1. Departmental  .
Organization  .
 .
 .
 .
 .
2. Public  .
Corporation  .
 .
 .
 .

3. Government  .
Company  .
 .
 .
 .

2. Which of the three is the best form of public enterprise? Explain (10)
3. Compare and contrast the public enterprise from a private enterprise.

Give 10 Comparison and 10 Differences (20 points)

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CHAPTER 3
The Characteristics and Objectives of

Public Enterprise
<Public enterprises are autonomous or semi-autonomous corporations and

companies established, owned and controlled by the state and engaged in industrial and
commercial activities.=

a) Know the characteristics of public enterprises
b) Understand the objectives of the public enterprises
Characteristics of Public Enterprise

https://www.yourarticlelibrary.com/enterprises/public-enterprises-
definitions-and-characteristics-of-public-enterprises/42067
State enterprise is an undertaking owned and controlled by the local or

state or central government. Either whole or most of the investment is done by
the government. The basic aim of a state enterprise is to provide goods and
services to the public at a reasonable rate though profit earning is not excluded
but their primary objective is social service. A.H. Hansen says, <Public
Enterprise means state ownership and operation of industrial, agricultural,
financial and commercial undertakings.=
S.S. Khera defines state enterprises as <the industrial, commercial and
economic activities, carried on by the central or by a state government, and in
each case either soley or in association with private enterprise, so long it is
managed by self-contained management.=

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<Public enterprises are autonomous or semi-autonomous corporations and
companies established, owned and controlled by the state and engaged in
industrial and commercial activities.= -N.N. Mallya
Characteristics of Public Enterprises:
(i) Financed by Government:
Public enterprises are financed by the government. They are either owned by
the government or majority shares are held by the government. In some
undertakings private investments are also allowed but the dominant role is
played by the government only.
(ii) Government Management:
Public enterprises are managed by the government. In some cases government
has started enterprises under its own departments. In other cases, government
nominates persons to manage the undertakings. Even autonomous bodies are

directly and indirectly controlled by the government departments.
(iii) Financial Independence:
Though investments in government undertakings are done by the government,
they become financially independent. They are not dependent on the

government for their day- to-day needs. These enterprises arrange and manage
their own finances. An element of profitability is also considered while pricing
their products. It has helped the enterprises to finance their growth themselves.
(iv) Public Services:
The primary aim of state enterprises is to provide service to the society. These
enterprises are started with a service motive. A private entrepreneur will start
a concern only if possibilities of earning profits exist but this is not the purpose
of public enterprises.

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(v) Useful for Various Sectors:
State enterprises do not serve a particular section of the society but they are
useful for everybody. They serve all sectors of the economy.
(vi) Direct Channels for Using Foreign Money:
Most of the government to government aid is utilised through public
enterprises. Financial and technical assistance received from industrially
advanced countries is used in public enterprises.
(vii) Helpful in Implementing Government Plans:
Economic policies and plans of the government are implemented through

public enterprises
(viii) Autonomous or Semi-autonomous Bodies:
These enterprises are autonomous or semi-autonomous bodies. In some cases
they work under the control of government departments and in other cases
they are established under statutes and under Companies Act.
Objectives of Public Enterprise
State enterprises are established to implement economic policies of the
government. The primary objective of the state enterprises is to serve the

people and help in creating an environment of industrial activity. In a mixed
economy, where there is coexistence of private and public sectors the presence
of public sector has improved the economic strength of the country. The
activities of public sector are rapidly increasing. To reduce the power of private
sector, public sector is needed. The main intension of public enterprise was to
overcome from the vicious circle of poverty and accelerate the pace of economic
development with the strong hands of public sector.
Public Administration Course (PAEC 300): Public Enterprise | 36

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Public sector plays a key role to bring industrialisation in the country and side
by side to bring the country to the path of self- sustained economic growth.
According to, John Maynard Keynes, the father of modern economics, the
importance of public sector is not only to arrange the proper environment for
smooth functioning of the state and give proper financial help to the private
sector to achieve a balanced economic growth.
Main objectives of state enterprises are as follows:
(i) To increase job opportunities for reducing the problems of unemployment
and poverty;
(ii) To accelerate the economic growth by increasing saving potentiality and
capital formation within the country;
(iii) To build up strong industrial base through proper industrialisation and
commercialisation of agriculture;
(iv) To generate more income for the Government by increasing the surpluses
from the public enterprises;
(v) To curb down the problem of inequality in the distribution of income and
wealth;
(vi) To check and control the monopoly activities of the private sector;
(vii) To reduce regional imbalances from the view point of industrialisation.
(viii) To make the country more power and strong, the sole responsibility of
public sector is to improve the defence industries;
(ix) To ensure self-sufficiency in the area of technology and capital goods;


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(x) To build the economy in the concept of 8Welfare state9 by increasing the
welfare activities among the citizens.
(i) Helping all-round Industrialisation:
Government wants to develop all types of industries whether they are
profitable or not. Private entrepreneurs invest only in those industries where
profit earning chances are more. They will not invest in an undertaking where
profits are low irrespective of its utility for the people. State enterprises are
necessary for those lines where private sector is hesitant to invest. It helps in
all-round industrialisation of the country.
(ii) Establishing Enterprises requiring Heavy Investment:
Some undertakings need heavy investment and their gestation period may also
be longer. Private industrialists cannot afford to make huge investments.
Government has large finances and it enters those fields where private
entrepreneurs cannot afford to invest. In case of railways, ship-building, energy
producing concerns, very huge investments are required and it is beyond the
means of private investor to enter these fields. These sectors are very important
from the country9s point of view. So, government enters these fields and
establishes its own undertakings.
(iii) To Provide Necessities:
Government undertakes to provide various necessities like electricity, coal, gas,
transport and water facilities to the people. The aim is not only to provide these
basic amenities but they should also be provided at cheap rates. Private sector
cannot be relied upon to provide these services. The chances of public
exploitation are more in these services. So, public utilities are provided by
government undertakings.

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(iv) For Balanced Economic Growth:
The aim of industrialisation is to develop all industries necessary for the
country. Secondly, various regions of the country should be equally developed.
Private entrepreneurs will aim more at profitability and not on balanced

economic and regional development. Public sector takes up all those industries
where private investors do not invest. The development of different areas is
also considered by the government while setting up new units.
(v) For Avoiding Concentration of Economic Power:
If private sector is given a free hand, industrialisation will lead to exploitation

of consumers. Private entrepreneurs will try to maximise their profits. It will
ultimately lead to concentration of economic power in fewer hands. The

existence of public sector will be a check on the private sector.
(vi) For establishing Socialistic Pattern of Society:
Under socialistic pattern of society, the gap between the rich and the poor is
reduced and the means of production are controlled by the state. In a

capitalistic society the poor becomes poorer and the rich becomes richer. The
establishment of a strong public sector is a must for the equal distribution of
wealth.
(vii) To Run Monopoly Sectors:
Some industries are to be developed only in public sector. The industries like
defence, nuclear energy etc., cannot be left for the private sector. Government
has monopoly in these sectors. State enterprises are required to run such
industries.
(viii) Exploitation of Natural Resources:

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State enterprises are necessary for exploiting natural resources. Private sector
will not like to risk capital in exploiting natural resources. Oil and Natural Gas
Commission in India spends huge amounts for finding out new sources of oil
and gas. A private industrialist will not be able to spend such amounts on
exploratory stages.
(ix) Helping in Implementing Government Plans:
Various government policies and plans are implemented through state
enterprises. They help the government in achieving various targets for output,
employment and distribution.
(x) To increase Government Resources:
Some of the state enterprises are run on commercial lines. These concerns can
provide resources to the government through their surplus. In India, various

public sector enterprises are running on profits. Such enterprises provide
resources to the government for initiating various developmental activities.
(xi) To provide Healthy Competition to the Private Sector:
State enterprises are a check on the private sector. Private sector will have to
provide goods and services on a competitive basis. If there is no state enterprise
then public will be at the mercy of the private sector. Public sector aims at
providing goods and services at reasonable rates; so private sector will also sell
goods on the same rates. So, state enterprises provide healthy competition to
the private sector.

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Summary
This chapter provides the characteristics and objectives of the public
enterprise. Basically, the following are the characteristics of a public
enterprises: Financed by Government, Government Management, Financial
Independence, Public Services, Useful for Various Sectors, Direct Channels
for Using Foreign Money, Helpful in Implementing Government Plans,
Autonomous or Semi-autonomous Bodies. By knowing these characteristics,
we can distinguish what public enterprise from private enterprise and its roles
and functions towards the country9s growth and development.
We also learn the basic objectives of a public enterprise. These objectives
are aimed to promote development in the various sectors and areas of the
society. It also aims to promote the competition and growth in areas where
private sectors usually do not enter.
Let’s Check
Justified TRUE or FALSE. In a separate sheet of paper, write TRUE if the
statement is TRUE. Write FALSE, if otherwise. If your answer is TRUE, justify
your answer by providing explanation as to why you answer TRUE. If your
answer, do the same explanation. Use your own words and be generous in your
explanation (5 points each).
1. Public enterprise is sometimes financed by the private sector.
2. Public enterprise is created to deliver services to selected individuals.
3. Public enterprise enjoys fiscal autonomy.
4. Public enterprises are instruments of the government to create changes
in specific sector of the country.
5. Public enterprise officials are not government officials.
6. Public enterprise employees and officials are not under the civil service
rules and not answerable to the people because they belong to private
companies.
7. GSIS and SSS are examples of public enterprises.
8. Local colleges like SICC is not an example of public enterprise
9. When public enterprises create programs and projects for the people, it
will pass first the congress before implementation.
10. When public enterprises implement programs and projects, they will not
undergo to public bidding.
Essay (25 points)
1. Among the objectives of public enterprise, rank the objectives according
to importance. Rank the 1st as the most important to the last. Discuss the
1st to 5th rank objectives based on your understanding of its importance.

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CHAPTER 4
Legal and Operational Framework of Public Enterprises in the Philippines
A law is valuable not because it is a law, but there are rights in it. ~ Henry Brecher

a) Know the legal and operational framework of the public enterprises
in the Philippines
b) Familiarize the legal and operational framework of public enterprise
Legal and Operational Framework of Public Enterprises in the Philippines
In this, we will discuss the history of the legal and operational
framework behind public enterprises in the Philippines from the national

constitutions of 1935, 1973 and 1987, to the proclamations, memorandums and
executive orders made in recent decades.
Today public enterprises in the Philippines are officially known as

government-owned or controlled corporations (GOCCs), as is their designation
under Presidential Decree (PD) No. 2029 (1986) and restated
in Administrative Order (AO) No. 59 (1988):
<…corporation which is created by special law or organized under the
Corporation Code in which the Government, directly or indirectly, has
ownership of the majority of the capital or has voting control…=
Public enterprises, however, existed long before the official
establishment of this term and definition, as will be discussed in a later section

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of this paper. The earliest legal basis for the establishment of public enterprises
was in Article II, Section 5 of the 1935 Constitution. It outlined that one of the
principles of the Philippine state was the <promotion of social justice to insure
the well-being and economic security of all people…=
In addition to this, Article XIII, on the use and conservation of
natural resources, stated that all the country9s natural resources belonged to the
state and that their use or development was to be limited to Philippine citizens
or to corporations with a majority of at least 60% ownership by Philippine
citizens.
These constitutional provisions formed the basis for the creation of
the earliest Philippine public enterprises in that they set the particular goals of
social justice and ownership of the national economy/resources by the Filipino
people. These broad themes would be replicated and elaborated upon in
subsequent constitutions.
The 1973 Constitution elaborated more on the state policy on the

establishment of public enterprises, specifically under Sections 4-7 of Article
XIV on the national patrimony.
Section 4 of Article XIV states:
<The National Assembly shall not, except by general law, provide

for the formation, organization, or regulation of private corporations,
unless such corporations are owned or controlled by the government or
any subdivision or instrumentality thereof.=

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Section 5, reiterated the theme of national ownership of the economy by stating
that operation of public utilities can only be undertaken by Filipino citizens.
Section 6 set a general policy framework on how public enterprises were to be
created and utilized by the government.
It states that:
<The State may, in the interest of national welfare or defense, establish and
operate industries and means of transportation and communication, and
upon payment of just compensation, transfer to public ownership utilities and

other private enterprises to be operated by the Government.=
Section 7 outlined the power of the state to, in the case of a national
emergency, temporarily take over private enterprises <affected with public

interest= should it be deemed necessary and in the public interest. A keyword
in this particular provision is <temporary=, in that it implies that any such
businesses taken over by the government should eventually and rightfully be
returned to the private sector. This, together with Section 4, implies a state
policy favoring free enterprise, at least in times of normalcy.
Thus, public enterprises during the 1970s and early 1980s were
created primarily for economic development, protection of the national
interest, and in response to specific problems. This policy, however, was rather
unspecific with regard to the boundaries between the state and the market. This
ambiguity, coupled with the patronage inherent in the system during the
martial law years, led to the proliferation of public enterprises as well as quite
a number of issues and challenges to the public sector.

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These problems led the Marcos government to create the Special
Presidential Reorganization Committee (SPRC) in 1985 with its view of
rationalizing the government corporate sector. This committee recommended
limiting the use of the government corporate form to certain areas and
activities, the institutionalization of effective supervision, the coordination and
control of government corporations, and the abolition/privatization/merging
and/or retention of existing GOCC9s. These reform efforts, however, were

overtaken by the political upheaval that occurred in 1986.
During the subsequent Aquino administration a new framework was
drafted for limiting the use of the government corporate form to those activities
usually considered to be natural monopolies, those that require large and

physically indivisible capital investments, those characterized by long and
uncertain gestation periods, and those deemed essential from the point of view
of national defense, security and welfare.
The plan also proposed that the following criteria should govern the use
of the government corporate form:
a. flexibility and autonomy in operations;
b. financial viability;
c. limited liability of the national government, and;
d. the possibility of private sector participation
Subsequently, Administrative Order (A.O.) No. 59 was issued in
February of 1988 for the purposes of providing principles and standards to be
followed in the creation, management, administration, supervision and
liquidation of GOCCs, defining the guidelines in determining the areas or

activities in which the government corporate form could be utilized, and

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establishing policy measures to improve the organizational and functional
capabilities of GOCCs.
Section 3 of A.O. 59 stated that the government should be engaged
in the provision of goods and services only if said goods and services are <vital
to society= and if <the private sector is unable or unwilling to provide the

same=, or if market intervention is <justified by the need to create a bias in favor
of disadvantaged sectors of society.=
In addition to these guidelines for state intervention, the order also

recommended that the corporate form only be used if the nature of the good or
service provided or the market structure for those goods/services required the
operation of a less restrictive organization than a regular government agency,
if it is intended <to limit the liability of government to its direct equity
exposure=, or when the enterprise could be <reasonably expected= to be able to
financially sustain itself.
Lastly, A.O. 59 mandated that all proposals for the acquisition,

creation, and dissolution of GOCCs would be reviewed and evaluated by the
Government Corporate Monitoring and Coordinating Committee (GCMCC)
established in 1986 through Memorandum Circular No. 10. This committee was
further empowered by Executive Order (E.O.) No. 236, issued on in July 1987,
to be the central monitoring, coordinating and performance evaluation unit for
all GOCCs.
The GCMCC filed legislative bills aimed at standardizing the general
features of the charters of GOCCs such that the management of GOCCs were
vested on its chief executive officer, the members of the Board of Directors were
required to have recognized competence and experience relevant to the GOCCs

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operations. This was aimed at professionalizing the management of the
GOCCs. However, the system of departmental attachment of GOCCs was
maintained together with their inter-departmental supervision by the GCMCC
and other service wide agencies like the COA, CSC, the Department of Budget
and Management (DBM), the NEDA and others.
Another major development during the first Aquino administration
was the establishment of the government9s privatization program. In December
of 1986, President Corazon Aquino issued Proclamation No. 50. Under this
program, the government would divest itself of two types of assets, the 122
GOCCs recommended to be privatized and non-performing assets (NPAs) that
were earlier transferred by the PNB and the DBP to the national
government. Proclamation No. 50 created the Committee on Privatization
(COP) and the Asset Privatization Trust (APT). The COP was a cabinet-level
committee that was primarily tasked to oversee the privatization program.
Furthermore, it was put in charge of formulating the policies and general

guidelines on issues of privatization, approving the sale and disposition of
GOCCs, NPAs and other assets, and monitoring the progress of privatization
actions.
On December 31, 2001, the COP and the APT became defunct and
were succeeded by the Privatization Council (PC) and the Privatization
Management Office (PMO) under Executive Order No. 323 issued by then
President Estrada. These bodies continued the work of their predecessors.
The most recent additions to the governance framework for the
public enterprise sector are Executive Order No. 24, which prescribes a
framework of rule to govern the compensation of members of the board of

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directors/trustees of GOCCs, and the subsequent Republic Act (RA) No. 10149,
or the GOCC Governance Act of 2011. Both of these were the result of the
current Aquino administration9s anti-corruption campaign. E.O. 24 in
particular was aimed at what were perceived to be unusually high benefits

accrued to executives in GOCCs. Of these, the Local Water Utilities
Administration (LWUA) was notably scrutinized due to the alleged purchase
of capital stock of Express Savings Bank, Inc. by its former chairman Prospero
Pichay, Jr.. However, due to the inability of an executive order to override the
charter of the LWUA, the GOCC Governance Act was rushed through
Congress and passed in the middle of 2011.
R.A. 10149 introduced sweeping changes in the public enterprise
sector, specifically it established a Governance Comission for GOCCs (GCG),

put into law a revised renumeration system for positions within GOCCs, called
for a new performance evaluation system, put obligations and appointment
guideline on directors/trustees/officers of GOCCs, mandate disclosure
requirements for all GOCCs, and set guidelines for the creation or acquisition
of GOCCs. By itself, the act constitutes the single most significant change in
public corporate governance in recent years. The implications of this law could
have been substantial, however a lack of commitment and half-hearted
implementation on the part of the Aquino administration resulted in very little

genuine change in the actual governance of the public enterprise sector.
From his own experience working the Home Development Mutual

Fund (Pag-IBIG Fund), the author got the impression that the GCG was
perceived not so much as a pilot agency strategically leading the public sector
but rather as yet another oversight body, one who9s purpose was primarily to

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rubber stamp performance targets set by the GOCCs themselves and collect
annual reports. Even more discouraging to the author was his discovery from
one of his professors that the GCG, about four years after its establishment, was
still no more than a small government office with only a few dozen personnel.
Summary
We learned in this chapter the constitutional basis in establishing public

enterprises. It also provides the enabling laws which carry out the purpose of
the charter. These laws provided specific details on how public enterprises
operate and the expected output/service to be delivered to the people. The

laws also provide the mechanism in which accountability is to be observed.
Indeed, public enterprises have the key role to perform for country9s fast
pace of growth and development by performing the expected service from

them.
Let’s Analyze
Make a summary matrix of the Philippine laws pertinent and relevant to the
operations of public enterprise. In bullet form, write the objectives of these laws and
purpose. 5 points each
Laws Its Purpose
1.
2.
3.
4.
5.
6.
7.
8.

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CHAPTER 5
Challenges Faced by Public Enterprises

a) Know the challenges encountered by the public enterprises, its
causes and effects of the challenges
b) Determine the causes of these challenges; and,
c) Come up with doable recommendations to address these challenges
mentioned
Situationer of Public Enterprises in the Philippines
Public enterprises are subject to various issues as a result of their unique

hybrid nature. They often have conflicting objectives, sometimes as a result
of ambiguously set mandates. Private firms have always had a clear
proprietary objective: to earn profit. Bureaucracies are entirely different
animals with different objectives from private firms. They are aimed at social
or political objectives handed down from above by their political masters.
Public enterprises involve a mix of both types of objectives, which may
contradict one another. More specifically, the pursuit of certain objectives
social or political objectives like economic development, may contradict
public enterprises9 proprietary objectives. This leaves public enterprises
unable to maximize their effectiveness in attaining their multiple objectives
due to having to balance them. It also often leaves them unable to ensure their
financial viability or exercise fiscal restraint, two objectives which recent
legislation has underlined.

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Another issue that may plague public enterprises is that of

ministerial or political interference in which politicians may become overly
involved in the running of public enterprises or may meddle in their affairs to
the detriment of efficiency, management initiative and employee morale.
Such meddling undermines the intended autonomy of public enterprises,
which, as mentioned above, is one of the theoretical advantages of the public
enterprise form. The undermining of public enterprise autonomy may arise
from other factors, notably political. Hanson (1965) cited the example of
public corporations in Turkey in the case of Law 3460. Under that law, several
government banks turned into public corporations so as to allow them the
autonomy to foster the flexibility and initiative required of enterprises.
According to Hanson, however, the legislated autonomy of those corporations
was soon practically eliminated by further legislation which provided for
extensive ministerial supervision.
Segovia (1995), in her case study of the National Power

Corporation cited political pressures during the Aquino administration,
particular due to suspicions of corruption among the pre-existing bureaucracy,
as factors that contributed the decline and subsequent crisis involving that
corporation. Micro-managing by the then newly-appointed NP Board,
deferment of rate increases and a roll back of the rate prices for political
reasons, and investigations by the legislature were notable examples cited.
These examples show that scrutiny in the name of accountability, if overdone
can have a severely detrimental effect on the operation of public enterprises.
Despite the argument that public enterprises can be more

accountable than private firms, public enterprises are often the subject of
controversy with regard to transparency. Because of the discretion and

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autonomy (supposedly) accorded to them as well as the public dimension of

their nature and of the funds that they often use, PEs the question of
accountability is perennially pertinent. The issue has been particularly
emphasized during this current administration. However, the issue of
accountability of public enterprises has often led to an over-emphasis on
accountability and thus to ministerial interference.
In addition to often being unable to put into practice the theoretical

advantages of private firms, public enterprises are also prone to the same vices
of bureaucracies. Rules and regulations intended to prevent abuses may also
act as disincentives to efficient management due to an over-emphasis on
following rules and regulations (Von Mises, 1969). On an individual level
principal-agent problems may be encountered. Public enterprise employees
may also take on the rational calculation of bureaucrats and may have little
incentive to optimize their performance given that the decisions they make
often have little to do with their own interests and thus they would have little
reason to consider decisions carefully (Tullock, 2002).
Lastly there is the tendency for public enterprises to be liabilities

in the government9s budget. Such is the case for several GOCCs in the
Philippines. Indeed, the Department of Finance (DOF) lists 14 <heavily
indebted GOCCs= as of 2004 (Mendoza, 2007). Phenomenon such as a soft
budget constraint, wherein public enterprises behave as if their budget
constraints were not 8solid9 due to the strong possibility of government
assistance (Kornai, Maskin, & Roland, 2003), can affect the fiscal viability
and economic efficiency of public enterprises.

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The Philippine public enterprise sector in particular has

historically been hounded by numerous problems that have been raised by
studies time and time again since the 1950s, notably: displaying <rampant
corruption, mismanagement and inefficiency=, nepotism, being vehicles for
crony capitalism under the Marcos regimes, a lack of a clear policy on
government intervention in the economy, <inadequate monitoring and
control=, and <poor corporate performance= (Mendoza, 2007).
Constraint 1: Market. When selling its output, a public enterprise
will be "constrained by the market" as it has to consider the demand
side of the market and has to cope with actual or potential
competitors on the supply side. Public monopolies are often obliged
to cover all demand at a given price, even if a deficit result. Such a

strict constraint will, of course, never be imposed on private
enterprises which are usually assumed to stop production if losses
occur in the long run. On the other hand we should not forget the
many cases of consumers left unserved by public monopolies (as

they were in the past by the telephone administrations in Britain,
Germany, and France through capital restrictions imposed by
governments; in Ital y and Britain the quality of postal services is

being impaired by similar restrictions). Th e acceptance of excess
peak demand in electricity, transportation or telephone services may
even be welfare optimal).
Competition on the supply side is often eliminated if a public

monopoly is sheltered against potential market entrants. Such
sheltering may be justified on welfare grounds if the monopoly
behaves appropriately. Otherwise barriers to entry should be

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abolished to force the monopoly into entry resistant policies which
can be shown to be welfare optimal under particular assumptions
(Baumol-Bailey-Willig, 1977). On the other hand, there are many
public enterprises in oligopolistic competition with private ones or

even in nearly perfect competition. Examples are nationalized and
private automobile companies or the small communal breweries in
Germany which compete with the many private ones. In these cases,
constraints by the market forces must be considered explicitly by the
public enterprise and, therefore, by any model of public enterprise
theory.
When buying their inputs, on the other hand, public enterprises
typically have to compete for blue and white collar staff with private
firms whereas they may be monopsonistic with respect to capital
inputs, e.g. if stat e railways buy locomotives
a) Constraint 2: Production. In private enterprises inefficient
production will always be considered to result from
mismanagement. In public enterprises there are kinds of inefficiency
which are accepted by government as the cost of achieving particular

objectives of economic or social policy. In our theoretical approaches
we will postulate efficient production by public enterprises, and by
private enterprises as far as the y are explicitly considered.
b) Constraint 3: Finance
c) Constraint 4: Political Environment
In addition, the following are also problems faced by state enterprises.

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(i) Form of Organization:

This is one of the important problems of state enterprises. In any undertaking,
form of organization is very important. The working of the undertaking
entirely depends upon the form of its organisation. A number of forms such as
departmental form, public corporations, and joint stock companies are used for
managing state undertakings.
Departmental form is used for strategic industries and public utilities. Public
corporations are useful for managing big undertakings and joint stock
companies may be useful for running concerns on commercial lines. Before

taking a decision regarding the form of an enterprise, the nature of work to be
undertaken, capital required, requirements of managerial personnel and state
policy should be taken into consideration.
(ii) Managerial Autonomy:

8How much autonomy should be allowed to the management is another
important factor. In theory, state enterprises are managed by independent

managements, but in practice, state interference always remains. In
departmental undertakings, managerial autonomy is minimum. Civil servants
occupy all important positions and these persons are directly under
government control.
Public corporations and government companies also have civil servants on

important positions. The management of these enterprises should be given a
free hand to take their own decisions as warranted by the situations.
(iii) Public Accountability:

State enterprises are financed by public money and they are primarily formed
for public service. Public should be aware of the working of these enterprises.

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Nothing should be concealed from the public. Government should present all
facts about the working of state enterprises to the state legislatures or to the
Parliament. These legislative bodies have representatives of the public and
government is accountable to these houses.
(iv) Pricing policy:
Pricing policy of enterprises has always remained a topic of controversy.
Whether these undertakings should take profits or should work on no-profit

no-loss basis, has always been debated. A sound pricing policy should aim at
earning some profit so that these units become economically viable units.
Moreover, these undertakings should finance their own growth.
(v) Working Conditions:

The working conditions of the staff concerning requirements, fixation of wages,
salaries and rules for incentives etc. should be made similar in all public
undertakings. Moreover, working conditions should be similar in all public
and in private sector undertakings. This will help government concerns to use
the services of qualified and competent persons. If working conditions are
better in private sector units, then qualified persons will join private sectors
instead of public sector.
(vi) Industrial Relations:

Industrial relations have become a significant factor in industrial environment.
There should be some machinery for settling employee-management disputes.
The workers should be given incentives for raising their output. A proper care
should be taken for selecting and training of workers. Various incentive

schemes should be devised to prompt the workers for raising their output.

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(vii) Research Schemes:

Public undertakings should always aim at providing better services and good
quality products to the public. It requires constant research and developmental
plans to devise new and better methods of production. Public sector
undertakings are generally monopoly concerns and they do not give much
attention towards improvement of their working. This tendency should not be
there. Lack of competition should not mean lethargy and inefficiency. These
undertakings should pay proper attention towards improving their working
and should try to serve consumers in a better way.
Summary
In this chapter, we learned and discussed the various challenges faced
by the public enterprises. These challenges are management in nature
especially the form of organization, managerial autonomy, pricing policy,
working conditions, industrial relations, and research schemes.
These challenges certainly affect the efficiency and effectiveness in
delivering expected service of public enterprise. The need to resolve such
challenges is imperative to effect change for the greater welfare of the people.
Source: https://www.yourarticlelibrary.com/enterprises/7-problems-faced-by-
state-enterprises/42064
Let’s Analyze
In the table below, list down the problems encountered by the public
enterprises and provide at least 3 solutions per problems.
Problems Solutions
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
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 .
 .

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 .

 .
 .

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 .

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CHAPTER 6
Proposed Reform Package for the Public Enterprises

<We must reform our society before we can reform ourselves= ~ George Shaw

a) Know the proposed reform packages
b) Critically determine the pros and cons of the proposed reform
packages
c) Determine whether these proposed reform packages are viable for
adoption or not
Reform Packages
Given the issues and the current state of the public enterprise sector
what recommendations can then be given to the government in addressing the
public corporate sector?
The previous wave of reform under the auspices of reinventing

government led to a massive decrease in the number of public enterprises as
government intervention in national economies was reduced and Pes were
privatized. Such was the case in the Philippines under both the Aquino and the
Ramos administrations. However, there have been recent calls to reconsider
such strategies and to review the role of Pes in developing national economies,
notably among contributing authors of working papers from the United
Nations Department for Economic and Social Affairs (UNDESA) (See: Chang,
2007 & UNDESA, 2005).
As such, one must take a critical eye when attempting to address the
various issues that may plague different public enterprises in different
countries.
The first step must be to recognize the significance and potential of
public enterprises as instruments of public policy and of development, but also
to rationalize their existence. Public enterprises must be able to contribute
meaningfully to national interests and to the cause of development. Public
enterprises that cannot be justified should not be retained and those that can
should be reformed. With regard to the latter the objectives of reform and the
type of reform to be undergone must be carefully considered, not doing so may

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have negative consequences for both the state and society in the long run.
Another fundamental issue that must be addressed is that of public
enterprises9 role and objectives, both as a collective whole and individually.
Ambiguity and uncertainly can lead to an undesirable proliferation of public
enterprises, as it has in the case of GOCCs in the Philippines. National
governments must clearly and unambiguously determine the role of the public
sector in the national economy. Such an over-arching state policy would have
to be discussed and formulated at the highest level of government, and would
require much commitment and political will if it is to be adhered to consistently
(Gouri, Sankar, Reddy, & Shams, 1991). In individual organizations it can lead
to sub-optimum performance as Pes struggle to balance various, and
sometimes conflicting, objectives. Clarifying public enterprise objectives and
priorities is a pre-requisite to their improved performance. Without a good idea
of what their priorities should be and what the appropriate criteria for
efficiency are, PE managers cannot optimize their performance towards the
attainment of them.
Yet another area that needs clarification is that of inter-governmental

relations with regard to Pes. If public enterprises are supposed to be able to
accrue the benefits of autonomy, there must be a distinction with regard to the
limits of ministerial supervision and the discretion of directors and managers
in the setting of organizational policy and the running of those organizations.
There must be a decentralization of decision-making in the public enterprise
sector in much the same way as there has been decentralization in the
development of local government in the Philippines, though it must be done
with care and consideration of individual circumstances of each enterprise
affected. Only when decision-making for public enterprises are less centralized
will those organizations be able to show the initiative that they were intended
to foster.
These suggestions are only those which broadly cover the public
enterprise sector. Specific prescriptions for improvement and reforms must be
formulated for different cases under different circumstances, particularly about
their fiscal viability, quality of personnel and efficiency.

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Macro Policy – Addressing Sector-wide Concerns
After clarifying the role of the state in the economy, we recommend

that the government should then address the existing public corporate sector
in two ways. First, it must improve public corporate sector governance. Second,
it must determine, based on the state ideology, which GOCCs should continue
existing and which are better off abolished. Gouri, et. Al. (1991) offer two
possible options for addressing troubled public enterprises (besides abolition):
privatization and public enterprise reform. The key is determining when and
where to apply either strategy. We discuss both these points in the following
two sub-sections.
i. Improving Public Corporate Sector Governance – Managed

Interdependence and Performance Evaluation
Improving accountability in government has long been a major

concern of public administration. Rules and regulations are at the core of
bureaucracies. So it is with public enterprises. Because of the public interest and
public ownership inherent in their nature, public enterprises and their
managers must therefore be held accountable to the state. However, as was
mentioned in the earlier section on public enterprise issues, there has often been
conflict between the intended autonomy of public enterprises and notions of
public accountability.
As the flexibility of decision-making of an autonomous enterprise is

one of the major reasons for the adoption of the public enterprise form of
organization, often debates and conflicts will arise when state actors seek to
hold public enterprises more accountable or when public enterprise managers
seek greater discretion in the management of their organizations9 affairs.
Sometimes the dilemma can lead to, or be caused by ministerial or political
interference, which hampers the autonomy of the public enterprise. Sometimes
it may lead to preferential treatment of PEs through the granting of great
Degrees of discretion to public enterprise managers, creating public enterprises
that are unaccountable and could become vehicles of abuse of state resources
by managers or employees.
Obviously, accountability is important, as public enterprises are state

assets and their managers and employees are by extension bureaucrats of the
state. Public interest needs to be protected. But in order for public enterprises
to truly make full use of the special organizational arrangement and decision-

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making structure, they must remain autonomous thus more flexible than
traditional bureaucracy.
To address this, we adopt Austin9s prescribed paradigm of managed

interdependence. Austin (1985) argues that these two principles need not be in
conflict one another, nor should they be. He argues that no public enterprise is
ever truly autonomous, as they are policy instruments of the state, and that the
more correct way to view autonomy is in terms of degrees. Additionally, he
argues that the dilemma of accountability and autonomy is a false one that does
more harm than good (Austin, 1985). In this paradigm the inextricably
necessary interaction between public enterprise and government is viewed as
positive rather than negative sum game. In it, the emphasis is on shared
interests which he argued to outweigh points of conflict.
There are four major areas of concern in the managed

interdependence paradigm:
1. Collaborative management
2. Information flows
3. Interaction diversity
4. Results orientation
The first area, collaborative management, requires that policymakers

and managers recognize that their interaction must be collaborative in nature.
The reality of government is that managers as just as involved in policy
formation as policymakers may be in management (Op. cit.). Thus managers
and policymakers must work with one another to set goals and objectives. Such
interactions would lead to clearer objectives as well as mutual understanding
and trust between policymakers and public enterprise managers.
The second area, information flows, deals with issues of

transparency. Lack of information available to policymakers and the public on
the activities of public enterprises is often the cause of political interference. In
order to address this, mechanisms of transparency must be put in place to
placate and to allow key stakeholders the ability to evaluate the activities and
performance of GOCCs. Austin writes that information management is key for
public enterprises: The information needs of stakeholders must be

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63ccount63ed and addressed, a proper information management system needs

to be put into place, and this information system can be a means through which
vital feedback from stakeholders may be taken in and utilized by the PE.
The third area of major concern deals with ways in which public
enterprises interact with the government. Austin argues that the state should
be open to diverse arrangements of interaction with different types of public
enterprises.5 This is as opposed to standardization which seeks uniformity.
Instead the state should attempt to find optimum arrangements depending on
character of the public enterprise involved.
The last major area, results orientation, deals with the focus of both
policymakers and managers with regard to public enterprise. Rather than the
traditional bureaucratic orientation to emphasize rules, regulations and
procedures emphasis should be placed on public enterprise performance. This
would necessarily require a performance evaluation system that takes into
consideration the nature of public enterprises and uses appropriate measures
and standards for different types of public enterprises with different social
objectives. Suggestions for this will be elaborated upon further below.
Below we cite ways in which it may be possible to apply the

managed interdependence paradigm, as well as look at how the new GOCC
Governance Act measures up to its prescriptions.
One of the important steps that should be taken to improve

accountability is to disentangle and streamline the current networks of
accountability. Due to the growth of the public enterprise sector over decades,
and the lack of a clear public enterprise policy has led to a complex network of
accountability and supervisory relations between GOCCs and various
departments and agencies, wherein there is much overlap. A centralized
government department dedicated solely towards governing the public
enterprise sector, much like India9s Department of Public Enterprises (DPE),
would help to address this issue.
The government has taken this approach with the newly-created

Governance Commission for Government-Owned or -Controlled Corporations
(GCG). Much like the DPE, it is a central body dedicated specifically for
addressing the public corporate sector. Republic Act No. 10149 outlines the
following powers and functions for the commission:

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1. Evaluation of performance and relevance of GOCCs and determining what

actions is to be taken to address them;
2. Classification of the various GOCCs based on, but not limited to, sector;
3. Formulation, in consultation with relevant departments and stakeholders,
of an ownership and operations manual as well as corporate governance
standards for GOCCs;
4. Recommend suspension for erring members of Boards of
Directors/Trustees who violate or do not comply with the ownership
manual;
5. Determine necessary skills for and make a list of, recommended qualified
candidates for appointive directors for the President;
6. Create performance evaluation systems for all GOCCs as well as for each
GOCC classification;
7. Conduct periodic assessments of GOCCs;
8. Conduct compensation studies and recommend a competitive and
attractive remuneration system for public enterprises;
9. Provide technical advice and assistance to relevant government agencies
for monitoring performance of GOCCs vis-à-vis their objectives and
targets;
10. Coordination and monitoring of GOCC operations to ensure consistency
with national policy;
11. Prepare semi-annual progress reports for the President and Congress;
12. Review functions of GOCCs and make recommendations to the President
should there be a conflict of interest with regard to regulatory and
commercial functions;
In terms of area of concern of collaborative management, we would

recommend that the GCG in its functions of coordination and monitoring
operations and performance of GOCCs should endeavor to meet with, consult
and coordinate with both the GOCCs and their respective government
departments or agencies in order to clear up objectives and goals so that both
GOCCs and the national government have a mutual understanding regarding
these as well as of the national policy. As it is, the only seeming way in which
collaboration takes place is in the one-time formulation of the GOCC
ownership manual. The rest of the functions and powers ascribed to the GCG
outline a traditional top-down approach to public corporate governance.

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With regard to transparency, the mandate of the GCG seems to be

certainly well covered when it comes to requiring transparency of GOCCs.
However while one might be quite certain that the results assessments of
GOCCs will be made available for the public much like the results of
Commission on Audit (COA) annual audit reports, stakeholders in different
types of GOCCs may require much more in the way of disclosure either in
frequency or content. Therefore, individual GOCCs will have to address this
need through the development of their own information management systems
aimed at addressing their stakeholders. There is also the possibility for sector
or industry-based information systems managed by the GCG for public firms
whose stakeholders might have similar information requirements, possibly
government financial institutions (GFIs).
With regard to inter-governmental relations between the national

government (through the GCG), and GOCCs, it seems that while the law seeks
to centralize oversight of public enterprises, it appears that existing lines of
supervision will be maintained, at least as far as the law stipulates.
Modifications to intra-governmental relations may be possible based on the
interpretation of the words 8reorganized9 and 8streamlined9 in Sec. 5 (a) of the
law.7 That said, we recommend that in reviewing GOCCs, the Commission
should take into consideration intra-governmental lines of supervision,
monitoring, etc. to the end of streamlining and removing unnecessary overlap
as well as determine the most efficient/practical arrangement for individual
GOCCs.
Lastly, with regard to the concern for a 8results orientation approach9
towards public enterprises: Performance assessment has is undoubtedly one
of the major concerns of R.A. 10149. In this sense the law is most stringent, and
implementation of this in the government has been rather aggressive. Such
evaluation is critical for the efficient and effective running of public
enterprises. In fact, Jones (1987) argued that much of the problems of public
enterprises can be traced to inadequate performance evaluation.
However, while the law requires the development of performance
scorecards based on GOCCs9 strategic objectives, the majority of disclosure
requirements for GOCCs center around traditional accounting standards
concerned largely with financial performance. Such an evaluation framework
is insufficient as it only takes 65ccountt the financial health and viability of
public enterprises and therefore only covers its proprietary
dimension/objectives.

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We recommend the adoption of performance evaluation/accounting

framework that better takes into consideration the different objectives pursued
public enterprises at the same time as well as providing an expanded set of
criteria for evaluating those objectives. Getting performance evaluation right
for GOCCs is crucial, as like private enterprises, performance evaluation of
public enterprises provides vital feedback necessary for efficient and effective
management.
Given this, we recommend the adoption of Guina9s (1986) framework

or a similar framework, for evaluating public enterprises. Formulated as a
doctoral thesis, the framework encompasses a wide variety of performance
criteria and indicators that can be used to assess public enterprises. Figure 1
outlines Guina9s performance evaluation framework:
Figure 1. Framework for evaluation of public enterprises
Source: adopted from Guina, 1986.
The adoption of such a comprehensive framework would help the

Commission in developing GOCC performance scorecards as well as

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improving the overall performance evaluation system by allowing it to move

beyond traditional accounting methods.
Lastly, we recommend the development of an incentives system that

encourages <socially desirable behavior= from public enterprises, and which is
linked to the performance evaluation system. We borrow from Jones9 (1987)
proposed framework of a 8signaling system9 composed of performance
evaluation system that deals with assessment, a performance information
system that deals with monitoring and am incentives system that links national
interest with public enterprise managers9 individual interest.
Such a system would mimic in a way the simpler incentives system

found in private enterprises. In private enterprises, good performance is
measured by profit, the clear and simple goal of any company (Von Mises,
1969). Behavior that brings profit is rewarded. This gives managers very strong
incentives to perform. This is not the case in bureaucracies, and often in public
enterprises where pay is often fixed and security of tenure assured, providing
little to no incentives for good performance.
R.A. 10149 partly addresses this with its chapter three which
outlines the development of a compensation system for GOCCs both covered
and exempted from the Salary Standardization Law (SSL). This system more
closely approximates the compensation system used during the Marcos years
which was replaced by the SSL. It seeks to provide compensation for work
comparable to that of the private sector. It also provides for additional
incentives tied to good performance. This provision, however, only states that
the GCG may recommend incentives for certain position for good performance
of GOCCs. This idea is commendable, but a more comprehensive system with
closer linkages between good performance and incentives is needed to better
encourage good management of public enterprises.

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Summary
Recognizing the significance and potential of public enterprises as
instruments of public policy and of development is crucial for sustainable
operations of the government. Public enterprises must contribute meaningfully
to national interests and to the cause of development. This section therefore
covers the proposed reforms and programs aimed at developing public
enterprises to be effective and efficient in the delivery of its expected services.
One of the ways to improve the services of GOCCs is to improve the salary
standardization which seeks to provide compensation for work comparable to
that of the private sector. This move is seen to incentivize employees which are
expected to perform better and productively. We also learn the adoption of
performance evaluation/accounting framework that better takes into
consideration the different objectives pursued public enterprises at the same
time as well as providing an expanded set of criteria for evaluating those
objectives. Collaborative management is also recommended which endeavor to
meet with, consult and coordinate with both the GOCCs and their respective
government departments or agencies in order to clear up objectives and goals
so that both GOCCs and the national government have a mutual
understanding regarding these as well as of the national policy.
Self-Check
1. In your own words, discuss the below figure

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2. Propose other suggestions to improve the state of public enterprise then

prove 4 brief explanation for the proposal you make.
Proposal Perceive Advantages of the Said
Proposal
1.  .
 .
 .
 .
2.  .
 .
 .
 .
3.  .
 .
 .
 .
4.  .
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 .
 .
5.  .
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 .
 .

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CHAPTER 7
Privatization or Public Enterprise Reform?
Privatization is a bitter pill, but it is a pill that will cure. ~ Frederick Chiluba

a) Determine whether privatization of public enterprises is
economically advantageous especially to the welfare of the people;
and
b) Know whether public enterprises is to be remained as public
enterprises or GOCC but need reforms.
Evolution of Privatization
Ever since the establishment of the Committee on Privatization during

the first Aquino administration, the Philippine government, inspired by the
neoliberal wave, actively pursued privatization as a means of addressing its
problematic public enterprises, some might say with a bit too much enthusiasm
and not enough critical thinking. Though privatization has slowed down both
in the country and globally and the enthusiasm for it has waned, it remains a
major strategy for dealing with public enterprises, in spite of real life
experiences and events that have put the economic tenets that support it into
question (Quiggin, 2011). In this section we will re-evaluate the strategy of
privatization in light of experience, its limitations and as well as the alternative
strategy of public enterprise reform.
Privatization refers to the process of transferring public assets to

private ownership and/or control. In the context of macro-economic
government policy, it may come in two forms: sale of assets and liberalization.
The former involves the straight forward sale of government assets to the
private sector, while the latter involves both the divesture of public assets to
the private sector as well as deregulation and decontrol of the economy in a
gradual shift towards a freer market (Gouri, Sankar, Reddy, & Shams, 1991).
Privatization was a primary strategy for dealing with public

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enterprises in many country cases, particularly during the height of the

reinventing government movement, when the intention was to downsize the
public sector to give room the private as well as improve outcomes. It was also
often undertaken as a means of generating revenues for the government.
Underlying this strategy was the argument that the private sector would be
more efficient in delivering certain goods and services than the public sector
(Lim & Moore, 1989). However, privatization strategies have had mixed results
in different country cases.
Key Reasons for Privatization
In a case study conducted in Honduras which covered several

construction projects that were outsourced to private companies, Lim & Moore
(1989) found little in terms of improvement with regard to cost, time and
quality of the privatized projects as compared to estimates as to the cost, time
and quality of those projects if done under direct administration.
With regard to factors that affected privatization, three major

considerations were derived from the Honduran case:
1. The level of competitiveness in the market for the good in question.

2. The existing institutional and regulatory framework and its possible effect
on privatization.
3. Possible social, political or economic impacts that may arise from

privatization.
The first and second points in particular highlight one of the

fundamental assumptions of proponents of privatization: that the market is
more efficient in delivering goods and services than the state. The arguments
for privatization all have the assumption of a competitive market underlying
them (Van Slyke, 2003). But markets are only efficient to the extent that they
are free and competitive.
In cases where in markets are not sufficiently competitive or where in

the industry or sector is not amicable to competition (e.g. natural monopolies)
privatization may yield little to no benefit. In such cases private
ownership/management may matter little, and in fact public ownership may

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even be more desirable. Regulations and the institutional structure established

by the state may add further barriers to competition.
The third point highlights the political and social objectives often
attached to public enterprises. Though privatization may improve the
economic viability of certain PEs, it does not guarantee that those organizations
non-proprietary objectives will be met as well as under public ownership and
management. It also highlights the displacements that may take place as the
state pulls back from its role as provider, producer and guarantor. This is
particularly pertinent to those public enterprises meant to cater to the needs of
indigent groups or sectors (minorities, the poor, etc.).
Gouri, et. al. (1991) made similar findings and reached similar
conclusion in a cross-country study composed of eight countries from the Asia-
Pacific region covering Australia, China, India, (South) Korea, Malaysia,
Philippines, Sri Lanka and Thailand. The authors determined that among the
country cases, the benefits accrued from privatization ranged from rather
moderate to low. Like the findings in the Honduran study, the authors
emphasized the significance of the conditions and structure of the market, as
well as the potential social, political or economic impacts of privatization. The
report similarly prescribed reforms and development of market structures, as
well as the need for safety nets to deal with social tensions that may arise.
Additionally, the authors emphasized the need for countries to have a clear
understanding of the rationale, objectives and methods to be had should they
pursue privatization.
In the case study of the privatization of social services in New York

state, another key factor that was cited as being necessary for the success of
privatization was that of public management capacity (Van Slyke, 2003). Public
management capacity is defined as the possession of skilled personnel with
<contract managing expertise, negotiation, bargaining, and mediation skills,
oversight and program audit capabilities, and the necessary communication
and political skills to manage programs with third parties in a complex political
environment. (Van Slyke, pp. 296-297)= The study linked the need for such in
the public sector due to the necessity of ensuring the existence of a competitive
market structure as well as necessary monitoring and evaluation measures. In

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addition, the study also reassessed the role of non-profit NGOs in the delivery
of social services.
While it is conventional wisdom is that the participation of civic

groups in shouldering the burden is a good thing, Van Slyke (2003) identified
that, while NGOs offer specialized expertise their actions often restricted
competition into the service markets that they operated in. In particular, the
networks by which NGOs often use to connect with public officials to maximize
the interests of those NGOs. Van Slyke cited the push for legislation requiring
certification standards to be applied to suppliers of specific services. In such
cases the proponent NGOs would be the most qualified to meet those
standards, while the need for certification doubles as a barrier to the entry of
other players.
In effect, such cases presented a change from a public monopoly to a

private (non-profit) monopoly. The pros and cons between which are up for
debate, thought it seems that the non-profits offer specialized expertise and
flexibility in addressing particular issue-areas (Van Slyke, 2003), while
government monopoly would probably allow for more generalized coverage
and possibly easier coordination. Thus there appears to be a trade-off between
the two cases of public service monopoly. Granted, the existence of NGOs
dependent on public funding seem to limit the effectiveness of transferring
responsibility to private actors in terms reducing public fiscal burden.
All in all, cross-country analysis of past experience indicates that

more often than not, successful privatization requires much in terms of
government effort. This brings to question the attractiveness of privatization as
a strategy for addressing public enterprises, which brings us to the alternative
strategy: public enterprise reform.
In contrast to privatization, public enterprise reform has no widely

accepted definition. Indeed, the term 8reform9 while implying change, betrays
nothing about the type of change meant to be undertaken except that it is
definitely meant to be for the better. Nevertheless, we do have some guidance
as to what reform can mean based on the GOCC Governance Act which besides
privatization lists the available options for dealing with public enterprises:
reorganization, merging, streamlining, or abolition. Here we will take the term
8public enterprise reform9 to imply the use of any of these in a macro-economic

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context referring to the public enterprise sector as a whole. With these options
on the table, it is now up to the GCG to study the cases of individual GOCCs
and to subsequently recommend what course of action to take as to implement
that course of action.
Obviously, determining the specific modality of public enterprise

reform to be applied in any particular case necessitates careful and deliberate
consideration of the various GOCCs now under the jurisdiction of the GCG.
The issues, problems and challenges of each GOCC need to be considered along
with their mandates and objectives. Indeed, some GOCCs fulfill some of the
goals of their mandate merely by existing (Jones, 1987).
That said, many unsuccessful or underperforming public enterprises

can be made successful with the proper reforms. As such, the government,
particularly the GCG, should endeavor to determine what reforms are needed
and to implement them. It is beyond the scope of this paper as well as of
practicability to recommend more than this.
In their conclusion Gouri, et. al. (1991) contended that the pursuit of
privatization is a matter of ideology and therefore of political choice. As it is,
the economic debate on the pros and cons of public and private firms remains
unresolved (Quiggin, 2011) offering no definitive answer for policymakers.
Should societies and their governments feel that their economy need to be more
market-oriented then they will likely pursue privatization policies. Other
governments and societies may be more inclined towards government
participation in the economy and may prefer to retain public enterprises.
However, privatization and public enterprise reform need not be mutually
exclusive.
Key Issues of Public Enterprise: The Need to Improve
While countries may opt to go for an extensive privatization campaign

or for an extensive public enterprise reform campaign, they may also apply
both on a macro- and micro-level. In the same way that there are different
instruments for privatization, a general reform of the public sector may utilize
different approached for different public enterprises and sectors. Some sectors
or individual PEs may be deemed as needing privatization, while others may
be retained by the government.

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It would makes sense to privatize enterprises that have become

superfluous due to changing government objectives, or when they are
unprofitable due to public constraints and this might be better off under private
ownership where they would be free of these constraint. In the case of the latter,
it is important to consider if the constraints to are truly tied to public ownership
(Quiggin, 2011). On the other hand, if public enterprises have goals and
mandates that are considered important to national policy, if their operations
contribute significant revenues to government coffers or if market conditions
are such that there is a lack of competition such that the chance of potential
benefits from privatization are relatively low, it would make sense to retain
public enterprises.
Decisions on what is to be done must be anchored in the state ideology,

and the specific circumstances of the PEs and sectors in question (nature of
market, financial status, potential social and economic displacements,
vulnerability to foreign firms and interests, etc.). A mixed strategy using both
privatization and public enterprise reform, if properly backed up by a clear and
unambiguous demarcation between the public and private spheres and of
when the state ought to intervene would allow for a large degree of flexibility
in dealing with the myriad of public enterprise issues found, in particular, in
developing countries.
Without a clear meta policy or a desire to adhere to it, there is the risk
of confusion and inconsistency in the application of either privatization or
public enterprise reform.
Summary
Reform of the Philippine public enterprise sector will require much in
terms deliberation, coordination and technical knowledge. It will require
rethinking of the conventional wisdom on the part of policymakers as much as
it will require much political will to enact. The current administration, with its
anti-corruption mandate has launched the most extensive overhaul of the
sector in years. However, in spite of the zeal by which the current
administration has pursued this effort, there are noticeable weaknesses in its
reform efforts, particularly in the contents of its centerpiece legislation, the
GOCC Governance Act possibly owing to the rushed manner in which this law

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was passed or to a lack of understanding or deliberation on the issues faced by

the public enterprise sector, or very likely both.
There has been much written about topics public enterprises and public
enterprise reform. Unfortunately, legislation has not taken much if any of the
lessons learned on public enterprises and reforming them, owing largely to a
lack of expertise and awareness among current legislators and government
officials. This situation is not helped by the lack of local interest in the academic
field of public enterprise studies. It therefore rests upon the few the academe
who have studied public enterprises, as well as those who work in public
enterprises themselves, to champion the cause of public enterprise reform.
Let’s Analyze
1. Provide and discuss several factors which leads to privatization of public enterprise?
Discuss the advantages of privatizing the public enterprise
FACTORS ADVANTAGES
PRIVATIZATION
2. Cite examples of public enterprises which were privatized or sold by the government
to private company. Give 5 examples of public enterprises which are now private
entity. Research the reasons behind these privatizations of public enterprises you
enlisted.

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lOMoARcPSD|36865676

Public Enterprise Lecture

Bachelor of Arts in Communication (Holy Cross of Davao College)

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The Samal Island City College

Self-Instructional Module for Self-Engaged Learning

Module for PAEC 301 Public Enterprise

Disclaimer: This learning module is a self-paced instructional learning

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Table of Contents Page Number

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Welcome to this PAEC 301: Public Enterprise Module.

Limit NOT yourself in learning! All the BEST and ENJOY!

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Development which is not sustainable is not development at all.

Learning Objectives (FOR Weeks 1-2)

Introduction to Public Enterprise

The International Centre of Public Enterprises (ICPE)1 defines public

<Any commercial, financial, industrial, agricultural or promotional

Based on this definition, public corporations are entities which

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Mendoza (1990) elaborates more on the classical, dualistic

Theoretically then, public enterprises constitute an overlap between

There are several rationales for the establishment of public enterprises:

First governments may deem it necessary to establish public

Second, public enterprises may be established in pursuit of national

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in the <commanding heights= of a national economy (Shepherd, 1991).

Third, there may be a need to provide of public goods and services

Fourth, governments may set up public enterprises as a means of

With the exception of the nationalization of <sick= companies, the

The autonomy of public enterprises is perceived to allow for greater

Evolution of Public Enterprise

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The government operates in the areas which are of basic or strategic

The state-owned enterprises play an important political, economic and

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Working Concepts of Public Enterprise

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A government-owned or controlled corporation is a stock or non-stock

There is general agreement and acceptance of this definition to date. On the

- To increase the availability and widen the distribution of basic life-

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Public Vs Private Enterprise

It would be interesting to learn about both similarities and differences

According to Paul H. Appleby the public administration is different

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Herbert Simon cited very practical and easy to understand differences

The management Guru Peter Drucker sums up the difference in more

 The managerial aspects of planning, organizing, coordinating and

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The Changing Role of GOCCs in the Philippine Landscape

The development impetus. The dramatic proliferation of GOCCs

Political economy, political change and the nature of the state:

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following an important change in a country's political condition, as in the case

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of Algeria, Tanzania, Bangladesh, Somalia and Peru. A similar pattern is

Muzzafer Ahmad points out that:

Contrary to the economists' assumptions, public enterprises come into being

Motives and rationale for establishing a GOCC, Leroy Jones classified

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