The Economics of Public Enterprise

V. V. Ramanadham, V. Ramanadham

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9780429576027
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Public enterprises have played a central part in the development of all mixed economies in the post-war period, but they are now in a crisis phase. Privatisation has pushed back the level of public enterprise almost throughout the world. Where public enterprises remain, they are being brought under significant reforms.

Originally published in 1991, this book presents a comprehensive critique of public enterprise, analysing why its performance has fallen far short of expectations. Part one is concerned with the establishment of public enterprises: the case for them, the circumstances in which they emerged, the extra enterprise objectives attached to them, and the decisions on their investment feasibility and capital structure.

Part two looks at the working of public enterprises: the state of their financial performance, the peculiarities of pricing, the determination of targets which they should meet, the continuous monitoring and evaluation of their operations.

Macro concerns are the focus of Part three. Among the issues addressed are the level of indirect taxation and subsidisation implicit in the pricing structures of public enterprises, the links between public enterprise and the public exchequer and the implications of their operations for distributional equity. In Part four the extent to which privatisation can solve the problems of public enterprise is discussed. The book ends with some broad conclusions on the future of public enterprise. Throughout, the approach is analytical, but the arguments are supported by extensive examples from both developed and developing economies.

Part I

The Genesis

1 The concept and rationale of public enterprise

It is useful to commence a study of public enterprise with an enquiry into what public enterprise signifies, and why it has assumed prominence in many countries. The former question is covered in the first section of this chapter. The second section considers the other question in terms of theory. The third briefly touches on the political dimension relevant to the establishment of public enterprise, and the last draws on governmental perceptions responsible for the prominence of public enterprise.

A prefatory observation, which applies not only to this chapter but to most others, is that generalisations are difficult in view of, not only global diversities of experience, but periodic changes in the organisations and working conditions in a given country, and, on occasion, could be faulty. It is necessary, further, to draw a distinction between developed and developing countries at several points of the analysis. Not all the developing countries themselves can be bundled together, either, though some broad similarities among them are traceable in the rationale and working of public enterprise.

THE CONCEPT OF PUBLIC ENTERPRISE

The concept of public enterprise, briefly, is that it refers to an organisation which combines in itself elements of ‘publicness’ and ‘enterprise’.¹

The elements of publicness may be set out under three heads:

(a) The entrepreneurial and major operational decisions are made by non-private agencies and the essential criterion of the decisions is not limited to the financial returns that accrue to the investors. The source of decisions may be understood in two senses: (i) the agencies which take the decisions, and (ii) the criteria on which decisions are taken. The latter are the more important. Where an agency takes a decision, what is important is not that it takes it out of its power but that the decision rests on criteria that have a public purport. Several chapters, for example, 1, 3 and 13, go into this question in detail.

(b) The net benefits of operations accrue, not to private parties, but to the public. The reason is that the equity capital belongs to the government or some other public agency. In the case of a public enterprise which has no equity capital, there can be different ways of profit utilisation, but there is no investor in the sense of equity holder to whom it goes.

(c) The enterprise is expected to be accountable to society. This follows directly from the element of public decision implicit in the concept of public enterprise. What is implied is not simply that the managers are accountable to those that decide, but that the enterprise as a whole, including the governmental agencies that take the decisions, should be accountable to society. In formal terms the accountability may be to parliament, ‘the ultimate guardian’,² but it is essentially to the public, including consumers, through a proper system of evaluation (see Chapter 9).

The enterprise characteristics of the organisation may be understood in the following terms:

(a) It is expected to be financially viable, by intention and in the long run. In this way it can hope to be under market disciplines, right from the procurement of capital, if necessary.

(b) The prices it charges should be based on related costs. This requirement goes beyond the overall coverage of costs by price proceeds. It is possible that an identified segment of operations is relieved of the requirement of cost-based prices for extra-enterprise reasons. That segment would be in the nature of a non-enterprise.

Viability and cost-price relationships are the elements that distinguish a public enterprise from several public activities, for example, those in the field of education, justice, and environment.

The term ‘public enterprise’ signifies that the organisation should represent a synthesis of the characteristics of ‘publicness’ with those of ‘enterprise’. This is the essential problem that public enterprise presents. The synthesis is made particularly difficult because, on the whole, there is greater clarity on the enterprise characteristics than there can be on publicness, and the decisional forces, however, tend towards publicness rather than the enterprise requirements in many cases.³

While the concept of public enterprise, as described above, is of fundamental importance, a definition is necessary when the government intends to apply a law or a directive to public enterprises, or when public enterprise data have to be included in statistical computations, for example, while making arrangements for audit say, by the Comptroller and Auditor-General in India, or by the Audit Corporation in Tanzania, or while compiling national statistics in the UK.⁴ In several cases where a definition is not attempted rigorously, a schedule is included in the law listing the enterprises that come within its purview.

Most definitions go by the ownership criterion. One hundred per cent ownership by the government, and other public agencies together, is a clear case. Majority ownership (that is, above 50 per cent) gives the government ample powers of public decision since it can influence board decisions. Minority ownership is assumed to be a condition under which the government does not enjoy significant decisional powers. The assumption may be wrong in practice, since the government directors tend to have a disproportionately significant opportunity of influencing board decisions, or if the articles of association of the enterprise are so framed as to make certain areas of operations specifically subject to government control.

Control potential, besides ownership, is an important aspect of the definition, though it is difficult to operationalise it in statistical terms, unlike ownership.

A public enterprise may be understood to be an organisation in which the majority ownership and/or control is non-private, and which is intended to be viable through sales activity on the basis of price-cost relationships.⁵ This is, of course, a conceptual statement, but it marks out enterprises from non-enterprises in the public sector; it applies to all forms of enterprises – departmental organisations, public corporations and government companies – and it is fairly neutral to how significant the autonomy of the managers is in a given case.

THE RATIONALE OF PUBLIC ENTERPRISE: IN THEORY

At the outset one has to distinguish public enterprise that owes essentially to ideology or the interests of a person or group possessing powers of decision, from that evolved on a ‘pragmatic’ basis, for want of a better term. It is to the latter that most part of the argument in this chapter relates. The two categories of forces coexist in some proportion in many cases, and it is not always easy to draw a neat distinction between the political and the pragmatic origins of public enterprise.

The emergence of public enterprise in developed economies has, by and large, been linked with post-development problems. For instance, the needs of rationalisation, restructuring, or rehabilitation of industries already well developed were prominent in the UK nationalisations during 1945–51. The bulk of the 1946–7 nationalisations in Austria were owed to the need of ‘profound reorganisation and comprehensive planning … to overcome their fatal propensity to a crisis and breakdown’.⁶ To cite another example – Italy, a major motivation behind the inception of Istituto per la Recostruzione Industriale (IRI) was the rehabilitation of many depressed enterprises.⁷

Most public enterprises in developing countries have, on the other hand, come into being in their early stages of development. A somewhat common thematic argument is, therefore, possible in their case, namely, that public enterprise has essentially been a product of the development strategy adopted by them. They did not leave investment and growth entirely to the market forces, for the latter were too ineffective to steer development on lines that the government, through conscious planning, preferred. The preferences expressed themselves in terms of aggregate investment, sectors of activity, location of activity, and the pace of investment over the time-scale. In most countries private entrepreneurship and investment were found to be inadequate to satisfy public preferences in the areas of growth and distributional equity.

The growth aspects

The growth argument may be developed as follows. There is a preferred aggregate figure of investment during a plan period; its sectoral and regional disaggregations and timing are so formulated that all complementarities necessary for achieving the overall rate of growth can be ensured. Further, all this is really intended to be in deliberate consistency with the investment strategies expected to be adopted in the succeeding plan periods. (Such perspective planning is illustrated in Figure 1.1 where C represents the growth rates, say, over a fifteen-year period – low at first but buoyant progressively; while C₁ represents one of the inferior possibilities, which private entrepreneurs ordinarily prefer.)⁸

Figure 1.1 Growth rates

Let us see how public enterprise becomes relevant under this argument. We are not debating the plan assumptions. Taking them as given, we come across three problems:

(i) The investment planned is larger than can be undertaken by domestic private capital. Hence the need for deficit financing, or foreign capital which, on balance, the government wishes to borrow and invest or attract in partnership with it in an approved activity.

(ii) Private investors in developing countries have an obvious preference, in the early years, for trading and light manufacturing act...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Half Title
• Original Title Page
• Dedication
• Original Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• Part I The Genesis
• Part II The working
• Part III The macro aspects
• Part IV Conclusion
• Notes
• Index