The Nature of Public Enterprise

V. V. Ramanadham, V. Ramanadham

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367181994
• eBook ISBN: 9780429594533
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In both the developed world and the third world public enterprise has come to assume considerable importance in the structure and development of national economies.

Originally published in 1984, this book, by an acknowledged international authority on public enterprise, explores this concept in both the major and the developing economies. He analyses how public enterprise functions and demonstrates how it may be integrated into both traditional Western mixed economies and third world economies with a much high level of state control.

PART I

THE CONCEPT OF PUBLIC ENTERPRISE

Chapter One

INTRODUCTION

This study aims at an analysis of the concept of public enterprise. The focus is on what being a public enterprise implies conceptually.

(i) At the minimum it sorts out the wood from the trees and focusses on the conceptual essence of what a public enterprise implies as distinct from symptoms and partial perceptions.

(ii) It enables us to compare an actual public enterprise situation with the conceptual and establish the area in which practice may have to improve in order that the conceptual implications are fully realised. And it suggests the conditions, as derived from the concept, under which the utility of public enterprise is likely to be at a maximum to the nation.

(iii) It throws up the inherent difficulties in creating a situation that closely approximates to the conceptual model of a public enterprise and suggests the existence of certain in-built costs in the evolution of public enterprise as an institution.

Chapter 2 deals with the ‘public’ element of the concept and Chapter 3 with the ‘enterprise’ element; and the crucial issue of synthesising the two is covered in Chapter 4.

Chapter 5 looks at taxonomic aspects relevant to the conceptual analysis, limiting itself to highlighting the particular problems or biases that certain categories of public enterprises present in relation to a conceptual element

The last chapter refers to the question of operationalising the concept of public enterprise through a definition. The term public enterprise is employed here in its generic sense and subsumes such terms as state enterprises, nationalised industries, parastatals, statutory boards and decentralised agencies, which we come across in the literature. These are not necessarily homogeneous in every aspect, but the interest of the present study lies in pursuing a matter of commonality, namely, what they all imply as public enterprises.

Chapter Two

THE ‘PUBLIC’ CONCEPT

Three elements stand out predominantly under the head of the ‘public’ concept.

(a) Non-private accretion of net benefits

First, the net benefits of the activity undertaken by the enterprise do not go to the enrichment of a private group of individuals standing in the position of owners. The benefits are of two kinds: surpluses, which represent the net revenues realised in the course of operations in a given period and are available for distribution as dividends; and capital appreciation, which results from the accumulation of undistributed profits (as reserves or under any other designation), or from the issue of bonus shares, or from a sale of assets. There can also be another source of capital gain which emerges in the event of sale of the business in a new proprietor, viz., goodwill.

The reason why these benefits of investment do not reach individuals is simply that the risk capital ranking for such benefits does not originate in them. There may be private lenders but what they get is limited to a fixed rate of interest, or (exceptionally) stockholders but not of the equity kind. As long as the surplus as a rate on capital employed exceeds the rate of interest on loan capital, there is an accretion of a net benefit to the non-private sector even from the use of private funds received as loans.

A similar cause of gain exists in the case of private participation in the equity capital of a public enterprise, if the regulations governing the dividend – over a specified period or indefinitely – limit it to a level that turns out to be lower than the rate of actual net return derived from the use of such funds. Even where a regulation of that nature does not exist, the same result is possible if the board of directors is so influenced as to declare dividends at a rate lower than the rate of net returns earned from such funds.

At this point it would be of interest to make a reference to the unique case of the ‘socially owned’ enterprise of Yugoslavia. There is no owner in the case of a ‘self managed’ Yugoslav enterprise in the sense of one that contributes equity capital. The investment funds are found from bank loans and, as time passes, the business fund of the enterprise itself. The lending banks have no ownership rights. Though the enterprise is self-managed and the workers have formal powers of management as well as entrepreneurial decision, none of them, even on retirement, can lay a claim to a share in the capital of the enterprise. In the event of its liquidation, the assets get merged in those of another enterprise or of a community of interest. What is crucial to our context is not the question who owns the enterprise but the fact that no private person owns it; and there can be no net benefit accretion to any private person, subject to the comment on wages in a following paragraph.

The way in which the net benefits of a Yugoslav enterprise get disposed of is simple in one sense: they do not go to anyone outside the enterprise. But the substantive position is somewhat complicated by two considerations, viz., that several governmental agencies receive payments from the enterprise out of what, in other countries, would have ended up as its net revenues, and that there is never a time when the net revenues that stay within the enterprise can be claimed by any insider as his share (1).

It is necessary to introduce two qualifications to the concept of non-private entitlement to net benefits of public enterprise. The first is that a leakage can occur in favour of certain private groups, though not owners, even before the point of net benefits is reached. This process often works in a way which is not readily detected. Three prominent channels of such leakage may be distinguished.

(1) Wage incomes: There occurs a diversion of what could be a net benefit (or surplus) to the category of cost when relatively high wage incomes are secured by the employees of a public enterprise This might take place through relatively high levels of wages or through surplus staff and low productivity – two features found associated with many public enterprises in developing (2) as well as developed (3) countries. The likelihood of such a leakage is the greater, the nearer the enterprise is to the following situations:

(i) The employees have a de jure right to participate in top directoral and management policies. An extreme case is that of an enterprise which is self-managed, as in Yugoslavia, where even at the conceptual level the wage incomes are strictly personal net incomes, or appropriations of net revenue (4), and the workers have the right to determine the levels of what they take out of the net revenue.

(ii) The employees have political strength enough to attract the government’s support to their generous wage and staff-number claims, overtly or covertly, and the directors, for various reasons, are too weak to resist them.

(2) Other input policies: If a public enterprise offers contracts for construction works or raw materials under political pressures at inflated levels of cost, or offers inflated compensation for any break in terms of contract on its part, there is, in effect, a conversion of what could have been a net benefit to the category of costs; and this benefit goes to private groups of individuals – not owners, but contractees.

(3) Price concessions: A strong consumer group may extract price reductions (5) that tend to diminish the net benefits otherwise accruable to the owners of the enterprise (6).

The other qualification of the concept of accretion of net benefits to non-private beneficiaries is simple, viz., that net benefits do exist in the first place; in other words, that a surplus is raised by the public enterprise. Or else, the point would be of little moment, as in several cases today.

Reference may be made to a far reaching implication of the non-private accretion of net benefits. It is possible that, on grounds of the surplus reaching a public level, the government may be tempted, in the case of certain public enterprises with a high profit potential, to let them raise extraordinarily high surpluses. But these imply prices that carry the function of taxes. The kind of calculations that underlie (or are introduced in support of) a tax measure are absent in this case; for example, the question of whether the given consumer groups are fit candidates for the indirect tax is not brought into the open. The process ordinarily escapes the attention of Parliament, unless the financial targets, if any, for a given public enterprise are approved by Parliament in the knowledge of their price implications; and the value of a comprehensive debate in Parliament on a given net income accretion in the total context of the revenues of the public exchequer is lost. Basically it would be helpful to keep the public exchequer angle distinct – though co-ordinated – as far as possible, from that of public enterprise pricing and net revenue.

This section emphasised the idea of net benefits (or surpluses) rather than ownership, since that more accurately represents the conceptual essence of public enterprise.

(b) Public decision-making

The second basic element in the ‘public’ concept is that entrepreneurial and other major decision-making activity shifts from the level of private groups of persons brought together as owners and/ or managers to some public level at which no such personal interest exists. There can be several ways of describing such decisions but they relate primarily to three areas: investment, covering the size, technology and location of the activity, and the capital expenditure sequence; surplus goals and the overall price level, as well as any prominent aspects of the price structure; (8) and input policies which have extra...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Dedication
• Preface
• List of Tables
• List of Figures
• List of Appendices
• Part I: The Concept of Public Enterprise
• Part II: Public Enterprise in Developing Countries
• Part III: Decentralisation of Public Enterprise Control
• Appendices
• Index