Public Enterprise at the Crossroads

John Heath

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415044721
• eBook ISBN: 9781134949588
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In many parts of the world public enterprise is in crisis. Privatisation programmes are being widely touted as the solution to many of the problems of inefficiency and slow rates of growth associated with public enterprise. This book discusses the underlying causes of those problems, and critically examines some of the solutions that have been adopted. Its geographical coverage is wide and it cuts across the political spectrum. The experiences of countries in four continents are analysed in an attempt to shed light on current dilemmas. Recurrent patterns are found; problems are frequently seen to be political as much as economic, and bureaucracy and administrative confusion is often found to be at the heart of poor financial performance.Yet since political aims, economic environment, and administrative and managerial capabilities vary so widely, universal solutions remain more difficult to define than universal problems.

Part one

Introduction

Chapter one

Survey of contributions

John Heath

In many developing countries public enterprise has reached the crossroads. Its future is uncertain. In some places, it is no exaggeration to say it is in crisis.

The aim of this book is to examine the public enterprise experience in many parts of the world, especially, but not exclusively, in developing countries. What are the real problems, what solutions are being sought and tried, and what are the results?

Its purpose is to provide guidance from this broad international experience, so that as countries reach a turning point they can more easily decide which path to follow.

The structure of the book is as follows. Part two consists of two survey chapters. In chapter two Dr Ramesh Adhikari and Professor Colin Kirkpatrick examine the scale and performance of public enterprise in a wide range of developing countries, largely through careful summaries of the methodology and results of research by other specialist authors. It sets the scene for the whole book. The powerful message of this chapter is the importance of meticulous care if valid conclusions are to be derived from the analysis of national statistics. Even so, the difficulties of study are immense.

The other survey, in chapter three, is quite different. Dr Esther Brimmer and David Thompson illustrate many of the general principles involved in considering the future of public enterprise through the detailed analysis of the privatization of what is now British Telecommunications plc. It is an important story of public policy formation and execution, and stands in its own right as an example of the complexities of privatizing what many would regard as a natural monopoly.

Part three comprises eight country reports on public enterprise, from the People’s Republic of China, Hungary, India, Malaysia, francophone Africa, Argentina, Chile, and Greece, respectively.

There are seven chapters on specialist topics in part four. These include the role of public enterprise in economic and social development, ‘performance contracts’, the role of holding companies, divestiture in a developing country, the political economy of public enterprise, and cultural change, especially in the context of privatization. These chapters also contain country material relating to Sri Lanka, Sudan, India, Pakistan, and Italy.

In addition, the World Bank’s role and experience in aid to African countries is reported in an important specialist contribution by Myrna Alexander (chapter twelve), which is itself a survey of thirty-four countries, though different in orientation from that by Adhikari and Kirkpatrick.

Symptoms

The major cause for concern both within developing countries themselves and internationally has been the large scale of financial losses, in some countries rising and in others falling, incurred by public enterprises. As Adhikari and Kirkpatrick cautiously conclude:

The weight of evidence surveyed on financial performance seems to support the conclusion that public enterprise performance has been unsatisfactory. In most cases these enterprises failed to generate sufficient revenue to cover their recurrent costs…and they have contributed significantly to the macro-economic problems, particularly external debt, experienced in many developing countries.

Alexander also reports from a World Bank survey which concludes that:

public enterprises have contributed little to national savings and are a major source of savings-investment gaps, which in turn are closely correlated with current account imbalances…and in sub-Saharan Africa poor enterprise performance has contributed to overall macro-economic imbalance.

Moreover, careful studies of like-with-like reported by Adhikari and Kirkpatrick show that, with a number of important exceptions, productivity levels have been lower in the public sector than in the private sector —although productivity growth has often been higher. ‘Xefficiency’ (cost reducing efforts, modernization and structural adjustments to meet market needs) is also found to be lower in public enterprises.

These general findings have been confirmed by many of the more detailed studies from authors in this book. For example, Dr Venugopal Reddy, writing about India in chapter six, says that from the mid-1960s the 700 or so public enterprises ‘came to be identified with unplanned and unwarranted expansion, inefficient operations, poor service, and large financial losses’. This led to several studies in the early 1980s to try to find a solution. Since 1985, under the New Economic Policy, many changes have been introduced, although there is still disappointment with public enterprise performance.

In 1988 the Malaysian government had equity in 1,133 companies. In chapter seven Dr Mavis Puthucheary reports that nearly one half of the 770 public enterprises which were under scrutiny by the government in that year were making losses, which in total value significantly exceeded the profits of the remainder.

In the People’s Republic of China the financial losses of state enterprises are expected to be Rmb 52 billion (=US$14 billion) according to the 1989 budget. Adding other subventions to state enterprises, the total amounts to 28 per cent of national revenue—which, if the figures are to be belie ed, is more than double the cost of defence. (On top of these subsidies to state enterprises is Rmb 41 billion expenditure for price subsidies.)

It appears also that, according to Alexander, public enterprise performance in Asia has been consistently better than in Latin America, and that in Africa it has been the worst of all. Moreover, in chapter eight, Professor Alfred Saulniers finds that public enterprise performance in francophone African countries has exceeded that of anglophone countries in Africa. It is an interesting and important question as to why there should be such systematic differences.

Causes

Governments

The most powerful message which comes through reading this book is that often the ultimate responsibility can be laid at the door of governments. Some are inept, others inefficient, a few ideologically blinkered. There can be abrupt and drastic changes in policy. In many countries there are simply too many public enterprises for the administrative capabilities available in government. Corruption is not unknown. Public enterprises, being close to government, do not thrive under these conditions.

There are exceptions. The situation is far from uniformly gloomy. There are also some marked improvements in recent years, but the learning process is long.

For example, Professor William Glade, writing about Chile in chapter ten, notes that:

The Allende episode (1970–3) brought with it a wildly aberrant expansion of the state that enlarged the scope of public management far beyond the capability of the administrative machinery to handle its new responsibilities.

In the muddle and confusion which followed, many of these newly formed public enterprises took advantage of the situation and ‘the payrolls of almost all agencies of government came to be bloated, as did the employee rolls of the firms brought into the public sector’.

Fortunately this experience was short-lived, the lessons were learnt, and the efficiency of the post-1985 privatization programme provided a sharp contrast.

In Argentina, as described by Dr Horacio Boneo and Enrique Waterhouse in chapter nine, government policy towards public enterprise has stumbled from expedient to expedient, new control agencies have been piled one on top of another while the earlier ones struggle to retain their power. Financial management in the public sector has been a constant problem— ‘in most cases central government administrative capability is of such low quality that projects only undergo superficial analysis’ — and arbitrary financial restrictions have had many different kinds of dysfunctional and costly consequences.

The major programme of divestiture in Pakistan from 1977, as described by Riyaz Bokhai in chapter sixteen, was brought about from a realization that ‘the public sector just did not possess the necessary administrative machinery and managerial skills to operate and control successfully such a large number of small units spread all over the country’.

In chapter eleven, Professors Spyros Lioukas and Demetrios Papoulias describe the numerous detailed matters on which public enterprises in Greece need authorization and the many supervising bodies from which they have to obtain consent. The exact functions of these agencies are so unclear, inconsistent and uncoordinated that a single decision may be taken to make different decision-makers in search of approval.

The focus of their chapter is a carefully executed and richly woven econometric study of 110 Greek public enterprises. This identifies which factors are most closely associated with good performance. Intensity of state control, competition, internal decentralization and internal management systems all come under statistical scrutiny. State controls, which in general are very tight, are negatively associated with enterprise effectiveness—however measured.

In chapter four Professor Hua Sheng and Dr Du Haiyan describe how, since the reform of public enterprise in the People’s Republic of China commenced at the end of 1978, there has been a series of experiments with the decentralization of state control—no single system was all pervasive. Most ran into great difficulties, and by the end of 1984 they had come to a halt. Efficiency had not been raised and internal inconsistencies had become apparent. New methods were then tried: leasing small enterprises, an ‘assets management responsibility’ system for top management appointments and control (described below), a ‘share capital system’, and, becoming widespread after 1986, ‘contracts’ between each enterprise and the administration. Most of these have run into difficulties, generally from heavy-handed administrators who lacked the commitment necessary to ensure success.

The 69 Articles of the April 1988 ‘Law of the People’s Republic of China on Industrial Enterprises Owned by the Whole People’ entrench what would appear to a Western observer to be some of the problems. for example, the parallel hierarchy of political and managerial control is retained. Article 8 states that:

The grassroots organization of the Chinese Communist Party in the enterprise shall guarantee and supervise the implementation of the guiding principles and policies of the Party and the State.

And Article 35 states that:

The enterprise must fulfil the mandatory plans. The enterprise must perform economic contracts concluded according to law.

There are, incidentally, nearly 400,000 public enterprises in China, including 87,000 state-owned and 300,000 ‘collectively-owned’ industrial enterprises, which are state enterprises attached to lower administrative levels.

But Hua and Du do not mention this new law in their chapter because ‘in China the law is not very important and has little effect. What matters is the political trend, and a directive or request today is much more important than what happened yesterday. for example, since the events in Tian An Men Square a new document has been issued which emphasizes the central role that the Communist Party should play. Who makes the directive is also important.’

In chapter four Dr Zoltán Román describes how in Hungary, with 1,043 public enterprises in 1988 (and a US$17 billion external debt in convertible currencies), rigid adherence to the central plans are no longer required but there is still ‘bargaining, manipulation and manoeuvring’ in the administrative controls over prices, subsidies, tax-exemptions, preferences and special rules of regulation. ‘Intense bargaining’ between individual enterprises and the government administration is also common in China, as Hua and Du mention.

In Hungary, weak market competition has been accompanied by increasing non-market competition. Román distinguishes between formal and informal non-market competition. In the former, enterprises submitting plans for R & D, investment, subsidies, grants, etc. ‘compete for a favourable decision’. In the latter there may be attempts to influence decisions ‘through personal connections and other clandestine means including return services bearing marks suspiciously like corruption’.

Behind-the-scenes government interference and ‘intense informal interventions’, to quote Lioukas and Papoulias, in the affairs of public enterprises are almost a universal problem in developing countries, mentioned by many authors.

However, in chapter seven Dr Mavis Puthucheary writes that in Malaysia there is significantly less government interference because the primary motive for having a large public enterprise sector was not ‘control’ but ethnic ownership. The notion of the ‘commanding heights of the economy’, which was influential elsewhere, played no part in that government’s thinking.

In India holding companies of groups of state enterprises were formed in order to protect individual enterprises from government interference, but that failed to work because each enterprise was still regarded as separate, and so holding companies were bypassed by the government (which had of course set them up in the first place).

Developmental and other social policies

It is not only the administration of government which is often at fault, but also the requirements placed on public enterprises which are sometimes unrealistic, unfeasible, or badly organized.

In most developing countries, public enterprises have a social as well as a commercial role, and their performance in this dimension should also be assessed. Although empirical evidence is extremely limited, Kirkpatri...

Table of contents

• Cover
• Public Enterprise at the Crossroads
• Photo
• Full Title
• Copyright
• Contents
• List of tables
• Preface
• Part 1 Introduction
• Part 2 Surveys of practice and principles
• Part 3 Country experiences
• Part 4 Specialist topics
• Books published by Professor V.V.Ramanadham
• Notes on contributors
• Index