Governance and Management of Public Enterprises

CHAPTER ONE

1. MEANING, CHARACTERISTICS AND RATIONALES OF

PUBLIC ENTERPRISES
1.1. INTRODUCTION
Many countries have turned over substantial and even predominant responsibility for
developing and managing their economy to new kinds of public agencies. These new
kinds of agencies constitute the public enterprise sector. Particularly, one of the most
significant features of the Post World War is the exponential growth of public
enterprises. The trend of such growth is more pronounced in developing countries
where organized private sector is limited and consequently the major burden of
industrialization has fallen on the shoulders of the public sector. While this is the
general scenario, the share of public enterprises varies from country to country
depending upon ideological preferences, historical, social and economic
circumstances. However, it is clear that even in the most "liberal" and private
enterprise-oriented systems, public enterprises not only exist but also play crucial
roles (Fernandes, 1986:2).

Although the instruments and techniques of government owning property is not new
and rather is as old as human civilization itself, the increasing importance of public
enterprises has been related with the steady increases in the philosophy and functions
of the state (a shift from laissez fair to social welfare activities). It has generally
become an accepted notion in modern states, especially the developing ones that
ownership of most of the natural resources and capital heavy industries should
increasingly rest in the hands of the state. In this regard, public enterprises came to
play an important role in terms of making major contribution to GDP as well as
providing a large amount of employment.

Public enterprises have been considered as key operational instruments to achieve

economic and social development and bring technological innovation in a number of
developing countries. Government intervention through public enterprises has been
also intended to encourage and strengthen economic development in the private
sector. More commonly, governments considered public enterprises to play crucial
roles and fill the gaps when the private sector demonstrated itself to be too weak or
disinterested to undertake economic activities, but deemed important to the objectives
of the development programs of the government.

Therefore, regardless of ideology and policy, public enterprises are being used today
the world over as an instrument of state intervention in national development. Almost
every country has found it desirable and even necessary to establish public enterprises
in order to meet the requirements of its development programs. In addition to the
creation of new public enterprises, intense nationalist feelings of pride for self-
sufficiency have led many nations, shortly after independence, to nationalize foreign-
owned enterprises, even when the goal in the long run has been to sell them to
indigenous investors. Such mutually supportive types of public enterprises may
include among others banking, transportation, communication, credit and marketing,
water and power agencies or institutions, applied research institutions and so on. For
the purpose of easier understanding of our discussions, the pattern of public
enterprises can be viewed with reference to three comparative periods; i.e. Pre-War
Period, Post War Period until mid of the 1980s, and a Period after the mid of the
1980s.

The first period covers those years before the end of the Second World War (or
contextually known as the period of colonization. Prior to the end of the Second
World War, public enterprises were not known or were not directed towards serving
the interests of the public in most developing countries. The colonial administrations
have created simple and small-scale enterprises in developing countries aimed at
extracting and evacuating raw materials and natural resources that would serve as
inputs for huge factories in their respective home countries. There were no serious
commitments on the part of those administrations for the development of colonized
countries and for the well being of the indigenous people.

The second period refers to those post-war years (equally known as the period of
independence) that range to the mid of the 1980s. Following the attainment of the
independence of most colonized countries, national governments have tried to adopt

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rational development administration to redress previous situations and ensure rapid
economic growth. Consequently, the newly independent states determined themselves
to intervene in major industry, mining and other expansive and profitable ventures.
One of the strategies adopted by governments of developing countries, notably Africa,
in the development effort is the use of public enterprises. They incorporated the
establishment, expansion, and operation of public enterprises in their medium and
long-term development plans assigned with diverse objectives. As a result, there has
been a proliferation of public enterprises in all African countries in terms of number,
scope, variety and complexity of operation as well as in terms of the amount of
resources allocated to them. Indeed the economic development through the process of
industrialization and commercialization had been of tremendous appeal to many
developing countries during this period.

The third period was marked as the period of "economic stabilization" or "economic
recovery" measures, a proposition made developed countries and multilateral donor
agencies to developing countries that took place since the mid 1980s. Not
withstanding the vigorous measures of many developing countries in terms of
nationalizing foreign and private-owned enterprises, establishing new ones, and
expanding nationalized and newly created public enterprises, most of them didn't
secure the level of development they aspired. They rather got even worse than the pre-
independence situations. In other words, the realities after independence exhibited not
only highly vulnerable and dependent economies but also increased financial
indebtedness and persistence of mass poverty, which gave rise to political instability,
social unrest and civil wars in a number of developing, notably African, countries.

Donor countries and agencies associated the developmental problems and

exacerbating poverty situations envisaged in most developing countries to wrong
policies and strategic myopias employed by governments of developing countries.
With such belief, donors propose the economic stabilization and recovery programs
notably the "Structural Adjustment Program-SAP" to be implemented. Donors set
these propositions as a prerequisite or precondition for developing countries to fulfill
in order to obtain loan or any form of assistance. Part of the SAP is privatization and
reforming of public enterprises. As a result, many developing countries have been

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implementing massive privatization and various reform measures regarding public
enterprises since the 1980s.
1.2. Origin of Public Enterprises
The origin of public enterprises could be traced to early twentieth century when
government intervened in economic management through departmental organizations,
which did not involve creating autonomous public bodies. In the alternative, it
granted license to a private enterprise for the management of natural or national
monopolies and where public bodies were involved in managing economic ventures,
such bodies did not enjoy financial autonomy. Public enterprises made a very strong
appearance after World War I for a variety of reasons, including managing the
consequences of the war, especially the economic crisis of the 1930s. However,
public enterprises sector developed rapidly because of the spread of Keynesian
Interventionist. Between the two World Wars, political and ideological consideration
prompted the establishment of parastatal in the former colonial metropolis.
The movement toward the establishment of public enterprises received a new impetus
after World War II for reasons related to both ideological considerations and
economic efficiency. Economic nationalism and the success of the Soviet Revolution
paved the way for nationalization and strong state intervention in national economic
management. When the former European colonies in Africa became independent in
the late 1950s and the 1960s, there were only a few public enterprises in different
countries. The public enterprises sector then developed at a tremendous pace in the
immediate years after independence through the 1980s and a huge public enterprise
sector was firmly established in most countries. The weakness of the private sector,
the lack of infrastructure, the low level of social and human development, and the
unfavorable social, economic and financial environment are some of the reasons given
to explain the proliferation of public enterprises in all areas of economic and social
development. Other reasons include the urge to generate revenue to limit foreign
economic domination, and to provide a substitute for private initiative where it was
not forthcoming.
CAPTER TWO
2. Meaning, characterstics. and rationales
2.1. The Meaning of Public Enterprise

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Public enterprises essentially have the features of several individuals who act as one.
The enterprise thus is viewed as an artificial person who is authorized by law to carry
on particular activities and functions. It is described as a corporate body created by
the legislature with defined powers and functions and independently having a clear-
cut jurisdiction over a specified area or over a particular type of commercial activity
(Ekhator, 2002:167).
Public enterprise is part of government apparatus and three implications are hereby
highlighted. First, a
public enterprise, by virtue of its intricate relationship with government, is an
instrument of public policy and its primary mission is in connection with
governmental objectives and programmes. It is therefore naturally under
governmental control. Second, a public enterprise, by its nature, mostly manages
public resources, especially public money and this means that attention must be paid
to mechanisms for enforcing accountability. Third, the combination of financial and
economic objectives with social and political aims invariably makes it difficult to
devise appropriate performance measurement instrument (Obikeze and Anthony,
2004: 248-249).
What do you understand by public enterprises?
 The Definition of Public Enterprise
The following lists of working/purposive and conceptual definitions provided by
different authors or institutions also useful to understand the meaning of public
enterprises. Even if there is no internationally accepted definition of a public
enterprise, each country is thus able to establish its own
definition of the term. Public enterprise may be held to include a wide spectrum of
institutions ranging from semi-government or purely regulatory agencies to industrial
and commercial undertakings. A variety of terminologies are used when referring
public enterprises. The use of a number of terminologies to describe these institutions
has been the sources of confusion. The terms that are used interchangeably may
include public corporations, public enterprises, public undertakings, public industries,
state-owned enterprises, state enterprises, government enterprises, government
companies, nationalized industries (used in UK), parastatal organizations (used in
African countries), and so forth.
 George Gant (1979:104) described public enterprises as "government
organizations established for the purpose of engaging in defined commercial or

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 business types of economic activities, although they are occasionally established
for non-business purposes (such as scientific research foundations or
technological institutions), to escape the shackles/chains of the existing
bureaucracy".
 The definition given by the expert group and used on the training systems and
curriculum development for public enterprise management, (Common Wealth
Secretariat, 1981:vi), could be reads as:
"Any commercial, financial, industrial, agricultural, infrastructural, or
promotional undertaking owned by a public authority either wholly or
through majority share-holding, which is engaged in the sale of goods
and services and whose affairs are capable of being recorded in balance
sheets and profit and loss accounts. Such undertakings may have diverse
legal and corporate forms, such as departmental undertakings, public
corporation, statutory/legislative agencies established by acts of
Parliament, or joint-stock companies registered under the company law"
This definition excludes government administrative or regulatory
agencies, and obviously those NGOs, civic society organizations,
religious institutions and private enterprises.
 However, there are different views, which define public enterprise as "a
bureaucratic institution with corporate form that is created or brought into
existence by a general purpose government to perform a specific or
specialized public function". Mathur (1999:17) acknowledges the
definition given by Friedman as the most practical one and quoted him as
saying:
"Public enterprise is an institution operating a service of economic or
social character on behalf of the government but as an independent legal
entity, largely autonomous in its management, though responsible to the
public through government and parliament and subject to some direction
by the government, equipped on the other hand with independent and
separate fund of its own..."
The definition emphasizes the fact that public enterprises are engaged in an activity of
commercial nature on behalf of the government. It is this engagement of the
government in activities of commercial nature that gives public enterprises special
characteristics as distinguished from the traditional conception of governmental

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functions. In some literatures, the term public enterprise is taken to comprise
corporations, parastatals, councils, commissions or other government agencies set up
by specific acts of legislature, and companies over which government has controlling
interest.
 President Roosevelt described a public enterprise in the most precise manner, as it
is "an institution clothed with the power of the government but possessed of the
initiative and flexibility of private enterprise".
2.2. THE CHARACTERISTICS OF PUBLIC ENTERPRISES

Primarily, public enterprises manifest direct involvement of the government in the

economic sphere, and assume special responsibilities to the government. In other
words, they represent government's active intervention in economic development by
engaging themselves in business activities, which are beyond the provision of
guidelines and the creation of an encouraging environment to the private sector.
Hence, they are distinguished from other conventional government organizations by
their functions of conducting economic and commercial activities.

The characteristics of public enterprises are highly influenced by several factors like
ideology, politics, history, level of economic development etc. For instance, in
countries that operate socialist type economies, the general characteristic of public
enterprises is to stand against the private sector and the trend appears to elimination or
substantial reduction of the private sector. In some of these countries, governments
have embarked on nationalization or public ownership of vital areas of production. On
the other hand, in countries, which operate a mixed economy, public enterprises
appear to be concentrated in the traditional and well-established fields of public
utilities as well as the so-called "commanding heights" of the economy, leaving a
substantial proportion of activities in other fields to private entrepreneurs.
The core of the concept "public enterprise" suggests an organization, which has two
dimensions or characteristics: the enterprise dimension and the public dimension. If
one of these dimensions is missing, the body cannot be described as a "public
enterprise". The implications of each dimension will be examined in the following
manner.
I. The Public Dimension
There are four basic elements in this dimension; i.e. public ownership, public purpose,
public control, and public accountability.

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(a) Public Ownership: the assumption is that ownership vests in a public
authority, which could be central government, state government, or
municipal government. While there is no ambiguity when 100 percent
of the ownership is vested in a public authority, it has got also an
increasing acceptance that if the public authority owns the majority
shares (51 or above percent) the enterprise would be classified as
public.
(b) Public Purpose: in establishing a public enterprise, the government
has in mind the attainment of some public policy goals. The aim and
purpose of the organization should be fulfillment of public interest, it
should be meant for achieving public interest. In addition to the
corporate objectives implicit/understood in its enterprise dimension,
the nature and content of the public goals, which the enterprise is
presumed to achieve, should be identified. The net benefits of the
activities undertaken by the enterprise do not go to the enrichment of a
private group of individuals, rather are directed toward fulfilling public
purposes. But, it is clear that private groups and individuals will have
their own shares from the net benefits of a public enterprise being part
of the general public.
(c) Public Control: the government as the owner is likely to exercise
managerial controls over the enterprise it created or over which it has
the majority share. The substance and scope of control, however, has to
be free from ambiguity/doubt. The specific areas of control for which
an enterprise will require government approval and the legitimate body
that will exercise control on behalf of the government need to be
clearly stipulated.
(d) Public Accountability: a public enterprise has to be accountable in
some way to a legitimate organ representing the public. The question
that entail on what matters and to whom the public enterprise is
accountable will depend on the precision of goals which have been set
for the enterprise, the agreed upon criteria of evaluation, and clarity of
who the evaluators are or to which agency is an enterprise reporting.
All proceedings and records of activities of the organization must be

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 available for public (government) scrutiny/inspection when demanded.
Indeed, it is customary that performance reports of public enterprises
are regularly submitted to the government.
II. The Enterprise Dimension
The enterprise dimension implies the notion of a business firm. The following
determine the enterprise character in general:

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

services
(b) The goods and services so produced are marketed at a price
(c) The revenues so earned are adequate at least to cover costs
(d) The activity is based on the entrepreneurial idea of investment and return,

These being the general characteristics that describe the enterprise dimension, it also
suggests three concepts or manifestations, which are core so to speak as "enterprise":

(i) Financial viability: This implies conscious effort on the part of an enterprise to
operate in entrepreneurship idea to raise net revenue. To do so, the organization must
continually engage itself in innovative endeavors as contrary to being complacent/self
satisfied with routine operations and regular level of returns. It must continually
explore opportunities for the benefit of both the organization and its stakeholders. In
theory this would imply net revenue maximization, but in practice several
qualifications do exist and revenue maximization may not happen true. In other
words, such net revenue is sought only when it doesn't encourage powerful
competitive threats, doesn't provoke/aggravate labor unrest, doesn't cause consumer
protests, and doesn't arouse public antipathy (opposition) towards the enterprise.
Thus, a public enterprise aims at "optimum satisfaction return" as distinct from a
private enterprise that invariably has a tendency for net revenue maximization.
(ii) The cost-price equation: The enterprise concept goes strictly beyond
financial viability though concerned with the way financial viability is achieved.
Financial viability is realized from sales activity, but the concept attaches significance
to the relationship between prices and costs. Therefore, extreme caution/concern is
needed before a disproportionate excess of price over cost in the case of a given
output is practiced, as it is open to be challenged by consumers.

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(iii) Commercial accounting: The organization regularly maintains a set of
commercial accounts that indicate its financial progress or status, but basically two
major accounting documents are needed; i.e. a balance sheet, which shows at a given
time, the assets and liabilities of the enterprise; and a profit and loss account, which
defines or indicates the inflow of income and the outflow of expenditure resulted from
surplus or from deficit of a defined period respectively.

The schema shown in Figure-1 below synthesizes the two dimensions of a public
enterprise. It is the public dimension, which differentiates public enterprises from
private enterprises, and it is the enterprise dimension, which differentiates it from
other governmental agencies. In other words, if there is no public dimension, there
seems little rationale for creating public enterprises, and if there is no enterprise
dimension there would be little or no rationale to give it the name of "enterprise".

Figure-1 Public Enterprise Model

Public Enterprise

The Enterprise
1. Producing and Marketing
of Tradable Goods and/or
Services

2.Financial Viability
(Investment & Return)
3. Cost-Price Equation
( Revenues Cover Costs)
4.Commercial Accounting

2.3. REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES

As Gant (1979) pointed out, the principal reason for the emergence of the public
enterprise sector in a country is the government's decision to intervene directly and
actively in the economy in order to achieve the objectives of its development plan.
Most frequently, decision on the creation of public enterprises is based on the analysis
and findings that show the institutional needs for development, which the government

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believes the private sector will not meet, at least by itself. In other words, the rationale
for setting up public enterprises is that they are better instruments for promoting
developmental goals.

Nevertheless, it would be difficult to generalize the motives for the creation of public
enterprises in precise terms since the reasons may practically vary to encompass
political, economic or social drives, whilst others have mixed and even conflicting
objectives combining social welfare and economic motives. The degree and extent of
government involvement in economic ventures through public enterprises is generally
determined by ideological considerations, historical factors and the state of economic
development.

Some countries, notably socialist countries, visualize a new role of the state as an
agent for change, for social transformation and economic development. Hence, they
believed that the economic functions of production and distribution should
substantially be managed in the public sector. In contrast, other countries prefer to
remain away from engaging, or are loath (reluctant) to engage, in any direct economic
activity unless they are compelled to do so by some temporary weaknesses or
shortcomings envisaged in the private sector (Mathur, 1999:8). Generally, there are
many shades of belief and reasons that vary from country to country with regard to
the creation of public enterprises. The justifications for state intervention in industrial
and commercial activities and the use of public enterprises as a model of planned
development strategy could be summarized as follows:

(i) The inability or unwillingness of the private enterprise to be involved in the

production of certain goods and service that are not rewarding in view of
financial profitability, but which are considered socially desirable in view of the
state; or the inability of the private enterprise to engage in ventures with long
term gestation periods, expecting long-term benefits over investment,
(ii) Strong need of the government to intervene in those sectors that have decisive
influence on the structure of the economy, and are considered to be basic and
strategic to national development. In view of the fact that there is a need to
guide economic development in the light of national priorities, the private sector
alone should not be allowed to venture in sectors that are found to be crucial to
over-all development.

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 (iii) The pressure of international competition in the home or external market that
would inevitably yield negative consequences like closure of infant private
industries, monopolistic trends by big companies or industries, and the resultant
prices escalation upon consumers.

Thus, over the years, the state had endeavored to intervene into, and/or control, some
sectors of the economy to bridge the gaps that the private sector failed to fulfill, and to
lessen the negative consequences resulted from external pressure. Consequently, the
beliefs or ideas that surround the argument are:

 Government ownership and control is essential in certain key sectors to ensure

that the country's economy partakes of high returns on investment in such
sectors
 Government intervention is required to ensure the economic survival of a
sector, organization or industry of strategic importance, especially on which
sufficient private commitment to take the risk is not available
 The ownership and control of basic industries are essential pre-requisites to
national economic planning and development
 Certain services to the public constitute national, local or natural monopolies
and, therefore, require considerable regulation in order to ensure acceptable
levels of service, prices and safety
 The most equitable distribution of income is dependent upon common
ownership of some particular means of production, distribution and exchange,
which in turn could be achieved through the means of public enterprises.

Generally speaking, therefore, public enterprises exist primarily to represent the

government's interventionist objectives in the economy because of the aforementioned
reasons. They exist as distinctive institutions with the management capability to
conduct business activities effectively and efficiently. Although economic motives are
important in explaining the reasons for setting public enterprises, these alone are not
adequate. Political and social expediencies are indeed other justifications. Therefore,
the motives for public ownership of enterprises that were mentioned in the preceding
discussions may be conveniently categorized under three headings: economic, social
and political/ideological (Barber, 1983).

(A) Economic:

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In many countries, mainly the developing ones, the inspiration for public enterprises
emanated from the desire to achieve rapid economic development and to make frontal
attack on poverty (Mathur, 1999:10). The desire to achieve success in the economic
sphere would be possible through public ownership, and this model of economic
development is backed by practical and imaginative reasons such as:

(i) The "commanding heights" argument postulates that certain key industries,
especially those connected with the processing of natural resources, are so vital
to the operation of the national economy and are of strategic importance. To
leave such economically key industries in private hands might jeopardize the
system. Therefore, the "commanding heights" idea has been a major justification
for public sector investment in many countries.

(ii) Control of monopoly power- it is accepted that monopoly firms are able to exert
undesirable pressure on the society, thus they need to be controlled. So, public
ownership may be considered as the ultimate form of control. It has become
extremely important today that essential infrastructural services such as public
and road transport, railways, electricity, water, etc. are state-owned even in
industrialized countries.

So, whatever the reasons and motivations are, government intervention in the
economy is a general practice today allover the world, with in fact varying degrees.
(B) Social:
Public enterprises are also established with social objectives and the decision criterion
for establishment is social cost-benefit consideration, not simply economic cost-
profitability like that of the private sector. For example, a state railway company may
operate "uneconomically", but continue to exist because closure would impose many
other "social costs" on the communities such as shortage in the means of
transportation and associated cost escalation. Another social motive of the
government in creating public enterprises is social security or social welfare. Many
governments have regarded employment generation as a motive for establishing
public enterprises. Developing countries, in particular have entrusted public industries
with special responsibilities in terms of contribution to improve income distribution.
Employment generation is one aspect of the equity measure of the government

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besides to other direct forms of social welfare or income distributions schemes
assured through the means of public enterprises.
(C) Political/ideological:

An important motive for the creation of public enterprises in this regard is the
ideology of socialism, born largely out of the inadequacy of the capitalist system. The
Great Depression of 1929 had seriously exposed the deficiencies of the capitalist
system, which assumes free play of the market forces. Keynesian economics had also
provided a sound theoretical basis for state intervention in creating effective demand
and generating employment.

However, the failure of socialist economies in almost all countries and the success of
the privatization drive have led many commentators to question the very reason of
existence of public enterprises today. The issue has got blurred with the ideological
debate since the retreat from the socialist ideology is beyond propensity, and rather is
a real practice this time. Galbraith (1990) commented in that "while socialism in
economic terms worked well in the initial stage, it has failed in today's context
because of its inability to adjust to the new world of the consumer society". This
entails that the ideological motive of public ownership has become an issue of contest
and the thing of the past for many commentators.

On the other hand, regardless of the ideological consideration, the essentials of public
ownership are still valid and justifiable. In an era of globalization and liberalization,
although state-owned enterprises may not provide the commanding heights of the
economy, their importance in national economic activity cannot be underrated. For
this reason, economies of a number of countries such as China, Korea and Taiwan
opted not to give top priority to privatization, but to allow the private sector to
develop around the public sector (Mathur, 1999:15). In summary, most developing
countries suffer from acute lack of capital, entrepreneurial skills and regional
imbalances. The immensity of the socioeconomic problems of these countries makes
state intervention inevitable and in fact desirable. Therefore, the state becomes a vital
partner in the promotion of industrial enterprises to ensure public control over certain
sectors of the economy.
 Summarized Reasons for the Establishment of Public Enterprises

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There are many reasons for the establishment of public enterprises. These are outlined
below:
• The desire to use the public enterprise as an instrument of effective plan
implementation in a context where it appears futile to devise a development plan
for the private sector.
• The need to secure economic independence.
• The urgent desire to assure government control over "strategic" sectors of the
economy (e.g. central
banking, broadcasting, iron and steel, roads, shipping, etc.).
• The need to separate some activities from the civil service and allow more autonomy
in their running.
• The perceived need to provide employment for the citizens in context where the
private sector offers very limited employment opportunities.
• The need to ensure state control of key profitable enterprises with a view to
generating revenues that will add to available national capital for financing
development programmes and projects.
• The desire of some socialist-orientated regimes to use state control of key profitable
enterprises to
pursue the objectives of preventing the concentration of wealth or of the means of
production and
exchange in the hands of few individuals or of a group (i.e. promoting equitable
distribution of wealth)
(Obikeze and Anthony, 2004:253).
2.4. OBJECTIVES AND ROLES OF PUBLIC ENTERPRISESS
There are immense objectives, which lead governments to engage actively in the
economy through the means of public enterprises such as; to gain control of the
economic monopoly, to ensure equitable distribution of wealth, to capture profits for
investments or development programs, to manage foreign trade, to create yardstick of
performance for the private sector and so on. Some of the explicit objectives of public
enterprises assigned by the government as a means of achieving macro-level
objectives may fall under those three major reasons for public ownership (economic,
social, and political) mentioned in section 2.3 above, and may include among others,
the following:

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 (a) To generate revenue to the government through various means such as
dividends, interest on loans, taxes etc.
(b) To save scarce foreign exchange or broaden foreign exchange base either by
exporting foreign exchange earning goods and services or by substituting
imported products.
(c) To reduce dependence of the economy on a narrow range of activities
domestically, and on foreign importation
(d) To create an even distribution of income and wealth among individuals and
groups by preventing the concentration of economic wealth in the hands of the
few
(e) To develop and provide infrastructure services that will foster the proliferation
of the private sector and accelerate the pace of national economic development.
(f) To ensure balanced development among different sectors of the economy and
reduce regional disparities through a fair dispersal of industries in various
geographical areas of a given country
(g) To create job opportunities for citizens or to reduce the level of unemployment,
and provide various welfare benefits such as housing, medical services,
transport, and other social services in order to serve as a model for private
entrepreneurs in the sphere of labor-management relations and thereby maintain
stable social security system
(h) To safeguard the interest of consumers by offering a basket of essential goods
and services at a fairly low prices to low-income groups.
(i) To stimulate research and development, which may lead to the building of
indigenous technology and optimum self-reliance
(j) To capture the advantages of increased participation by citizens in the
ownership and management of the productive enterprises
(k) To serve as a regulatory agent of the government in ensuring compliance to law
by organizations within its area of jurisdiction. Examples include the National
Bank of Ethiopia that monitors and controls the activities of private banks;

These are, inter alia, the national/macro level objectives that the government intends
to achieve through the means of public enterprises, which fall under the economic,
social and political motives. In addition to macro/national objectives, public
enterprises do have also corporate/micro objectives that would contribute for the

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accomplishment of such macro-level objectives. Hence, we need to examine the
specific identification and articulation of the corporate goals of each public enterprise.
Corporate objectives may be classified into as many as at least four types, namely;
financial and commercial objectives, production and productivity objectives,
marketing and service objectives, and developmental objectives. A brief discussion of
these objectives is presented as follows.
(A) Financial and commercial objectives
As Fernandez (1986:52) noted, the early history of public enterprises in developing
countries reveals a cloud of uncertainty and ambiguity about their financial goals. The
idea of "profit" was associated with private enterprises. The goals of public
enterprises were mainly seen in terms of the nation-building posture or attitude.
Profitability in purely financial accounting terms seemed an irrelevant thing. Public
enterprises were considered to be pioneers of social and economic changes and the
engines of growth. Although this has been the initial intent behind the establishment
of public enterprises, financial and commercial soundness became an important
consideration eventually. The case for financial stability, commercial viability and
adequate return on investment rests on the following compulsions.

(i) Public enterprise's investment is generally based on feasibility studies and project
reports.
(ii) Since the source of funding of public enterprises could be from borrowing, they
will obviously be required for debt-servicing, and this in turn is possible only if
they are financially viable by generating surplus

Therefore, the creation of public enterprises should be associated with the declaration
of intent that they are expected to be financially viable, appraised in terms of their
capacity to yield a reasonable rate of return on total capital employed. What is the
reasonable rate of return then? In terms of pure financial logic, the answer is simple
and clear in that, the rate of return should not be less than the opportunity cost of
capital.
(B) Production and productivity objectives
Production planning is an integrated managerial discipline, which takes into account
productive capability or installed capacity, availability of inputs and market situations.
What is suggested in line with this is that the determination of production goals and

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strategies of production should be essentially an integral managerial exercise. The
focus should be on productivity goals rather than production targets, a shift from a
static concept of absolute levels of production to a more dynamic concept of
productive use of assets and resources.

This in turn implies "capacity utilization", to mean, the major productivity goal should
be to step up the utilization of capacity (for example machine) until it reaches the
optimum level. Another and equally important aspect of productivity is "consumption
coefficients"- the ratio of usage of raw materials to outputs. "Labor productivity" is a
far more sensitive area of setting productivity goals, which will depend on many other
factors such as training, work norm, and so on. "Total factor productivity" is the most
rational and sensible measure of productivity. The productivity of machines,
materials, workforce, and money is a highly integrated network-each of which
influencing the other. Because of this, sophisticated methodologies have been
designed to calculate "total factor productivity". Multiple inputs and outputs can be
weighed at factor costs

so as to determine whether a public enterprise has met its productivity objectives or

not.
(C) Marketing and service objectives

The real effectiveness of the enterprise can also be assessed in light of its performance
vis-à-vis its main constituency- customers, consumers or clients. Designing marketing
and service goals can be better understood by determining the marketing position of
each enterprise.
(D) Developmental and social objectives
Achievement of financial viability and generation of surplus and thereby
contributing to resource mobilization is by itself a major developmental
responsibility. Besides, the productive use of assets and the optimized use of
resources is a matter of both economic and social concern of public enterprises.
However, the accomplishment of social objectives is an obscure (unclear) and often
misunderstood subject. Public enterprises are expected to be, for example, model
employers, to take long-term developmental views of research by investing in such
areas, to support the environment, and so on. Consumer satisfaction is also considered

17
as the discharge of an important social obligation. The conclusion one might arrive at
could be that public enterprises, which are financially successful, are good performers
in terms of achieving development and social objectives.
CHAPTER THREE
3. ORGANIZATION AND MANAGEMENT FORMS OF PUBLIC
ENTERPRISES

3.1 MAJOR MANAGEMENT FORMS OF PUBLIC ENTERPRISES

Besides to its economic functions, the public enterprise sector is distinguished
prominently and importantly by its management characteristics. In other words, the
public enterprise sector exists as an identifiable and separate segment of the public
establishment because of its special management features. It is this aspect that makes
it especially significant in the study of public and development administration.

The administrative systems devised to satisfy the requirements of traditional

government activities are not adequate to the requirements of industrial and
commercial enterprises. They were not set up to serve the needs of business
(flexibility and economic efficiency), but to serve expectations of political
responsiveness and bureaucratic conformity. Whatever improvement of efficiency
might exist in the conventional public administration system, it wouldn't meet the
requirements of business management since the needs of such efficiency improvement
are justifiably different and tailor-made. Public enterprises cannot be dependent upon
annual appropriations for the continuity or flexibility of its operations. The
accounting, audit and personnel systems needed in traditional government do not
satisfy the management system of commerce. Hence, public enterprises need a
different form of management, which is flexible, adaptable and autonomous.

On the basis of this logic, public enterprises have been established separate and
different from the existing public bureaucracy and are endowed with the management
systems uniquely necessary to their success. There are, however, very few public
enterprises still remain in the administrative system of the older government
departments. There are different kinds of public enterprises, which can be classified
according to the source and nature of their legal authority and management, the
nature of their function, and their location and position in the government structure.

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Three types of public enterprises; i.e. Government Departments or Department
management, Government Companies, and Public Corporations, can be identified in
terms their categorization according to their legal bases and major forms of
management, the major features of which will be discussed separately below.

A) Department Management: under this pattern, public enterprises are owned and
managed just like government departments that are staffed by career personnel and
headed by ministers. Notable examples of which could be railways, posts and
telegraphs though these could also transform to a public corporation type. Department
undertakings display the following characteristics:

(i) It is financed by annual appropriations from the treasury and all or a major share
of its revenue is paid to the treasury
(ii) It is required to work out financial results, determined through accounts
maintained on commercial principles
(iii) It is subject to the budget, accounting and audit controls applicable to other
government departments
(iv) The permanent staff comprises civil servants recruited under terms and conditions
similar to those other civil servants. In this case, the minister is directly
responsible for all aspects of policy and administration.
(v) It possesses the sovereign immunity of the state and cannot sue and be sued
without the consent of the government

The departmental system of management has generally been adopted in the following
cases:
(i) Where the need for security or strategic importance make them difficult to be
operated by other forms of management, e.g., defense industry

(ii) In administration of national services, for instance postal, telegraph and telephone
services and railways

The main advantages of this system are that it assures maximum government control
in vital public services. Secondly, it helps in bringing about greater coordination by
establishing a clear relationship between a public enterprise and concerned
government departments. This form of management, however, suffers from obvious
disadvantages. The bureaucratic form of administration is likely to lead to inevitable

19
inefficiency, red tape, and delay. The danger is that the administration may be
subjected to excessive fiscal and personnel restrictions and interferences leading to
inadequate departmental autonomy in vital matters such as capital expansion, finance,
technical improvement, purchasing and personnel administration.

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

management, which has been increasingly used by most governments in respect of
manufacturing industries. This type is also known as mixed ownership company. The
company form amounts to running purely commercial and industrial enterprises. Its
capital is contributed by the government and shareholders, and the management is
headed by the board of directors appointed by government either from amongst its
own officials or from outside. This form includes various joint enterprises, shared
between the state and private interests. Its principal features (characteristics) are:

(i) The whole of the capital stock or 51 per cent or over is owned by the government,
(ii) It is a corporate body created under the general provisions of the Company Law
of the country
(iii) It can sue and be sued, enter into contract and acquire property in its own
name,
(iv) The majority of the directors are appointed by the government, depending on the
share of private capital in the enterprise
(v) Unlike public corporations, it is created by an executive order of the government
without parliament's specific approval
(vi) Its funds are obtained from the government and in some cases from private
shareholders and through revenue derived from the sale of its goods and services
(vii) It has almost the feature of a private limited company
(viii) It is generally exempted from the personnel, budget accounting, and audit
laws and procedures applicable to government departments
(ix) Its employees are not civil servants

The company form of public enterprise is chiefly used by the government in

industries where it has to rely on foreign (financial and technical) aid and assistance.
C) PUBLIC CORPORATION:
public corporation is a relatively new concept of administrative organization.
Although it has been occasionally employed in earlier periods, it is essentially the

20
twentieth-century creation to meet certain emergencies as a result of the Great
Economic Depression. The public corporation method is a sort of compromise
between the policy of laissez fair and strict bureaucratic control in public
administration and is generally adopted in the revenue producing enterprises. Public
corporation has become an important area of study in public administration as it
represents a conscious attempt to unite the advantages of public and private
administration in one enterprise. It has been also described in the following manner;

Public corporation is a corporate body created by public authority with

defined powers and functions and is financially independent. It is
administered by a board appointed by public authority to which it is
answerable. Its capital structure and financial operations are similar to
that of a government company."

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

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

(i) It is wholly owned by the state

(ii) It is a separate legal entity and is distinct from the government, which created
it. It has a corporate character or franchise, which confers power upon it. It can
do only what the charter authorizes.
(iii) It is incorporated under a special statute of the parliament (statutorily created
by a special law) outside the ambit of an ordinary company law, which lays
down public purpose and defines its powers, duties, and immunities and
prescribes the form of management and its relationship with ministers.
(iv) It is managed by a board, which has a self-contained financial structure. It is,
at least in theory, independently financed through its revenue and capital
borrowing.

21
 (v) It is a corporation in the sense that it has flexibility and initiative of a private
enterprise, has freedom of administration and finance, accounting and
purchasing, and has power to recruit its own personnel.
(vi) It is a legal person entering into contracts, which can sue and be sued and
acquire and own property in its own name.
(vii) Though the primary objective of a corporation is not profit, but public service,
it is run on business lines and not in accordance with bureaucratic procedures
and practices.
(viii) It holds funds in its own name, and is generally exempted from most
regulatory and prohibitory statutes and enjoys “complete” autonomy in the
management of funds.
(ix) It operates within the broad outline of government policy, while the day-to-
day administration is the exclusive responsibility of the managing directors of
the corporation.
(x) The personnel (employees) of public corporations are not civil servants, and
recruited independently in the pattern of business executives under terms and
conditions determined by the corporation itself.
The major advantage of this type of organization is that it has the flexibility and
initiative of a private enterprise combined with minimum public regulation of its
major policies. However, there are major operational problems in this type of
organization. Difficulties arise in reconciling autonomy of the corporation with public
accountability. The theory of corporate autonomy demands the largest measure of
operational freedom, which however, may be abused by administrative elite in the
organization. On the other hand, too much government interference defeats the very
purpose for which they are established. Reconciling "democracy" with "efficiency" is,
therefore, the crux (core) of the problem of public corporations.

The second way to categorize public enterprises is according to the nature of their
functions. One group of such categorization may include production and trading
companies, industrial and commercial enterprises that are expected to operate at profit
such as mines, wholesale and retail stores, rubber and tea estates, and steel and
pharmaceutical plants. Other groups of enterprises in accordance to the nature of
functions are composed of public utilities and services, which are supportive
infrastructure types such as power, water communication, railways, and ports. There

22
are also other groups of enterprises in this categorization, which are created explicitly
for the purpose of development that is for the purpose of giving encouragement, credit
assistance under special terms, and support to other institutions both public and
private. Such enterprises may include industrial development authorities, river basin
development agencies, etc.

A third way to categorize public enterprises is according to their location and position
in the governmental structure. In many countries, central and state (regional)
governments have established more or less systematic networks of public enterprises.
Such enterprises are created to develop a particular region or location. Another
growing trend in the third categorization is the emergence of a hierarchical
relationship among public enterprises, such as trading companies that often have
branches in districts and towns.
3.2.ORGANIZATIONAL STRUCTURE OF PUBLIC ENTERPRISES
In countries where the public enterprise sector is very large, public enterprises are
shaped or organized into a hierarchical form similar to the conventional government
bureaucracy. This trend, together with its distinctive management characteristics, is
converting the public enterprise sector into a "third bureaucracy" form, approaching
the dimensions and importance of those of traditional public administration and the
private sector (Gant 1979:125).
Grouping of public companies operating in a particular field under a central holding
company is a more or less typical pattern. Holding companies or corporations have
been consciously adopted in many countries for management functions of different
public enterprises. They are established to provide for more expert and rational
management and for better co-ordination of public sector companies as well as to
enhance the autonomy of management. In Ghana, for example, there are separate
holding companies for industrial, mining, trading, and financial enterprises. The
Nigerian National Petroleum Corporation (NNPC) is another typical example of the
holding company, which now manages the activities of other eleven subsidiary
companies.

This pattern obviously forms hierarchical relationships between subsidiary and

holding companies. In other countries also, large holding companies notably trading
companies, have set up operating branches to serve regions and districts. Generally,
public enterprises are related or organized horizontally and vertically in a bureaucratic

23
hierarchy. The holding company concept is often suggested as a desirable option for
public enterprises for its notable advantages, such as:
 The subsidiaries pursue common policies, and helps for uniform information
and reporting systems. Government policies are more effectively communicated
and implemented by subsidiary companies through the holding company
 Cross subsidization or inter-transfer of funds: In the event of financial distress or
severe economic downturn, the holding company may provide financial
assistance to subsidiary companies or vice versa. By the same token, subsidiary
companies may help one another or among each other in the case of
emergencies through the mediation of the holding company.
 It helps for interchange of experiences when facing common problems

Nevertheless, holding companies of monopolistic nature may pose demerits of the

following sorts:
 It is likely to curb operational freedom of the subsidiaries in matters of major
policy-making decisions
 The subsidiaries, even though belonging to the same line of activities, may
have differences which require discrete handling
 The holding companies involve costs of establishment, personnel and
functions, which may duplicate the work of subsidiaries
 For successful operation, the holding company may need to delegate powers,
which would deviate from the necessity of its establishment in the first place.
 Monopoly and centralization: They foster monopoly in particular sphere of
activity.
 Create time-consuming bureaucratic procedure: Holding companies create
another organizational layer in already inappropriate and time consuming
bureaucratic procedures. Thus, it hinders efficient and prompt decision-making.

Like any government agency, public enterprises have formal organizational structures
depicting their intra and inter-relationships and their internal functional arrangements.
Broadly speaking, organizational structure can be described as a pattern of
responsibilities, that is, a framework within which the process of management can be
effectively carried out. The organizational structure of a public enterprise is, therefore,

24
the framework for carrying out the responsibilities for the co-ordination of activities
or operations and for the motivation of members.

Although the framework varies from enterprise to enterprise depending on the aims
and objectives of the individual bodies, general observation shows that a pattern is
common to most of them, i.e. the public enterprise is so structured in a manner that
the Head of Government/Cabinet is on the top followed by the Supervisory Ministry,
the Board of Directors, and the Management (Chief Executive) in order of their
presentation. The holding corporation is adjacent to the board. All public enterprises
adopt this structure, which is aimed at achieving an effective policy formulation and
execution in line with government policy directives. All the bodies that feature in the
structure are supposed to see themselves as parts of an organism and not as
competitors for power.

Regarding their internal arrangement or organization, all public enterprises, regardless

of their size or mission, establish various segments or units that make up the
organization structure. This is done by dividing the overall operations into sub-
activities and then by combining these sub-activities into specialized functional units.
This process of grouping specialized activities in a logical manner is called
"departmentalization". Public enterprises do have different bases for
departmentalization since they are different in their activities, objectives and areas in
which they operate. The most common bases of departmentalization are function,
territory, product, customer, and process.

(i) Departmentalization by Function: It is the grouping together of activities

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

(iii) Departmentalization by Territory/ Geography:

25
Departmentalization in this consideration implies arranging a group of business
activities on the basis of geographic location or territory. It is common in enterprises
that operate over wide geographic areas; i.e. it is attractive to large-scale firms or
other enterprises whose activities are physically or geographically dispersed. The
logic is that all activities in a particular area or region should be assigned to a manager
who will be in charge of operations in that geographic area. Geographic
departmentalization works best also when different laws, currencies, languages and
traditions exist that have a direct impact on the ways in which business activities must
be conducted.

(iii) Departmentalization by Product (Product Line): It is the grouping

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

(iv) Departmentalization by Customer: It is a grouping of activities around

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

(v) Departmentalization by Process: Manufacturing firms often group

activities around a process or type of equipment they use. The final product of a single
enterprise may be obtained after passing through several processes and stages. In this
case, the output of a given process or department may be used as an input for the other
until the final product is produced.

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3.3MANAGING THE INTER-LINKAGES WITH DIVERS STAKEHOLDERS
The idea of inter-linkages lies at the heart of all development planning. Viewed from
the perspectives of the public enterprise, inter-linkages take on a managerial face.
Managers are consistently faced with external influences, pressures and demands-
from the government, consumers, suppliers, trade unions, the physical environment,
the private sector, and other public enterprises. The fundamental premise is that inter-
linkages are not merely phenomenon to be analyzed and recorded as they occur, but to
be planned and managed. The "constraints" must be converted into managerial
challenges. Indeed there is an organic connection between the manner in which the
inter-linkages are managed and the scope and intensity of influences of those
intervening organs or elements.

The first task is to identify the inter-linkages, to locate all the points of external
contact, which an enterprise has as part of managing the situation. While managers
are actually conscious of their external relations, there is rarely an attempt to draw up
a planned network and to view the interrelationships as a system at work. Since the
character of enterprises differ considerably, the framework of inter-linkages and the
intensity of the contact will equally differ. In designing its corporate plan, each
enterprise will have to draw up its own model of inter-linkages, depicting the scenario
of its external relationships and the nature and content of contacts. The following are
the inter-linkages that a public enterprise would have for its success.
(i) Inter-linkage With The Government
The most powerful influence affecting public enterprises comes from the government.
Indeed, public enterprises' managers are so pre-occupied with the task of establishing
an adequate relationship with the public authorities that control, monitor, and evaluate
them. Hence, mangers tend to view the inter-linkage with government as the only one
that matters. The relationship between governments and their enterprises create
immense problems of adjustment and could even develop into a situation of tension.
As it was mentioned earlier, although there are common areas for government
interventions, the specific nature of this relationship differs widely from country to
country and even from enterprise to enterprise.
(ii) Other Public Enterprises
There are empirical reasons for the existence of interdependencies among various
public enterprises. The activity of one public enterprise will be determined or

27
significantly affected by the activity of the other. The horizontal linkages among the
family of public enterprises are as crucial as the vertical linkage with the government.
In a free market economy where enterprises have choices of clients and suppliers,
problems of interdependence may not perhaps be quite serious. However, the situation
in developing countries calls for the management of horizontal inter-linkages among
public enterprises. There are at least four sets of inter-linkages namely, investment,
production, pricing, and marketing.
(iii) The Private Sector
Most of the developing countries have adopted a "mixed economy" pattern. This
creates inter-linkages between private and public enterprises. The private- public
enterprises inter-linkages are conditioned by the rules established by the government.
The various inter-linkages could be established for designed mutual benefits or may
happen as a result of the natural courses of activities, both as collaborators and
competitors.
(iv) The Workers
These days, most workers are organizing themselves into associations to protect their
interests. A fundamental aspect of the enterprises' inter-linkages is, therefore, the
relationship established with the organized labor. The objective is clear enough; i.e. to
create industrial peace and tranquility, involvement and motivation, and thereby high
productivity.
(v) The Consumers
Marketing establishes a relationship between the producer and the purchaser of the
goods and services. The technique of marketing has been developed in order to
understand and satisfy consumer demand and taste. What is special with the situations
of public enterprises is that they assume heavy responsibility to provide protections to
the consumer, which the market place doesn't offer. Consumers have their own ways
of evaluating the performance of public enterprises. Their criteria are related to their
own benefits, including price, quality, service, and after-sales facilities. Public
enterprises would have to make a major effort to understand consumers' needs
through market research. This can be possible by maintaining effective inter-linkage
with consumers.
(vi) The Physical Environment

28
Public enterprises assumed to take appropriate steps to prevent ill effects of their
respective operations and such effects caused by other family enterprises and
enterprises of the private sector on the environment. This concern of the physical
environment is expressed in many ways such as sponsoring and funding research
projects aimed at studying the causes and effects of environmental problems, as well
as by employing appropriate devices to protect the environment from possible
hazards. Viewing the relationship more constructively, one can say that public
enterprises should not only prevent social dislocations on the environment, but also
should make active contributions to the healthy growth of the environment. This
shouldn't rest only with the cosmetics of parks and gardens created around industrial
units, rather of great importance is the infrastructure support that public enterprises
can provide to local communities and the environment. The problem of public
enterprises with regard to their inter-linkages with environment is that the
contributions they make are not adequately reflected in their profit-loss accounts.
(vii) Foreign Contacts
Public enterprises develop contacts abroad; arising from imports of technology,
equipment and machinery, raw materials, spare parts and components; export of
goods and consulting, contracting and other services; hiring of expatriate managers
and consulting firms, international shipping and insurances etc. Since most public
enterprises are exposed to such foreign influences, they are supposed to develop their
own "foreign policy" which defines their inter-linkages within the provisions of the
government in this regard. Foreign Inter-linkages of public enterprises may focus,
among others, in developing information networks on the availability of goods and
services from each other's side, skill and technology transfers, understanding and
exploration of market situation and possibilities, assessing the availability and
comparative advantages of establishing joint ventures and selection of the right
partners.

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