I.

CONCEPTUAL DEFINITION OF PUBLIC ENTERPRISES

Before delving into the specifics of the Philippine case, it would be prudent to re-

visit the concept of public enterprises as defined both theoretically and legally.

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

as:

“Any commercial, financial, industrial, agricultural, or promotional undertaking –

owned by public authority, either wholly or through majority shareholding – which is

engaged in the sale of goods and services and whose affairs are capable of being

recorded in balance sheets and profit and loss accounts. Such undertakings may have

diverse legal and corporate forms, such as departmental undertakings, public

corporations, statutory agencies, established by Acts of Parliament or Joint Stock

Companies registered under the Company Law (Basu, 2005, p. 3).”

Based on this definition, public corporations are entities that undertake

‘commercial’ activities like private firms but are owned and/or run by the government.

However, this definition does not quite give justice to the theoretical complications

presented by the concept of public enterprises.

Mendoza (1990) elaborates more on the classical, dualistic definition of public

enterprises by elaborating on the ‘public’ and ‘enterprise’ dimensions. Citing Fernandes

and Sicherl (1981), Mendoza explains that the public dimension of the nature of state-

owned enterprises consists of their embodiment of public interest, public ownership,

public control, public management, and public accountability. Their enterprise

dimension meanwhile involves their organization, their decision-making identity, their

provision of goods and services, the ‘marketing factor’, the presence of investments and

returns, and the presence of a commercial accounting system that lends itself to

economic calculation.

Theoretically, then, public enterprises constitute an overlap between private firms

and public bureaucracies. On one hand, public enterprises’ assets are similar to

bureaucracies in that they are organs of the state, they take at least part of their income

from state subsidies, and their employees are civil servants. Distinguishing them from

pure bureaucracies are their participation in ‘commercial’ activities which involve the

pursuit of income and revenues and which are typically undertaken by private firms, and

the autonomy that their organization theoretically provides them.

There are several rationales for the establishment of public enterprises:

First governments may deem it necessary to establish public enterprises to

introduce economic activities that the private sector is either unwilling or unable to

undertake. Industries involving high upstart costs, and long-term capital investments

may be desirable for economic development and the state’s interest, but may not be

within the capabilities or the interest of the private sector to establish. In such cases, the

government may sometimes take it upon itself to make the necessary investments to

establish the industry to win the country’s economy.

Second, public enterprises may be established in pursuit of national and social

interests. This is typically the case for strategic industries within national economies

such as electrical generation, defense, banking, etc. In the case of nationalization, the

government wishes to exert national sovereignty over particular industries and avoid
domination by foreign firms. In fact in the Philippines, early forays into public enterprises

were intended to increase Filipino control over the domestic economy (Corpuz, 1994).

Public enterprise may also be established to check the power of private firms involved in

the “commanding heights” of a national economy (Shepherd, 1991).

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

best undertaken by the government, either because the private sector does not provide

a sufficient supply (Shepherd, 1991) or because their nature means that it would be

more efficient if they were provided by the state (such as in the case of natural

monopolies).

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

revenues through their commercial functions. Because of their proprietary objectives

public enterprises are usually expected to be financially independent and viable enough

to fund their activities, or even able to contribute to the national coffers. Public

enterprises can therefore be used to provide the state with an alternate source of steady

revenue besides traditional taxation.

Lastly, there are those public enterprises that arise out of the government’s

efforts the save “sick” units (Gouri, et. al, 1991). Private companies that are deemed

either politically or economically important may be nationalized by the government to

prevent them from shutting down. An example of this is General Motors (GM) in which

majority ownership was acquired by the United States government in 2009 to prevent

the company from going bankrupt.

 Except for the nationalization of “sick” companies, adopting the public enterprise

form of organization typically involves the perception that creating a state entity infused

with the entrepreneurial nature of a private firm will lead to better outcomes than what

would occur with a traditional bureaucracy.

The autonomy of public enterprises is perceived to allow for greater flexibility in

the implementation of policy as well as being conducive to greater initiative on the part

of the public enterprise’s managers. The hybrid nature of public enterprises is also

perceived to be more accountable to the public than normal private firms, due to their

being subject to various state controls and regulations.

II. LEGAL AND OPERATIONAL FRAMEWORK OF PUBLIC ENTERPRISES IN THE

PHILIPPINES

In this sub-section, we will discuss the history of the legal and operational

framework behind public enterprises in the Philippines from the national constitutions of

1935, 1973, and 1987, to the proclamations, memorandums, and executive orders

made in recent decades.

Today public enterprises in the Philippines are officially known as government-

owned or controlled corporations (GOCCs), as is their designation under Presidential

Decree (PD) No. 2029 (1986) and restated in Administrative Order (AO) No. 59 (1988):

“…corporation which is created by special law or organized under the

Corporation Code in which the Government, directly or indirectly, has ownership of the

majority of the capital or has voting control…”

 Public enterprises, however, existed long before the official establishment of this

term and definition, as will be discussed in a later section of this paper. The earliest

legal basis for the establishment of public enterprises was in Article II, Section 5 of the

1935 Constitution. It outlined that one of the principles of the Philippine state was the

“promotion of social justice to ensure the well-being and economic security of all

people…”

In addition to this, Article XIII, on the use and conservation of natural resources,

stated that all the country’s natural resources belonged to the state and that their use or

development was to be limited to Philippine citizens or corporations with a majority of at

least 60% ownership by Philippine citizens.

These constitutional provisions formed the basis for the creation of the earliest

Philippine public enterprises in that they set the particular goals of social justice and

ownership of the national economy/resources by the Filipino people. These broad

themes would be replicated and elaborated upon in subsequent constitutions.

The 1973 Constitution elaborated more on the state policy on the establishment

of public enterprises, specifically under Sections 4-7 of Article XIV on the national

patrimony.

Section 4 of Article XIV states:

“The National Assembly shall not, except by general law, provide for the

formation, organization, or regulation of private corporations unless such corporations

are owned or controlled by the government or any subdivision or instrumentality

thereof.”
 Section 5, reiterated the theme of national ownership of the economy by stating

that the operation of public utilities can only be undertaken by Filipino citizens.

Section 6 set a general policy framework on how public enterprises were to be

created and utilized by the government.

It states that:

“The State may, in the interest of national welfare or defense, establish and

operate industries and means of transportation and communication, and upon payment

of just compensation, transfer to public ownership utilities and other private enterprises

to be operated by the Government.”

Section 7 outlined the power of the state to, in the case of a national emergency,

temporarily take over private enterprises “affected with the public interest” should it be

deemed necessary and in the public interest. A keyword in this particular provision is

“temporary”, in that it implies that any such businesses taken over by the government

should eventually and rightfully be returned to the private sector. This, together with

Section 4, implies a state policy favoring free enterprise, at least in times of normalcy.2

Thus, public enterprises during the 1970s and early 1980s were created primarily

for economic development, protection of the national interest, and in response to

specific problems. This policy, however, was rather unspecific about the boundaries

between the state and the market. This ambiguity, coupled with the patronage inherent

in the system during the martial law years, led to the proliferation of public enterprises

as well as quite several issues and challenges to the public sector.

 These problems led the Marcos government to create the Special Presidential

Reorganization Committee (SPRC) in 1985 with its view of rationalizing the

government's corporate sector. This committee recommended limiting the use of the

government-corporate form to certain areas and activities, the institutionalization of

effective supervision, the coordination and control of government corporations, and the

abolition/privatization/merging and/or retention of existing GOCCs. These reform

efforts, however, were overtaken by the political upheaval that occurred in 1986.

During the subsequent Aquino administration, a new framework was drafted for

limiting the use of the government-corporate form to those activities usually considered

to be natural monopolies, those that require large and physically indivisible capital

investments, those characterized by long and uncertain gestation periods, and those

deemed essential from the point of view of national defense, security, and welfare.

The plan also proposed that the following criteria should govern the use of the

government-corporate form:

a. flexibility and autonomy in operations;

b. financial viability;

c. limited liability of the national government, and;

d. the possibility of private sector participation

Subsequently, Administrative Order (A.O.) No. 59 was issued in February of

1988 to provide principles and standards to be followed in the creation, management,

administration, supervision, and liquidation of GOCCs, defining the guidelines in

determining the areas or activities in which the government-corporate form could be

utilized, and establishing policy measures to improve the organizational and functional

capabilities of GOCCs.

Section 3 of A.O. 59 stated that the government should be engaged in the

provision of goods and services only if said goods and services are “vital to society” and

if “the private sector is unable or unwilling to provide the same”, or if market intervention

is “justified by the need to create a bias in favor of disadvantaged sectors of society.”

In addition to these guidelines for state intervention, the order also recommended

that the corporate form only be used if the nature of the good or service provided or the

market structure for those goods/services required the operation of a less restrictive

organization than a regular government agency if it is intended “to limit the liability of the

government to its direct equity exposure”, or when the enterprise could be “reasonably

expected” to be able to financially sustain itself.

Lastly, A.O. 59 mandated that all proposals for the acquisition, creation, and

dissolution of GOCCs would be reviewed and evaluated by the Government Corporate

Monitoring and Coordinating Committee (GCMCC) established in 1986 through

Memorandum Circular No. 10. This committee was further empowered by Executive

Order (E.O.) No. 236, issued in July 1987, to be the central monitoring, coordinating,

and performance evaluation unit for all GOCCs.

The GCMCC filed legislative bills aimed at standardizing the general features of

the charters of GOCCs such that the management of GOCCs was vested in its chief

executive officer, the members of the Board of Directors were required to have
recognized competence and experience relevant to the GOCCs operations. This was

aimed at professionalizing the management of the GOCCs. However, the system of

departmental attachment of GOCCs was maintained together with their inter-

departmental supervision by the GCMCC and other service-wide agencies like the

COA, CSC, the Department of Budget and Management (DBM), the NEDA, and others.

Another major development during the first Aquino administration was the

establishment of the government’s privatization program. In December of 1986,

President Corazon Aquino issued Proclamation No. 50. Under this program, the

government would divest itself of two types of assets, the 122 GOCCs recommended to

be privatized and non-performing assets (NPAs) that were earlier transferred by the

PNB and the DBP to the national government. Proclamation No. 50 created the

Committee on Privatization (COP) and the Asset Privatization Trust (APT). The COP

was a cabinet-level committee that was primarily tasked to oversee the privatization

program. Furthermore, it was put in charge of formulating the policies and general

guidelines on issues of privatization, approving the sale and disposition of GOCCs,

NPAs, and other assets, and monitoring the progress of privatization actions.

On December 31, 2001, the COP and the APT became defunct and were

succeeded by the Privatization Council (PC) and the Privatization Management Office

(PMO) under Executive Order No. 323 issued by then President Estrada. These bodies

continued the work of their predecessors.

The most recent additions to the governance framework for the public enterprise

sector are Executive Order No. 24, which prescribes a framework of rule to govern the
compensation of members of the board of directors/trustees of GOCCs, and the

subsequent Republic Act (RA) No. 10149, or the GOCC Governance Act of 2011. Both

of these were the result of the current Aquino administration’s anti-corruption campaign.

E.O. 24 in particular was aimed at what were perceived to be unusually high benefits

accrued to executives in GOCCs. Of these, the Local Water Utilities Administration

(LWUA) was notably scrutinized due to the alleged purchase of capital stock of Express

Savings Bank, Inc. by its former chairman Prospero Pichay, Jr.. However, due to the

inability of an executive order to override the charter of the LWUA, the GOCC

Governance Act was rushed through Congress and passed in the middle of 2011.

III. ISSUES FACED BY PUBLIC ENTERPRISES

Public enterprises are subject to various issues due to their unique hybrid nature.

They often have conflicting objectives, sometimes due to ambiguously set mandates.

Private firms have always had a clear proprietary objective: to earn profit. Bureaucracies

are entirely different animals with different objectives from private firms. They are aimed

at social or political objectives handed down from above by their political masters.

Public enterprises involve a mix of both types of objectives, which may contradict one

another. More specifically, the pursuit of certain objectives social or political objectives

like economic development, may contradict public enterprises’ proprietary objectives.

This leaves public enterprises unable to maximize their effectiveness in attaining their

multiple objectives due to having to balance them. It also often leaves them unable to

ensure their financial viability or exercise fiscal restraint, two objectives that recent

legislation has underlined.

 Another issue that may plague public enterprises is that of ministerial or political

interference in which politicians may become overly involved in the running of public

enterprises or may meddle in their affairs to the detriment of efficiency, management

initiative, and employee morale. Such meddling undermines the intended autonomy of

public enterprises, which, as mentioned above, is one of the theoretical advantages of

the public enterprise form. The undermining of public enterprise autonomy may arise

from other factors, notably political. Hanson (1965) cited the example of public

corporations in Turkey in the case of Law 3460. Under that law, several government

banks turned into public corporations to allow them the autonomy to foster the flexibility

and initiative required of enterprises. According to Hanson, however, the legislated

autonomy of those corporations was soon practically eliminated by further legislation

that provided for extensive ministerial supervision.

Segovia (1995), in her case study of the National Power Corporation, cited

political pressures during the Aquino administration, particularly due to suspicions of

corruption in the pre-existing bureaucracy, as factors that contributed to the decline and

subsequent crisis involving that corporation. Micro-managing by the then newly-

appointed NP Board, deferment of rate increases and a rollback of the rate prices for

political reasons, and investigations by the legislature were notable examples cited.

These examples show that scrutiny in the name of accountability, if overdone can have

a severely detrimental effect on the operation of public enterprises.

Despite the argument that public enterprises can be more accountable than

private firms, public enterprises are often the subject of controversy about transparency.

Because of the discretion and autonomy (supposedly) accorded to them as well as the
public dimension of their nature and the funds that they often use, PEs the question of

accountability is perennially pertinent. The issue has been particularly emphasized

during this current administration. However, the issue of accountability of public

enterprises has often led to an over-emphasis on accountability and thus to ministerial

interference.

In addition to often being unable to put into practice the theoretical advantages of

private firms, public enterprises are also prone to the same vices of bureaucracies.

Rules and regulations intended to prevent abuses may also act as disincentives to

efficient management due to an over-emphasis on following rules and regulations (Von

Mises, 1969). On an individual level, principal-agent problems may be encountered.

Public enterprise employees may also take on the rational calculation of bureaucrats

and may have little incentive to optimize their performance given that the decisions they

make often have little to do with their interests and thus they would have little reason to

consider decisions carefully (Tullock, 2002).

Lastly, there is the tendency for public enterprises to be liabilities in the

government’s budget. Such is the case for several GOCCs in the Philippines. Indeed,

the Department of Finance (DOF) lists 14 “heavily indebted GOCCs” as of 2004

(Mendoza, 2007). Phenomenon such as a soft budget constraint, wherein public

enterprises behave as if their budget constraints were not ‘solid’ due to the strong

possibility of government assistance (Kornai, Maskin, & Roland, 2003), can affect the

fiscal viability and economic efficiency of public enterprises.

 The Philippine public enterprise sector, in particular, has historically been

hounded by numerous problems that have been raised by studies time and time again

since the 1950s, notably: displaying “rampant corruption, mismanagement and

inefficiency”, nepotism, being vehicles for crony capitalism under the Marcos regimes, a

lack of a clear policy on government intervention in the economy, “inadequate

monitoring and control”, and “poor corporate performance” (Mendoza, 2007).