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Public Enterprises:Unresolved Challengesand

New Opportunities

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Department o Economic and Social AfairsDivision for Public Administration and Development

Management

Public Enterprises:Unresolved Challengesand New Opportunities

Publication based on the Expert Group Meeting onRe-inventing Public Enterprise and their Management

27-28 October 2005New York

asdfUnited Nations

New York, 2008

ST/ESA/PAD/SER.E/69

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Mission Statement

The Department o Economic and Social Aairs o the United NationsSecretariat is a vital interace between global policies in the economic, socialand environmental spheres and national action. The Department works inthree main interlinked areas: (i) it compiles, generates and analyses a widerange o economic, social and environmental data and inormation on whichMember States o the United Nations draw to review common problemsand to take stock o policy options; (ii) it acilitates the negotiations oMember States in many intergovernmental bodies on joint courses o action

to address ongoing or emerging global challenges; and (iii) it advises inter-ested Governments on the ways and means o translating policy rameworksdeveloped in United Nations conerences and summits into programmesat the country level and, through technical assistance, helps build nationalcapacities.

Note

The designations employed and the presentation o the material in this publication

do not imply the expression o any opinion whatsoever on the part o the Secretariato the United Nations concerning the legal status o any country, territory, city orarea, or o its authorities, or concerning the delimitation o its rontiers or boundar-ies.

The views expressed are those o the individual authors and do not imply any expres-sion o opinion on the part o the United Nations.

Enquiries concerning this publication may be directed to:Mr. Guido BertucciDirector, Division for Public Administration and

Development Management, Department of Economic and Social AffairsUnited Nations, New York, NY 10017, USAFax: (212)963-9681 Email:[email protected]/ESA/PAD/SER.E/69United Nations publicationCopyright United Nations, 2007

All rights reservedPrinted by the United Nations, New York

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FOREWORD

In recent times, globalization, liberalization and marketization and ongoingstructural transormations o national economies contributed to an expan-sion o the private sector, on the one hand, and downsizing o the publicsector including dismantling or divestment o public enterprises, on theother. These initiatives seemed to have been undertaken to accomplish twomain objectives giving more space to the private sector to unction as themain engine o growth and at the same time, by downsizing and divestingineicient public enterprise operations, save costs and generate revenue.

However despite being divested or dismantled, PEs continue to occupysigniicant roles in many countries, both developed as well as developing. Additionally, PEs remain in many developing countries, especially in theSub-Sahara Arica, the principal suppliers o social services, some relevantto the attainment o the Millennium Development Goals (MDGs). Forexample, due to the slow growth o the private sector PEs remain the mainsources o employment in many countries.

These varying conditions warrant a careul review o the role the PEscan play in socio-economic development o countries. However, what is also

crucial is that new PEs must perorm eiciently and eectively and whereappropriate, under market conditions. The reorm agenda o PEs includes,inter alia, the issues o management, structures, perormance monitoringand eedback arrangements including exploring options o private/publicpartnerships etc. Currently, the debate on PEs do not seem to concern anymore whether PEs have a role to play, but what that role should be and howit should be played.

By organizing the Expert Group Meeting (EGM) on Re-inventingPublic Enterprises and Their Management, in New York during 27-28

October 2005, the Division or Public Administration and DevelopmentManagement (DPADM) o the United Nations Department o Economicand Social Aairs (UN-DESA) attempted to advance the debate on thesubject urther and articulate more clearly the needs and options o PublicEnterprises so that the Member States are in a better position to determinethe institutional options o development more suitably. More speciically, theEGM discussed two inter-linked issues: (i) the role o Public Enterprises intodays economy, especially within the context o the realization o MDGs;and (ii) the management and more particularly the perormance monitoring

issues o Public Enterprises.This publication titled Public Enterprises: Unresolved Challenges andNew Opportunities is based on the papers presented and views expressedduring the EGM.

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I take the opportunity to thank the experts, discussants and organizersor their contributions, especially the concerned sta o the Socio-economicGovernance and Management Branch (SGMB) o DPADM who contrib-

uted more directly to the publication o this report.

Guido BertucciDirector, Division for Public Administration

and Development Management

Department of Economic and Social Affairs

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PREFACE AND ACKNOWLEDGMENTS

The Expert Group Meeting on Re-Inventing Public Enterprises and TheirManagement and the resulting publication on Public Enterprises: UnresolvedChallenges and New Opportunities were undertaken as part o the UnitedNations Programme on Public Administration managed by Mr. GuidoBertucci, Director, Division or Public Administration and Development(DPADM) o DESA.

DPADM/DESA is grateul or the invaluable insights and expertisecontributed by public enterprise experts namely Proessor Prahlad Kumar

Basu, Mr. Marc Dandelot, Proessor Aristide Police, Proessor Ismael JosGmez Gordillo, Mr. John-Mary Kauzya, Proessor Dennis Rondinelli,Mr. Prajapati Trivedi and Mr. Jomo Kwame Sundaram, Assistant Secretary-General o DESA. In particular, DESA acknowledges the notable contribu-tion o Pro. Basu who served as the Lead Consultant or this EGM and

was responsible or the preparation o the initial background paper or themeeting. The ollowing UN sta members acted as respondents to the spon-sored papers: Mr. Shabbir Cheema, Mr. Jean Le Nay, Ms. Elida Reci, Mr.Ejeviome Otobo, Mr. Julio Darcy and Mr. Olympios Katsiaouni.

The Socio-Economic Governance and Management (SGMB) oDPADM, headed by Mr. Adil Khan, Chie o Branch, implemented theactivities. Mr. Khan provided the over-all guidance to the content o theEGM and o the publication. Mr. Jacinto de Vera, Chie, Policy Analysisand Coordination Unit (PACU) o SGMB and Portolio Manager o theEGM steered the entire process and supervised the production o the inaloutput, this publication o the EGM. Mr. De Vera was assisted in theinalization and editing o the publication by Ms. Mary Christine Ong-Reyes, Research Assistant. Mr. Numayr Chowdhury, consultant to PACU,provided useul inputs in the initial drat o the publication including itspreliminary editing. Additional research inputs were also provided by Mr.

Erasto Almeida, ormer intern rom Columbia University.The inputs o all other SGMB sta members during the EGM are alsoduly acknowledged.

With a heavy heart, DESA also wishes to pay special tribute to ProfessorDennis Rondinelli, one of the experts and a long-time member of theCommittee of Experts on Public Administration, who passed away in theearly part of 2007.

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Contents

F o r e w o r d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i i i

Preace and Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Abbreviations and Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v iii

Part 1 Concepts and Deinitions

1. Introduction: Reinventing Public EnterprisesM. Adil Khan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Reinventing Public Enterprises and Their Management as the

Engine of Development and GrowthPrahlad K. Basu. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Can Public Enterprises Contribute to Development? A CriticalAssessment and Alternatives for Management Improvement

Dennis A. Rondinelli. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 14. Designing and Implementing Mechanisms to Enhance

Accountability for State-Owned Enterprises

Prajapati Trivedi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 35. The Question of the Public Enterprise and Africas Development

Challenge: A Governance and Leadership Perspective

John-Mary Kauzya. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3Part 2: Highlights

6. Issues on Public Enterprise Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Annex

A. Agenda of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

B. Example of a Performance Agreement in the US( A p p e n d ix I , T r i v e d i ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

C. Suggested Best Practice Evaluation Methodolody for Performance

Agreements in the US (Appendix II, Trivedi). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

D. Perceptions Analysis: Role and Relevance of MOU as

an Instrument

(Appendix III, Trivedi). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

E. Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

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Abbreviations and Acronyms

ASEAN Association o Southeast Asian NationsBOO Build-Operate-OwnBOOT Build-Operate-Own-TranserBOT Build-Operate-Transer

CEO Chie Executive OicerCFE Federal Electricity CommissionCMA Capital Markets AuthorityCNOOC China National Oshore Oil CorporationDPADM Division or Public Administration and

Development ManagementDPI Directly Productive InvestmentsECOWAS Economic Community o West Arican StatesEIU Economic Intelligence UnitEU European UnionFGSA French Government Shareholding AgencyGATS General Agreement on Trade in ServicesGCE Government Controlled EnterpriseGDP Gross Domestic ProductICPE International Centre o Public EnterprisesLDCs Least Developed CountriesLMB Lint Marketing BoardMDGs Millennium Development GoalsMERCOSUR Southern Common MarketMOU Memorandum o UnderstandingNAFTA North American Free Trade AgreementNEMA National Environment Management AuthorityNEPAD New Partnerships or DevelopmentNDA National Drug AuthorityNGO Nongovernmental OrganizationNNPC Nigerian National Petroleum CorporationNPM New Public ManagementOECD Organization or Economic Co-operation and

DevelopmentPA Perormance AgreementPE Public EnterprisePEMEX Mexican PetroleumPICKO Private Inrastructure Investment o Korea

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PO Parastatal OrganizationPPP Public Private PartnershipSAP Structural Adjustment Program

SGMB Socio-Economic Governance and Management BranchSOC Social Overhead CapitalSOE State Owned EnterpriseSRT State Railway Authority o Thailand

TELMEX Mexican TelecomUDC Uganda Development CommissionUEB Uganda Electricity BoardUN United NationsUNDESA United Nations Department o Economic and

Social AairsUK United KingdomURA Uganda Revenue AuthorityUWA Uganda Wildlie AuthoritySASAC State Asset Supervision and Administration Commission

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Part 1

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Reinventing Public Enterprises

M. Adil Khan

Introduction: Setting the Scene

Since the 1930s and particularly ater World War II, numerous State OwnedEnterprises (SOEs), also called Public Enterprises (PEs), were created in bothdeveloped and developing countries to address market deicits & capital

short-alls, promote economic development, reduce mass unemploymentand/or ensure national control over the overall direction o the economy,especially in developing countries. By providing capital and technology tostrategic areas where the private sector either shied away rom or lacked thecapacity to invest (such as heavy industries, inrastructure etc), most govern-ments resorted to PEs to increase capital ormation, produce essential goodsat lower costs, create employment and generally contribute to the economicdevelopment o the nation state. This trend continued till the early eight-ies.

However, rising corruption, management ineiciencies, overstaing(without due regard to their economic viability, many governments treatedPEs as easy conduits or job creation and a convenient vehicle or patron-age distribution), inlation and rising current account deicits o the 1980s,exposed serious government ailures and the limits o PEs as major playersin economic development. In addition to management deicits many PEsalso suered rom technological shortcomings. Imported through eitheroreign aid or sot loans rom abroad, many o the PEs were either equipped

with low or second grade machineries contributing to low capital/output

ratio, or were established without due regard to their economic and inancialsustainability1.

DivestmentsAs a result o these ailures, large-scale privatization o PEs were undertakenin the 80s and 90s, with the vital support (i not inducement) o multilat-eral inancial institutions. The collapse o the Soviet Union also removedideological and political barriers that hindered capitalist/market-orientedreorms, triggering a movement towards divestitures, marketization and

privatization.1 In the Philippines, a nuclear power plant constructed at a cost o approximately$2 billion during the mid-eighties did not produce a single KW o power, mainlydue to sub-standard technological inrastructure acquired at inlated prices a cleareect o corruption.

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Public Enterprises: Unresolved Challenges and New Opportunities

Privatization activities peaked in developing countries in 1997 and beganto drop o in the late 1990s; though it still remains at a low level overall,the level o privatization is once again slowly creeping up. As a result o

two decades o divestiture, states have signiicantly reduced their direct par-ticipation in vital sectors o the economy. These disinvestments incorporatedthousands o PEs worldwide with a net worth o US $850 billion. In developingcountries, revenues earned through divesture totaled US $250 billion, o which49% came rom the inrastructure sector, 19% rom the primary sector, 16%rom manuacturing and 12% rom inancial services. These sectoral distributionso divestures also reveal the relative preerences o private sector investments.

About 55% o the proceeds were generated in Latin America and theCaribbean, 21% in Eastern Europe and Central Asia, 14% in East-Asia, 4%

in South Asia, 3% in the Middle East and North Arica and 3% in Sub-Saharan Arica. Again this distribution highlighted the comparative ordero privatizations among nations Latin America and the Caribbean beingthe most privatized, Sub-Sahara being the least. Overall, PEs share o valueadded on GDP decreased by 15%2.

Current State of Public EnterprisesAlthough reduced signiicantly, PEs continue to have a major presence inmany national economies. In high-income countries, PEs share o GDP

and investment constitute 8%, and 13% respectively. For middle-incomecountries the corresponding shares are 9% and 17%, while in the so-calledLeast Developed Countries (LDCs) 3 they are 14% and 28%4. PEs alsoconstitute an important source o government revenue in many develop-ing countries (China: 7%, Thailand: 7%, Turkey: 6%) and regions such asNorth Arica (Algeria: 60%, Egypt: 12%, Morocco: 4%, Tunisia: 7%), theMiddle East (Jordan: 14%, Lebanon:17%, Syria: 24%) and Eastern Europe(Czech Republic: 2%, Hungary: 3%, Poland: 4%, Slovakia: 5%, Slovenia:3%).5 In terms o employment, PEs employ 34.3% o the total workorce

in Ghana, 25.1% in Gabon, 12.2% in Sri Lanka, 8.1% in India, 7.7% inKenya and 7.4% in China6.

2 Global Development Finance 2001, The World Bank.3 Sheram, K. and Soubotina, T., Public and Public Enterprise: Finding the RightMix, in Beyond Economic Growth, The World Bank, 2000.4 While in high-income countries SOE shares are smaller, when it comes to cen-tral government expenditure the situation changes signiicantly: the share o GDPreached 46.6% in France, 32.9% in Germany and 21.1% in the US, compared to14.4% in India, 8.1% in China, 29.9% in Turkey and 21.6% in Chile.5 ANIMA Euro-Mediterranean Network o Investment Promotion Agencies; Data

reer to the most recent year available during the period speciied. Share o govern-ment revenues rom public enterprises includes mostly revenues rom property andtax payments as a percentage o total revenue.6 Note about the data: most o it rom World Banks database organized or theresearch report Bureaucrats in Business and included in the 1999 edition o the

World Development Indicators. Data missing or many countries and not up to date.

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The question arises with regards to what role, i any, PEs (given theirsigniicant economic presence) can play in achieving the Millennium

Development Goals (MDGs), particularly in LDCs. Should PEs incorporatecommercially-oriented enterprises or should they be limited to producingpublic goods requisite or the satisaction o societal needs? An answer tothis question calls or an assessment o general outlook on trends in privateinvestments, particularly in FDI:

(i) Between 1990-2003, apart rom Brazil and China, most countriesexperienced a reduction in Foreign Direct Investment (FDI) as a shareo GDP(ii) FDI tends to lean towards aluent nations that are considered to be

stable, both politically and economically(iii) FDI tends to shy away rom the social sector(iv) Countries that receive more FDI also tend to have higher GDPper capita; however, some countries with high FDI also have high GiniIndices (Brazil: 59; China: 45; Malaysia: 49; Nigeria: 51), underscoringin some way, a correlation between increased FDI and inequality.(v) Conversely (though not conclusively) it can also be inerred thatcountries where SOEs play a relatively minor role, tend to have greaterinequality given higher Gini Indices (Brazil, Nigeria, Malaysia, South

Arica etc.)(vi) With regards to capital ormation, intense privatization & privatesector development rom 1999-2003 resulted in mixed outcomes.Countries where PEs played a prominent role achieved higher capitalormation (Bangladesh, China & India) compared to countries wherePEs played a comparatively smaller role (Brazil and Kenya).(vii) During the same period, Industry Sector Value Added (ISVA) as apercentage o GDP experienced mixed results; most countries recordedgains (China, Malaysia and Nigeria gained signiicantly) with the nota-

ble exception o Brazil where ISVA was low.(viii) Furthermore, countries with increased FDI as a share o GDPalso experienced gains in Service Sector Value Added, which lead to thebeneits o oreign investment being shared unequally.

A number o lessons emerge rom this scenario: countries that pursuedprivatization within a strategic policy ramework or investment gained morerom privatization compared to countries that approached it haphazardly andconsequently only had partial or no gains. Secondly, countries that retained

a signiicant proportion o their SOEs gained in a more balanced manner.Finally, with regards to inrastructure development, countries gained posi-tively when they combined privatization with appropriate market structures,regulatory rameworks and sound contract design.


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Public Enterprises: Unresolved Challenges and New Opportunities

Public Enterprise and the Millennium Development Goals (MDGs)

Measured in the medium term by the MDGs, poverty reduction as well as

timely, quality public service delivery are essential to the United Nationsdevelopment agenda. Suitable strategies accompanied by appropriate insti-tutional options are vital to the achievement o MDGs. While the intento this publication is not to establish a hard and ast deinition or PublicEnterprise, or the purpose o acilitating an understanding o the concept,Public Enterprise can be considered as an organization established by thegovernment under public or private law, as a legal personality which isautonomous or semi-autonomous, produces/provides goods and services ona ull or partial sel-inancing basis, and in which the government or a public

body/agency participates by way o having shares or representation in itsdecision-making structure.7

Although there is no acceptable deinition o the role o PE in the gov-ernmental agenda, there is support or the view that PEs have an importantrole to play in achieving socio-economic growth. While governments haveadopted numerous strategies to promote the transer o activities romthe public to the private sector, there is a widely held belie that essentialbasic services like health, education, water, electricity and transportationshould remain as public enterprises. Rondinelli8 states that the distinction

between public enterprise and public service is being blurred and givesthe example o the state providing services and then recovering the cost andoten making proits through user charges something that can also be doneby the private sector. However, Dandelot9 makes the important distinctionthat the social beneit o having the state provide a particular service is thatthe state theoretically reinvests proits or the beneits o the citizenry whilethe private sector distributes the proits or the beneits o its shareholders.

Additionally, there is a prevailing argument that retaining vital services aspublic entities guarantees the masses equitable and eicient provision o

social services. Give that seven o the MDGs address social issues, this argu-ments bodes well or the role o public enterprises in their implementation.

However, eicient and eective management o public enterpriseremains one o the key concerns o development management. Public enter-prises that tend to unction either in monopolistic or in near monopolisticconditions are oten not subjected to the market signals to enable assessmento the quality and relevancy o the goods and services produced, requir-ing a very dierent set o management tools and eedback mechanism or

7 Kauzya John-Mary, The Question o the Public Enterprise and Aricas DevelopmentChallenge: a Governance and Leadership Perspective8 Rondinelli, Dennis. Discussions rom EGM on Re-inventing Public Enterpriseand its Management9 Dandelot, M. Discussions rom EGM on Re-inventing Public Enterprise andTheir Management

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perormance monitoring. Geopolitics also places PE in a category o itsown given that its domain o inluence extends well beyond the national

economy to preservation o the nation state itsel. For example, PE playeda pivotal role in the uniication o post-colonial Arican and Asian statesand in the reconstruction o war-torn European states in the post World WarII period. Additionally, PEs are entrusted with governing strategic nationalresources, whose control by private vested interests, particularly oreign,can greatly jeopardize the sovereignty o the nation state. Consequently theaorementioned circumstances necessitates that PE cannot be judged by itscommercial viability alone - i.e. PE has a purpose that precedes simple proitmaximization the bottom line in measuring the perormance o private

enterprises. Hence, the challenge is to look or non-market tools that canprovide or a semblance o cost eiciency and guarantee transparency andaccountability in the management o PEs.

In situations where the public sector acts less as the provider and moreas a partner in the provision o services, challenges unique to public/privatepartnerships arise at three levels: (i) the choice regarding types o partner-ships (joint ventures; purchaser/ producer equation etc.); (ii) the regula-tory arrangements or private sector development; and (iii) impact basedpartnerships,10etc. Regardless o whether these partnerships are seen as

public enterprises or as quasi public sector initiatives, the key elements thatmust guide all partnerships are cost eiciency, sustainability and equity inthe delivery o the services. However it is also argued that public enterprise(given its nature and role) is intrinsically a part o the governmental agendaand cannot be seen as a partner.

In summary, the integration o the national economy in the global mar-ket has led to the privatization o public operations, leading to a reduction indirect state participation in traditional commercial and public service activi-ties. Nevertheless, despite more than 15 years o privatization, government

ownership is still prevalent in a number o regions and countries, particularlyin certain basic sectors in virtually every country, given that neither theprivate sector nor the market can respond ully to the challenges o develop-ment, especially equitable development. Furthermore, resource conditions,the operating environment and the size o the market all have importantbearings on the size o the private sector. Consequently there is a heavy reli-ance on the public enterprise in countries where the aorementioned actorsare lacking. Even in countries where the contribution o public enterprise isrelatively lower than the private sector, the strategic importance o PEs to the

national economy is still quite signiicant.

10 Impact based partnerships reer to those partnering arrangements that contributedirectly to social development accomplishments.


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Reinventing Public Enterprises andTheir Management as the Engine of Development

and Growth

Prahlad K. Basu

Introduction

The role o State on the lives o people is a universal phenomena in bothcapitalist as well as socialist economies o the world. The subject o State

intervention has thus been an issue o continuous debate over the years indierent socio-economic milieu. The State assumed greater economic rolein certain periods o time, ollowed by the doctrine o Laissez-aire. TheIndustrial Revolutions in the 18th and 19th centuries in the West and thecolonial rule in a number o Asian and Arican countries led to massive soci-etal imbalances in the world. Concentration o economic power and intensepoverty among the vast millions o people compelled the State to step in abig way in the irst hal o the 20th century.

Two world wars 1914 18 and 1939 45 led to intensiication o the

role o State over the economic processes. Europe, especially UK turned toSocialist ideas, which advocated the philosophy o Welare State in health,education and inrastructure sectors with State-ownership o the means oproduction in the public utilities during the irst hal o the 20th century.Even in USA, Tennessee Valley Authority in the last century and the roleo NASA and ARPA with the creation o inormation highway in the 21 stcentury are also examples o the role o the State. The recent initiative inUSA to convert the several thousand employees in the airports within theambit o the State is a recent example o this trend. Similarly in the UK the

total public sector employment during 2004 increased by over 200,000 asstated by Prime Minister Tony Blair with pride on the loor o the BritishParliament not so long ago.

A wide and vast application o the instrumentality o State wasdesigned to correct the economic and social imbalance through investment,production, trade, distribution and consumption. Further, the role o Stateunderwent change in the second hal o the 20th century led by the UK andollowed by other nations. Dismantling o the States role in industrial activ-ity in the erstwhile Soviet Union and East-European nations brought about

on the other hand a sea change in the concept o Public Sector i.e. Stateownership.

The prevailing opinion in early 1980s in many countries was thatthe State-owned Enterprises had become a drain on national economy.

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10 Public Enterprises: Unresolved Challenges and New Opportunities

Privatization emerged as a signiicant element o the economic reorm pro-cess. The major objective was reduction o iscal deicits, subsidies and costso debt servicing. At the same time, the interest o workers was sought to be

protected through saety nets.Another development which emerged over the last two decades or so,is the Public-Private Partnership in the economic developmental process.Even in India, the policy is under active consideration with proposed Public-Private partnership projects in Roads, Ports, Airports and Railways. IndianGovernments ambitious plans to und inrastructure projects is expectedto take shape in the coming weeks with Prime Ministers Committee onInrastructure deciding to lend $ 2 billion special purpose vehicle to ocuson Public-private partnership projects 11. With this backdrop, a new deini-

tion o the Public Sector with its various models adopted in dierent coun-tries and a vast gamut o issues thrown up by the philosophy and practiceonce again need to be considered and discussed.

CONCEPTUAL ISSUES

The term Public Sector is understood to mean dierent things to dierentpeople in dierent countries. In its widest interpretation the Public Sectorencompasses all activities o Government. An understanding o the distinc-tion between Public Sector which is a very compendious term and Public

Enterprise (PE) which is otherwise called Government Controlled Enterprise(GCE) 12 or State Owned Enterprise (SOE) 13 would be instructive.

With a vast range o activities extending to diverse ields, a workingdeinition is desirable or a meaningul interpretation. In this endeavor,the deinition adopted by one o the ICPE14 Expert Groups provides someguidance. It covers Any commercial, inancial, industrial, agricultural orpromotional undertaking owned by public authority, either wholly orthrough majority share holding which is engaged in the sale o goods andservices and whose aairs are capable o being recorded in balance sheetsand proit and loss accounts. Such undertakings may have diverse legaland corporate orms, such as departmental undertakings, public corpora-tions, statutory agencies, established by Acts o Parliament or Joint StockCompanies registered under the Company Law. Basic to the adoption othis deinition is the concept o an expected economic or social return oninvestment.

11 Reported in the Economics Times, New Delhi, 6 October 299512 Renalto Mazzoline, Government Controlled Enterprises in International

Strategic and Policy Decision, John Wilsey & Sons.13 Mary M. Shirley Managing State-Owned Enterprises World Bank Sta PaperNo. 577.14 International Centre o Public Enterprises at Ljubljana set up under the guidanceo UN with participating Member Governments which included India.

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11

In the evolutionary process, Public Sector has taken distinct orms, each withits own status and varying degrees o autonomy. There are three distinctorms:

(i) Departmental undertaking(ii) Statutory Corporation, and(iii) Joint Stock Company with shares owned by State

The departmental orm is the oldest and traditionally used or undertakingcertain activities, e.g. the Post Oices, the Ordnance Factories, the Railwaysincluding its workshops as well as establishments under Atomic Energy,Space, etc. in the Indian context. Government control is total in respect othis category o PSUs and they orm an integral part o budgetary process o

the department concerned. The managers o these Departmental undertak-ing like the Railways in India are run by civil servants with high proessionalreputation.

Statutory orm o undertaking does have more operating lexibilityrequired or a commercial venture, but as a creature o an act o Parliament,any amendment or modiication to the provisions contained in the Act requireapproval o Parliament, which is time consuming. This orm in the Indiancontext included Damodar Valley Corporation, Food Corporation o India,Lie Insurance Corporation o India, Central Warehousing Corporation, etc.

One could say that organizationally this orm holds a middle stage.The third type is the Joint Stock Company orm which provides greaterlexibility and is created by an executive decision o Government which ownsthe shares issued without any speciic approval o Parliament. The largestnumber o PEs belongs to this category in India.

In the ormative years o Public Enterprises system in India, distinc-tions between Corporation and Companies, executive Ministries (suchas Railways), Commissions and Valley Authorities had been belabouredand strained. The distinction between statutory Corporation and Company

has validity in Indian law, but the distinction is a technical one and notundamentally signiicant 15.

THE THEORY OF PUBLIC ENTERPRISES (PEs)

In any economy, there are our types o economic activity: irst, those whichare privately remunerative provided by market through Directly ProductiveInvestments (DPI); secondly, those which are socially proitable but notprivately remunerative provided by State, like road building, irrigation,through Social Overhead Capital (SOC); and third, those which are privately

15 Paul Appleby Consultant o Governments Industrial and Commercial Enterprises,Government o India, Cabinet Secretariat, O&M Division, 1956

Reinventing Public Enterprises and Their Management

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remunerative but not capable o private execution, like heavy industry, hightechnology involving capital intensive investments like power, transporta-tion, etc also provided by the State with/without the help o the market;

and ourth, those which are natural monopolies. PEs are set up to under-take the second, third and ourth category o activity. The third category oactivity can be transerred to the private sector when the capitalist develop-ment in these countries attain suicient maturity to enable them to handlecapital intensive investment where private sector development takes placealong with inancial sector restructuring. That State intervention througheconomic planning and PEs can help countries to catch up decades o poorgrowth and slow development is also borne out by experiences in India,Mexico, South Korea, Brazil and China. Ideological and strategic economic

and social considerations provided the genesis o growth and development oPublic Sector in several o these countries.In the Indian context the orms o PEs included (1) Statutory Corporation

where PEs are ormed under Acts o Parliament like (2) Holding Companies(a set o companies in one type o activity bound together e.g. Coal India,Bharat Bhari Udyog Nigam etc.), (3) Departmental Enterprises like themassive Indian Railways as well as ISSRO in the Department o Space,the Atomic Energy Department establishments not orgetting the hugeIndian Posts & Telegraphs Department (4) other orms like Public Limited

Companies. That this is a critical pre-condition or PE management successis also evident rom the Japanese experience where PEs are ormed in severaldierent categories like Kosha, Gengo, YO, Kokyo Hojin, Kodan, Jigyodan,Kinko, Koko, Eidan, Tokushu, Kaisha & Koshi Kongo Kigyo.

WHY PUBLIC ENTERPRISES?

That the role o the State has increased maniold 16 in the advanced countriesis also evident rom (i) the percentage o government expenditure in theGDP in those countries as well as (ii) increasing levels o tax collection bytheir governments as percentage o their GDP. Thus governments expendi-ture exceeded 40% o GDP in Austria, Belgium, Canada, France, Germany,Italy, Netherlands, Norway, Spain, Sweden and Britain in 1996. Similarlythe ratio o the tax revenue to GDP exceeded 40% in several OECD coun-tries including Sweden, Denmark, Finland, Belgium, France, Austria, Italy,Norway, Greece, Germany, Britain and Canada in 2000. There is an overallrealization on Galbraiths conclusion17 that aluent societies must strike asocial balance between the production o private goods and the provision opublic amenities. That such a balance is diicult i not impossible to achievein a country like India is evident rom the extremely low level o tax to

16 IMF reproduced in the Economist 17 September 1997.17 Galbraith, The Aluent Society 1968

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GDP ratio which still ranges below 10%. The link between public inanceand public enterprise is thereore extremely important. The short-sightedapproaches o several developing countries including India to reduce iscal

deicit by selling public enterprises- which ollow rom inadequacies o pub-lic inance management could be disastrous in the long run.

Issues of Governance and Management in Public EnterprisesThe composition o boards o PEs is an important issue. In Chinas

CNOOC, Chie Executive Oicer (CEO) Fu Chengyu has two oreigners inhis Board rom Shell and Goldman Sachs who recently last July 2005 playedan important role in preparing CNOOCs bid or US Company Unocolagainst Chevron. In Indian PEs like ONGC (which is the counterpart o

CNOOC), the question o inducting oreigners in the Board has so ar beenunheard o.

The French system o contrat du programme combined with a pos-teriori control replacing a priori control prevalent in most developingcountries is also an important institution. In the Indian context the systemo MOU has not made much impact owing to continued a priori controlo the Government over PEs. The option o preparing Department-wisePerormance Aims and Financial Targets documents attempted in theMinistry o Steel & Mines in late 1980 with its impact on PE perormance

should be looked at again. Clear guidelines or investment policy and pricepolicy o PEs 18 can also clariy the PEs role. Wrong investment decisionstaken by Government led to enormous delays in project management.In 1987, a Committee under the Chairmanship o Ratan Tata recom-mended that Public Investment Board, Project Appraisal Division, PlanFinance Division and associated agencies should be merged in a FinancialInstitution so that there is appropriate accountability or implementation otheir decision. This recommendation is yet to be considered by the IndianGovernment. This needs urgent consideration.

Whether some selected PEs should be placed under ManagementContract or Lease or Joint Venture should also be examined as options onon-divestiture led privatization is also an important issue. The need to insti-tutionalize the partnership between the Government and the PE withoutdiluting their accountability in the running o PEs is an equally importantissue in eicient running o PEs. Chinas SASAC and Singapores Temasakand Malaysias Khazana are interesting institutions which could throw newlight against the increasingly dysunctional Indian system o a whole lot o

18 Basu P. K. and Nove, Alec Public Enterprise Policy on Investment, Pricing andReturn: City Press Kuala Lumpur, 1979 and Basu P. K. Perormance Evaluationor Perormance Improvement: An Essay on Strategic Management O PEs in India

Allied Publisher 1991, Boycko, Shleier and Vishny: A Theory o PrivatizationEconomic Journal, March 1996


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supervising Ministries numbering 38 today which oversee 240 PEs underCentral Government without accountability or their under perormance.

Synergy between the State and the MarketIt should also be emphasized that Public Enterprises are generally estab-lished with two distinct strategies take over or nationalization o theexisting activity in the private sector as well as creation o new activity inthe public sector through investments which are entrepreneurial in nature.Public Enterprises created by the newly independent countries as the visiblehand o the State through the post-independence planning machinery inthe mixed economy like the PEs in India belong to the second category.Unortunately, the setting up o these Public Enterprises in these economies

in order to ameliorate the problem o market ailure brought in govern-ment ailure in many countries with its impact on the managerial ailureand deiciencies in PE management. This vicious circle which has sincebeen broken in several countries with improved management, as wellas control o the State replaced by partnership between the State andthe PEs - once again needs urgent attention. The issue today is no longerRivalry between the State and the Market but how to achieve Synergy

which eluded the grasp o several developing countries. The assumption thatState has no role in economic activity and the Markets do not ail - have both

proved to be incorrect.Several PEs today continue to run eiciently in France, Japan, Germany,Italy, Australia, South Korea, China, Malaysia, Philippines, Indonesia,Sri Lanka, India as well as in Arica and Latin America. The paradigm oSynergy between State and Market achieved by China where they haveopened up their economy or the private enterprises without privatizingtheir PEs can even be revolutionized i we can consciously bring in thenew regime o Government Industry (both PE and private enterprise)partnerships as well as introduce Public Private Competition to ensure

(i) not only the PEs run well with the active involvement and leadershipo their governments (ii) but also that Private Enterprises run well withthe new norms o corporate governance. Both PEs and private enterprisescould thereby achieve Eiciency and Welare. It is pertinent to men-tion that the US Congress not only passed the legislation o GovernmentPerormance and Results Act, 1993 applicable to all civil servants o theState but also Sarbannes Oxley Act o 2002 applicable to all privateenterprises in the country. It is equally pertinent to mention that ChinasState Asset Supervision & Administration Commission (SASAC) has

replaced the dysunctional role o several scores o Administrative Ministries/Departments in the Chinese Government, even though the AdministrativeMinistries continue to play their dysunctional role o control and iedom

without sharing either accountability or responsibility or PE perormance inseveral countries, including India.

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STATE OWNED ENTERPRISE MODELS

Temasek, Singapore 19 one o the largest State investment agency owned bythe State o Singapore; Baosteel, China 20 one o the largest steel producing

company in the world owned by the State o China (PRC); EdF, France 21 one o the largest power generating- cum-distributing company in Franceowned by the State which is also one o the largest power generatingcompanies in the world; NTT 22 NTT Do Como and NTT Data one othe largest group in communication industry owned by the State o Japan NTT alone had until recently occupied ourth position in the League tableo global companies; ENI Italy 23 one o the largest energy groups in the

world, owned by the State o Italy; also Oil & Natural Gas Corporation oIndia 24 which igures as the largest Indian company in FT 500, which is

also owned by the State. These are not the only examples o State OwnedEnterprises (SOEs) which are also called the Public Enterprises which aremanaging huge operations with great eiciency in various developed anddeveloping countries o the world. Volkswagen in Germany, Pohang Steelin South Korea, Pertamina in Indonesia, Khazana in Malaysia we can goon adding similar PEs in other countries to the list. Indeed, we should notbe misled into thinking that it will be a retrograde step to once again havea close look at the PEs o the world and ensure that they ollow the guidinglight o excellence still burning bright in countries like Japan, France, Italy,

China, Singapore. Even in India where several PEs are rightly under attackor their less than satisactory perormance some o the largest and best runcorporate enterprises like ONGC, Indian Oil, National Aluminum, Steel

Authority o India, etc. are SOEs.The drama o Development in the last ew decades ater the end o the

Second World War, unolded powerul scenes o both rivalry, synergyas well as control-cum-reedom syndrome in the role o State and Marketin dierent parts o both capitalist and socialist economies. Adam SmithsInvisible Hand o the Market Forces was clearly lawed in several o its

invalid assumptions like perect competition on the demand as well as on

19 The Economist, 14 August 200420 Like Temaseks CEO, Ms Ho Ching Baosteels CEO is also an impressive

woman o China21 French PEs are classiied into Listed and Unlisted Stakes. EdF is unlisted stakeas not a single share has been sold by the State, like SNCF, GDF, Snecma etc. SeeP. K. Basus Disinvestment: Recent Experience in Britain, France, India London,

October 2003.22 FT Global 500, Financial Times Special Report, London 27 May 200 Governmentholding o shares in NTT was 65.5% in 2000.23 Interview with ENIs Franco Barnabe in Harvard Business Review, July-August199824 Op.cit FTGlobal 500 27/5/2004


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the supply side with perect market inormation and absence o indivisibleactors o production and economies o scale; In post-Marxian, post-Sovietand post-Keynesian decades, thereore, the State intervened to correct the

market ailures. The market ailure syndrome including absence o mar-kets was also written largely in developing countries even beore they gainedtheir independence rom the colonial State as the so-called ree markets didnot provide any engine or growth or development in these countries.

HOW TO PRIVATISE PUBLIC ENTERPRISES EFFICIENTLY WHENCONSIDERED NECESSARY?

A balanced agenda o PE reorm as well as privatization or Divestiture 25can be presented in the low diagram in the ollowing page. Backward and

orward linkages are critical to any successul privatization.Inability to undertake investment or renewal and repair o rail track by

the privatized British Rail led to their re-nationalization in UK during thelast one and hal years (2004-05). This is a reminder o what can go wrongdespite the overall success o British privatization. The experience o France26 though quite dierent rom that in Britain also had its own lessons. Whilecash may be welcome to be raised through privatization, the French will notexchange the cash or control which must continue with the government.The French always maintained this attitude towards the role o government

which can be expressed in their saying - it is better to be French and ine-icient rather than oreign and eicient. This goes back to the inluenceo Colbertism in France. Similarly, the paradigm o Government-Industrypartnership in Japan cannot be easily traded or privatization o ownershipo Japanese PEs. In Japan, privatization oten conveys commercializationo departmental PEs into joint stock companies with shares owned by theState. There are other models which have their own lessons. Big bang hastyand wrong privatization and divestiture led to destruction o the economyo Russia where the economy suered rom negative growth rate throughoutthe decade o 1990-2000. Slow and steady opening up o the economy inChina introducing competition and tremendous vigor without divestiture oPEs is another equally impressive model.

25 Basu, P.K :Demystiying Privatization in Developing Countries, InternationalJournal on Public Sector Management, Bradord, U.K. 1994.26 Op-cit. Disinvestment Experience in U.K, France and India: London, October2003

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Figure 1 Linkages: Privatization Agenda withBackward/Forward Linkages

1 PE Restructuring

2 Public Enterprise (PE) Reorm and

3PEs Placed on management contract

Also leasing: joint venture, hire

4

Divesture o shares/assets o

PEs With/without redundancy

5Private sector development & nancial sector

strengthening

A B C D

6 Privatization as a part o a wider reorm package

Convertabilityo Currency

Export Development Civil service reorm

Reviving scaldiscipline

Reviving tradediscipline

Getting prices right &removing subsidies

Forward linkage

Backward linkage


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HOW TO RUN PUBLIC ENTERPRISES WELL?

In order to attack market ailure - Public Enterprises must ater they setup, avoid government ailures as well as consequent managerial ailure

in their operation. Managerial ailure invariably ollows rom inability ogovernments to adopt sound policies on investment, prices, inancing, as

well as on new projects which are invariably delayed and several other areasaecting the management o PEs. Inability o governments to build eectiveand eicient managerial cadres or the PEs and provide the managerial cadres

with necessary autonomy to run PEs with eiciency and welare also result inmanagerial ailures. In earlier stages o PE development it was elt necessaryto delink the impact o managerial decision making by governments as poli-cy-makers but governments continue to enjoy over-riding strategic powers

o appointing the PE Board, ixing their terms and remuneration, decidingon all new investments and expansion, ixing prices, approving contracts andpurchases besides policy on location, employment etc. without co-sharingeither the corporate risk o managing the PEs or being accountable or PEperormance. The experience o countries like Japan and France shows thatthe governments and PEs can and do operate as partners in developmentand not as adversaries unable to share both success and ailure. Thechecklist o issues to ensure 27 that PEs run eiciently with its accountabilityto the public as well as to the governments which are their owners would also

include several issues, like:(i) The pattern o ownership and management o Public Enterprises

which vary rom country to country. Management is an extension othe ownership pattern. Given a corporate orm, Public Enterprises ismanaged by a Board o Directors. Ownership provides the authorityto Government.(ii)Building Managerial Cadres or the PEs which could be inside theCivil Services, like the Central Administrative Pool and the IndustrialManagement Pool o India as successor to the Commerce Finance Pool

in the ICS as well as proessional civil services in the Indian Railways,Ordnance Factories, Atomic Energy and Space Organizations, etc as

well as Career Executive Service in Philippines/Iran and related institu-tions like the ENA o France which throws up some o the brightestleaders o French PEs. Alternatively, PE based management cadres canalso be established like Tata Administrative Service in the Tata Groupo Companies in India. Induction o appropriate managerial remunera-tion which should relate to remuneration in the private sector is also anurgent issue that needs to be addressed.

27 Op-cit. Basu and Nove.

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The Government PE relationship should not be either Control orFiedom but Partnership, Involvement and Accountability or results

with eiciency and welare. PEs must implement and deliver the physical

and inancial results with growth, eiciency and welare. In searching ornew innovation or strengthening the eiciency and eectiveness o PE man-agement we can emphasize a global partnership or development whichis also a Millennium Development Goal. The essential approach would be toask three undamental questions on this issue and to try and ind an answerto each one o these questions, namely, (i) Why Public Enterprises even incapitalist economy? (ii) How to run Public Enterprises well by appropriatelyempowering the managers so that the enterprises achieve both eiciency and

welare? (iii) I it is decided to privatize selected Public Enterprises, how do

we privatize them, and again with eiciency?


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21

Can Public Enterprises Contribute to Development?A Critical Assessment and Alternatives for

Management Improvement

Dennis A. Rondinelli

Introduction

Public enterprises were created in most countries to accelerate economicand social development. Yet, increasing evidence indicates that most publicenterprises either do not contribute strongly to development or perormtheir public service unctions ineectively or ineiciently. Policy makersengage in continuing debates over whether or not state-owned corporationscontribute to economic and social development, why so many have ailedto deliver eectively the services or which they were created, and how theirmanagement can be improved. These issues will become more crucial as gov-ernments in developing and emerging market countries consider how best toachieve economic and social development in an age o globalization, how tospread more widely the beneits and mitigate the potential negative impactso international economic interaction, and how to alleviate poverty so thatlarger numbers o people can participate eectively in productive activitiesand gain access to social services essential or human development.

In this paper, I deine state enterprises much as the World Bank does:as government-owned or controlled commercial entities that generate allor most o their revenues rom the sale o goods and services.28 As does the

World Bank, I exclude rom discussion those government organizationsthat provide goods and services through general revenues. The distinctionbetween those goods and services provided by what are essentially com-mercial enterprises owned or controlled by government and those providedby ministries and agencies through general revenues is important in ocus-ing the discussion on the appropriateness and eicacy o one speciic typeo organization -- a legally created commercial entity generally known as apublic enterprise, state-owned enterprise, or parastatal organization. Thedistinction also highlights the option that all governments have in seeking toachieve the Millennium Development Goals: whether to provide goods andservices essential to peoples social and economic well-being through conven-tional ministries and agencies, through state-owned enterprises, or throughother types o organizations.

28 World Bank, Bureaucrats in Business: The Economics and Politics o GovernmentOwnership, New York: Oxord University Press, 1995

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Over the past 50 years governments around the world established largenumbers o public enterprises to accomplish development objectives, amongthe most important o which were to provide services and inrastructure

that could not easily be extended by conventional departments and agen-cies o the State or by a weak or ledgling private sector. In many countries,however, state-owned enterprises took on a lie o their own. Many pursuedtheir objectives independently o government development policy or ailedto perorm eiciently and eectively unctions or which they were created.In other countries, political intervention and strenuous government controlinhibited public enterprises rom ulilling their intended missions. Althoughpublic enterprises in some countries are managed eectively and do provideservices that are needed or development, too many merely become another

bureaucracy plagued by ineiciency, ineectiveness, corruption, and incom-petence, draining resources rom the public treasury.Recognizing their ineectiveness, governments have been restructuring

or liquidating public enterprises since the early 1980s. Many state-ownedenterprises have been commercialized, corporatized, or privatized. Some gov-ernments require them to compete with private providers, orge partnerships

with private businesses and non-government organizations, or outsourceunctions to the private sector.

Although many enterprises remain in public ownership, their rationale,

purposes, and eectiveness continue to be questioned. Governments seekingto meet the Millennium Development Goals (MDGs) should be asking ithere is a role or public enterprises in countries where the private sector hasgrown stronger, where market economies are established or emerging, and

where development depends at least in part on providing services and inra-structure to larger numbers o people.

I will argue that in many developing countries, serious questions needto be asked about whether or not state-owned enterprises are the most eec-tive instruments or economic and social development. SOEs are oten

perceived to be ineective as instruments or development or a variety oreasons: because governments never inused them with strong developmentalmissions, because they used them or purposes that were not directly relatedto economic and social development, or because the inherent limitationso state ownership render public enterprises ineective. I will also arguethat governments should use as the primary justiication or creating publicenterprises, or or attempting to reorm those that have a past history o poorperormance, whether or not they have a strong probability in the uture oachieving development objectives that are not and cannot be achieved more

eectively by the private sector or by non-government organizations.Moreover I contend, as much o the literature on public enterprises nowshows, that the organization and structure o state-owned enterprises inher-ently create diiculties in providing developmentally-oriented services andacilities in many countries whether or not they have strong private business

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or civil society sectors. Public enterprises ace continuing risks o politicalintererence, o cronyism and corruption in their governance and operation,and o an inability to generate adequate inancial returns to either cover their

costs or return a surplus to the government, all o which can divert themrom ulilling development objectives.In an era o increasing globalization, emerging markets, and expand-

ing private sectors, governments seeking to achieve the MillenniumDevelopment Goals must have a clear strategy or deciding which enterprisesremain in public ownership and how they will contribute to achieving socialand economic progress. The record o experience with public enterprise ail-ures is now so strong that governments cannot merely assume that they willnecessarily contribute to development. Although none o the alternatives to

state ownership is a panacea or the problems o weak public enterprise man-agement, under appropriate conditions they can sometimes overcome thecontinuing diiculties that plague many SOEs. When governments decideto keep them in state ownership, serious consideration must be given to theneed or reorming their internal structures, governance, and operations in

ways that assure that they can pursue clear development objectives.

THE PERFORMANCE PROBLEMS OF PUBLIC ENTEPRISES AS

INSTRUMENTS OF DEVELOPMENT

Any assessment o public enterprises as instruments o economic and socialdevelopment must begin with a rank recognition o the problems encoun-tered in their perormance over the past o hal century. In both economicallyadvanced and developing countries, governments created public enterprisesas revenue-generating ventures, to support an import-substitution develop-ment strategy, or to provide services or inrastructure that were considered tobe essential to national, regional, or local development. In reality, however,many governments created public enterprises or reasons that were only tan-

gential to development or that ineectively contributed to it. Ater the Second World War, governments in Europe and North America used public enterprises to develop economically lagging regions,to provide specialized services that were beyond the expertise or resourceso traditional government agencies, or to protect industries that were con-sidered essential to uture economic growth. But a signiicant expansion opublic enterprises also took place both in Western Europe and in the ormerSoviet Union and its satellite countries or political or ideological reasons.Many countries with socialist governments nationalized industrial and ser-

vice enterprises and collectivized agriculture in order to centrally plan theireconomies and minimize or eliminate market inluences.In the post-colonial period o the 1950s and 1960s, governments in

Arica, Asia, and Latin America sought rapid economic growth throughindustrialization strategies that required heavy investment in physical

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inrastructure and production acilities. In many o the post-colonial devel-oping countries the government expropriated oreign-owned companiesand centralized control over natural resources, mining, mineral, and some

manuacturing industries. And in their push to accelerate economic growthand consolidate political control, governments in many developing countriescreated new public enterprises rather than looking to the private sector orinvestment. The number o public enterprises also grew rapidly because theprivate sector was oten viewed with suspicion by both political leaders andthe public, especially in countries where colonial regimes previously ruled,or where major industries were owned by oreign companies, or where com-mercial activities were dominated by oreign or ethnic minorities. By thelate 1970s, however, the contribution o public enterprises to economic

and social development came into question when military or authoritariancivilian governments in some Latin American countries nationalized nearlyall major industries in order to consolidate their political power and controlover the economy and sometimes to extract public resources or private gain.29Moreover, the developmental orientation o public enterprises became moreambiguous as many Arican governments, pursuing the concept o AricanSocialism, took control o agricultural and agribusiness sectors as well asmining and natural resources industries that they lacked the expertise orinancial capacity to manage eectively. Nationalization o production and

service enterprises increased the already growing number o public employeesin many developing countries and the public wage bill grew rapidly.30Although not all o the growth in government employment took place

in public enterprises, SOEs were oten convenient organizations or locat-ing surplus labor and providing a wide array o social beneits or workers.Directorships and senior managerial positions in public enterprises wereoten viewed as political patronage positions or retired military and highlevel civil servants or or relatives and riends o powerul political leaders. InEastern Europe, the ormer Soviet Union, and many Asian countries, public

enterprises hired large numbers o redundant employees to reduce socialdisaection and to build political support. In Eastern Europe and in China,governments imposed strong social burdens on state industrial enterprises tohire redundant labor and provide social services while at the same time allow-ing them to operate with sot budget constraints, leading to ineiciency, lowlevels o productivity, and inancial losses.31

29 See P.H. Boeker, Latin Americas Economic Opening and the Rediscovery

o Foreign Investment, in P.H. Boeker (ed.), Latin Americas Turnaround (SanFrancisco, Caliornia, ICS Press, 1993), 3-12.30 World Bank, World Development Report 1988, Washington: World Bank, 198831 X.Y. Dong and L. Putterman, Sot Budget Constraints, Social Burdens and LaborRedundancy in Chinas State Industry, Journal o Comparative Economics, 31, 1(2003): 110-133.

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The developmental orientation o public enterprises was more seriouslyquestioned with the growing economic and inancial problems that accom-panied worldwide recession in the late 1970s, the debt crises aced by many

Arican and Latin American countries in its atermath, the succession opolitically conservative governments in North America and Europe duringthe 1980s, and the shit to market economies in Asia, Latin America, andEastern Europe during the early 1990s, all o which ocused attention on theailures o public enterprises to deliver services eectively, contribute inan-cially to the national economy, or to promote social progress. These trends

were reinorced in the 1980s and early 1990s by growing dissatisaction withthe way governments provided goods and services, especially to the poor; bypolitical intererence in the operation o public enterprises; by continuing

charges o cronyism and corruption in some state-owned corporations; bythe imposition o surplus employment requirements; and by their ineicientoperation.32

By the end o the 1980s, widespread criticism o the perormance oboth national government ministries and public enterprises in providinggoods and services and o the rising costs and ineectiveness o governmentcontrol o economic activities in general led political leaders in both Westernand developing countries to reconsider their eicacy. Their ineiciencies

were seen clearly in their limited abilities to satisy the rapidly growing needs

or commercial and social services that were becoming crucial or economicgrowth and or widespread participation in a globalizing economy. Theinvestment decisions o government agencies were constrained by speciallaws and by central government planning criteria and procedures; they rarelyconsidered the needs o communities or the preerences o consumers.33

Almost everywhere, government-owned telephone and telecommuni-cations companies, or example, were notoriously ineective in meetingdemand or services that had become crucial to the participation o bothsmall and large enterprises in global trade and investment and or creating

jobs that would help alleviate poverty and raise peoples standards o living.During the 1980s and early 1990s, the average waiting period or telephoneinstallation in Indonesia was nearly 8 years, in the Philippines 7 years, andin the ormer Soviet Union and in Pakistan 10 years. Call completion rates

were extremely low in many developing countries because o the inability opublic enterprises to invest in even basic telecommunications equipment andswitching capacity. Completion rates or trunk calls were as low as 12 per -

32 Richard M. Kennedy and Leroy P. Jones, Reorming State-Owned Enterprises:Lessons o International Experience, Especially or the Least Developed Countries,

Working Paper 11, Vienna, Austria: United Nations Industrial DevelopmentOrganization, 2003.33 Jin Ho Choi, Republic o Korea Country Paper, in Asian Development Ban,Urban Policy Issues, (Manila: ADB, 1987): 477-527.


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cent in Pakistan and or local calls as low as 31 per cent in Indonesia. Manyo the state-owned telecommunications companies in developing countrieslacked investment capital and inancial resources or maintenance and line

expansion, and were seriously over-staed. The World Bank reports thatstate-owned telephone companies in developing countries had 50 to 100employees per 1,000 telephone lines in service compared to 0.2 employeesor ewer in the United States and Europe.34

The ineectiveness o public enterprises to deliver basic services extend-ed to other sectors as well. In Nigeria, or example, state ownership and themonopoly position o the National Electric Power Authority, an organiza-tion plagued by corruption, ineiciency, and mismanagement (conditionsthat characterized many o Nigerias public enterprises) compounded rather

than solved that countrys continuing energy service delivery problems.

35

Doubts about their ability to contribute to development increased withgrowing evidence that many public enterprises were loss-makers rather thanrevenue generators. Studies by the World Bank indicate that by the begin-ning o the 1980s, public enterprises in developing countries accounted orone-quarter to one-hal o all outstanding domestic debt and or a substantialportion o oreign borrowing.36 In Thailand, 61 public enterprises account-ed or more than 60 per cent o the governments oreign debt in 1988.37

About 40 per cent o Malaysias external debt service payments in the late

1980s were made by non-inancial public enterprises.

38

The heavy demandso many public enterprises or capital squeezed private investors out o capi-tal markets in some countries, and in others limited the private sectors accessto borrowing or investments that could generate jobs, income, and publicrevenues.

These limitations on the capacity o public enterprises to contribute todevelopment continued into the 21st century. In Romania, or instance, thesurvival o loss-making public enterprises through direct and indirect statesubsidies led in the late 1990s to pervasive networks o arrears throughout

the economy and to negative impacts on the national budget and on overalleconomic eiciency.39 In Turkey, the governments manipulation o the

34 W. Ambrose, P. Hennemeyer and J. Chapon, Privatizing TelecommunicationsSystems, Washington: World Bank, 1990.35 A. Alukoju, Never Expect Power Always: Electricity consumers Response toMonopoly, Corruption and Ineicient Services in Nigeria, Arican Aairs 103(2004): 51-71.36 Mary M. Shirley, Managing State-Owned Enterprises, World Bank Sta

Working Papers No. 577, Washington: World Bank, 1983.37 Matthew Montagu-Pollack, Privatization: What Went Wrong Asian Business,

(August 1990): 32-39.38 United Nations Economic Commission or Asia and the Paciic, Issues inPrivatization, Development Planning Newsletter, No. 9 (June 1989): 10-15.39 R. Ahrend and J.O. Martins Creative Destruction or Destructive Perpetuation:The Role o Large State-Owned Enterprises and SMEs in Romania DuringTransition, Post-Communist Economies, 15, 3 (2003): 331-356.

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prices o goods and services produced by public enterprises during periodsprior to elections to reduce inlation and potential political backlash, placedboth public and private service suppliers in unstable inancial positions.40

The inability o public enterprises to contribute to development arosenot only rom their ineiciencies due to their monopoly or protected statusbut also because o lax governance and oversight. The checks-and-balancesthat come with private ownership -- that is, the pressures that shareholdersand external directors can exert on managers to improve eiciency, that capi-tal markets can exert on companies to allocate scarce resources economicallyand to operate within hard budget constraints, and that managers whoare responsible to shareholders and outside directors can exert on workersto improve productivity -- are all usually missing rom public enterprises.

Where SOEs were too strongly controlled by the state they oten becameinlexible bureaucracies.41 In the ormer Soviet Union, ormer socialistregimes in Poland, Hungary, and Czechoslovakia, authoritarian regimes inmany Latin American countries, and in China and Vietnam most o largestate enterprises were over-staed and had obsolete technology and deterio-rating acilities that made it diicult or them to compete eectively with

Western multinational irms in global markets or to provide goods and ser-vices in adequate amounts and at reasonable prices in domestic markets.

In many countries ineective public enterprises not only ailed to con-

tribute to development but siphoned-o resources that could have goneto development activities, thus creating signiicant opportunity costs inresource-scarce economies. The costs o continuing to subsidize unproit-able state enterprises took a heavy toll on the treasuries o even the largestcountries. The government o China, or example, had to commit $11 bil-lion (17 per cent o the national budget) in direct subsidies and $20 billionin loans to ineicient state enterprises in 1990. Despite these high subsidiesthe state-enterprise sectors industrial production grew by less than 3 percent.42 The highest rates o growth in the value o industrial output were

in private enterprises (about 21 per cent) and joint ventures and oreignirms (56 per cent).43 Recent studies o public enterprises in China oundthat, controlling or a variety o other actors, those provinces with a larger

40 H. Berument, Public Sector Pricing Behavior and Inlation Risk Premium inTurkey, Eastern European Economics, 41, 1(2003): 68-78.41 Organization or Economic Cooperation and Development, Reorming the

Economies o Central and Eastern Europe, Paris: OECD, 1992.42 David Shambaugh, China in 1991: Living Cautiously, Asian Survey, Vol.

XXXII, No. 1 (1992): 19-31.43 Erin McGuire Endean, Chinas Foreign Commercial Relations, in U.S.Congress, Joint Economic Committee, Chinas Economic Dilemmas in the 1990s,(Washington, D.C.: U.S. Government Printing Oice, 1991): 741-757.


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proportion o state-owned enterprise industrial production have lower pro-vincial economic growth rates.44

With the increasing globalization o economic interaction across nation-

al borders, many countries with large numbers o public enterprises oundthat they inhibited both national development and international integration.By the early 2000s, the government o Vietnam, or example, explicitly rec-ognized that most state-owned enterprises no longer met development needsdue to their small scale and irrational structure and their ailure to ocus onkey areas o the economy.45 The government reported that Vietnams SOEshave backward technology and weak management capacity with low levelso autonomy and accountability in business and production, weak manage-ment capacity, unclear objectives, weak accounting systems, and low levels

o eiciency, rising overdue debts, and large numbers o underemployed andredundant employees.An assessment o public enterprises in South Arica in 2000 pointed out

that the establishment o SOEs skewed development aims and inrastructureand service delivery and that many o them have unsustainable debt bur-dens, underinvestment in inrastructure and technology and unmanageablecorporate structures. The report pointed out that by continued publicownership o these enterprises, South Arica risks not only ailure toachieve its broader policy objectives, but also a severe depreciation in the

value o these assets as the market discounts them owning to their presentdiiculties. The study emphasized that the total eect would be continuedailure to ensure rigorous and directed interventions or ensuring that socio-economic development takes root both in those areas most sorely aected bythe past and in the areas o the new economy.46

POLICY ALTERNATIVES FOR IMPROVING THE MANAGEMENT OFPUBLIC ENTERPRISES

For all o these reasons, governments should clearly determine the devel-opment contributions o public enterprises and rationalize their structure.Figure 1 suggests one approach to public enterprise reinvention in develop-ing countries.

44 Kerk L. Phillips and Shen Kunrong, What Eect does the Size o the State-Owned Sector Have on Regional Growth in China? Journal o Asian Economics,15, 6 (2005) 1079-1102.45 Tran Ngoc Phuong, Reorm o State Owned Enterprises in the Context oVietnams WTO Accession, paper presented at conerence on Vietnam: Readinessor WTO Accession, Ho Chi Minh City, VN, June 2003.46 Republic o South Arica, Ministry o Public Enterprises, An Accelerated Agendatowards the Restructuring o State Owned Enterprises: Policy Framework, (Hatield,South Arica: Department o Public Enterprises, 2000): quote at p. 15.

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2

Public Enterprise Reinvention Process

Reinventing public enterprises in any country should begin with a compre-hensive perormance review and the ormulation o a government strategyor reorm. Governments are unlikely to be successul in restructuring publicenterprises unless they develop a strategy that sets out a clear vision or howSOEs are expected to contribute to development and deines clear missionsand perormance criteria or each public enterprise.

In South Arica, or example, the government declared the goal o pub-lic enterprises would be to contribute to sustainable economic and socialdevelopment, an objective that was more likely to occur where there is amixed economy, that is an economy that is responsive to market incentives

within a ramework o socially integrative institutional mechanisms.47 The

47 Sivi Gounden, Restructuring o State Owned Enterprises A Critical Elemento Economic Restructuring in South Arica, speech delivered at Leadership Center,University o Kwazulu-Natal, South Arica, March 7, 2001.

1. Asses public

enterprise sectorperormance

3. Revise legalstructure or

public enterprises

Enact policies orstrengthening

business climate

Establish efectiveregulatoryramework

Impose hardbudget constraints

4. Select publicenterprise reorm

policy options

Internalgovernance and

managementreorm

Commercialization

Contracting-out

Public-PrivatePartnerships

Privatization orLiquidation

5. Evaluateorganizationaland managerial

perormance

2. Formulategovernment strategy

or public enterprisesector reorm

Vision orcontribution

to development

Enterprisemissions and

objectives

Perormancecriteria

Figure 1: Framework or Assessing Public Enterprise Reorm


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vision or reorm o South Arican public enterprises at the macro-economiclevel was to attract oreign direct investment, contribute to the reduction inpublic borrowing, and assist the development o an economy that promoting

industrial competitiveness and growth and increased domestic savings. TheSouth Arican government set social imperatives on public sector reorm thatincluded the need to increase employment and rationalize or develop newskills in the labor orce as well as promote wider ownership and participationin the South Arican economy.

In any country seeking to reorm public enterprises, strategy ormula-tion should be preceded by an assessment o the perormance o the publicenterprise sector carried out by a government commission or agency that canidentiy SOE objectives, assets, and resources; assess their inancial assets and

liabilities; evaluate their perormance in meeting their objectives; and dem-onstrate their contribution to economic and social development.Governments undertaking public enterprise reorm must oten revise the

legal ramework to clariy the ownership relationships between the state andSOEs, impose internationally accepted accounting and inancial reportingstandards, and outline governance options. Public enterprise reorm shouldproceed in conjunction with the enactment o policies that strengthen thebusiness climate and competitiveness within the economy; the creation oeective regulatory rameworks and corporate laws that protect the rights o

businesses, consumers, workers, and citizens; and that impose hard budgetconstraints on those enterprises that remain in state ownership. Whetherpublic enterprises remain in state ownership, or are commercialized or priva-tized, governments must create a balanced regulatory ramework to ensurethat neither public nor private enterprises abuse their power. At the sametime, however, governments should not make regulations so overly restrictivethat they prevent enterprises rom achieving their objectives eiciently.

Any reorm strategy should assess the strengths, weaknesses and appro-priateness o options or restructuring public enterprises. Among the poten-

tial policy alternatives open to governments are 1) internal management andgovernance reorm; 2) commercialization or marketization; 3) outsourcingor contracting out; 4) public-private partnerships between SOEs and privatecompanies or civil society organizations; and 5) privatization or liquidation.In pursuing any o these alternatives, governments retain important rolesin creating conditions and adequate oversight to ensure that reorms workeectively and that they achieve development objectives.

Internal Governance and Management Reforms

Governments decide to keep poorly perorming public enterprises in stateownership or a variety o reasons, including a strong belie that the goodsor services they provide cannot be oered eectively by the private sector,because o strong political opposition to privatization, in order to protect

what is considered a strategic industry or sector or economic development

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1

purposes, because o the ear o potential social or political backlash romthe reduction or elimination o jobs, as a means o publicly subsidizing theprovision o services to poor or low income people, or because o political

inertia. Whether or not these reasons are deemed valid and legitimate, igovernments decide to maintain state ownership, they should undertakeinternal governance and management reorms that increase the capacity o

public enterprises to attain development goals eectively.Governance reorms are among the most important ways to improve pub-

lic enterprise perormance. In order to operate eectively, public enterprisesshould be adequately supervised by a state agency or an independent boardo governors. Enterprise governance includes those structures and proceduresthat ensure that the enterprise operates eectively, eiciently, accountably,

and responsively in the public interest and that it is contributing to nationaldevelopment. Governments role is to establish the policies, procedures, andorganizational structures that guide public enterprise operations to achievingthose goals.48 The most appropriate structure or governance diers amongcountries, but three options include 1) a politically objective and qualiiedBoard o Directors composed o representatives o government and outsidemembers who do not have a conlict o interest or potential or illegal per-sonal gain rom serving on the board; 2) a responsible government bodysuch as a Public Enterprise Commission or Agency with the responsibility

or supervising the enterprises activities, auditing its inances, and ensuringcompliance with laws and regulations, and 3) a state enterprise holding com-pany to which several state-owned enterprises report.

Whichever option is chosen, the governance structure should not mixoperating, regulatory, and public enterprise supervisory responsibilities with-in government ministries. Governments should take measures to ensure thatthe operations and procedures o the public enterprise governance body aretransparent and open to inspection. Adequate checks and balances should becreated to limit inappropriate political intererence in the governance bodys

decisions and to protect it rom cronyism, conlict o interest, corruption,and nepotism in the hiring o executives and workers.

Little change is likely to come about in poorly perorming public enter-prises unless the governance authority establishes procedures or ensuringthe recruitment o proessional and competent management and trainedand skilled workers and support sta, and assists managers to set or clariyclear objectives or the organization. The governments role is to establisheective and appropriate legal and regulatory rameworks that simpliy andstreamline legal structures or public enterprises operations, speciy obliga-

48 Richard M. Kennedy and Leroy P. Jones, Reorming State-Owned Enterprises:Lessons o International Experience, Especially or the Least Developed Countries,

Working Paper No. 11, Vienna, Austria: United Nations Industrial DevelopmentOrganization, 2003.


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tions, protect the rights o stakeholders, and create standards and proceduresor eective internal and external audit, transparent and accurate accounting,and public inancial disclosure.49

The governance body and senior management, together, can improvethe operation o public enterprises by developing and applying perormancecriteria related to a clear mission and set o development objectives. Thisrequires public enterprises to ormulate short-term operating and medium-term strategic plans and programs, evaluate organizational perormance andthe perormance o executive oicers or senior managers. The governancebody should provide appropriate compensation standards and incentivesneeded to attract experienced, qualiied, and proessionally trained managersand sta. Where restructuring involves streamlining operations or downsiz-

ing or right-sizing the workorce, adequate provisions need to be developedor assisting laid-o workers or or retraining them or new unctions withinor outside the organization.

CommercializationIn many developing countries internal governance and management reormso public enterprises alone, while necessary, may not be suicient to achievedevelopment objectives. Once the governance body and senior managementhave been strengthened, governments may have to deregulate relevant sectors

o the economy to allow or greater market competition in providing whathad previously been considered purely public goods. Deregulation to allowmarket competition is oten ollowed by corporatization, that is, legallymaking public enterprises independent corporate entities and requiring themto cover their costs and to generate revenues under hard budget constraints.

A third stage o commercialization involves marketization -- that is, open-ing goods, services, and inrastructure provision to the private sector andrequiring public enterprises to compete in the market with private or civilsociety providers. Governments can marketize service through ranchising,

the use o vouchers, or leaving service provision to voluntary organizationsor to

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