Government and Public Enterprise: Essays in Honour of Professor V.V. Ramanadham [1 ed.] 0714632589, 9780714632582, 9780203988770

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GOVERNMENT AND PUBLIC ENTERPRISE

PROFESSOR V.V.RAMANADHAM

GOVERNMENT AND PUBLIC ENTERPRISE Essays in honour of Professor V.V.Ramanadham Edited by

G.RAM REDDY Vice-chancellor, Open University, Hyderabad, India

FRANK CASS

First Published 1983 in Great Britain by FRANK CASS AND COMPANY LIMITED Gainsborough House, 11 Gainsborough Road London, E11 1RS, England This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” and in the United States of America by FRANK CASS AND COMPANY LIMITED c/o Biblio Distribution Centre 81 Adams Drive, P.O. Box 327, Totowa, N.J. 07511 and in India by N.M.TRIPATHI PRIVATE LIMITED 164, Samaldas Gandhi Marg, Bombay 400 002 Copyright © 1983 V.V.RAMANADHAM British Library Cataloguing in Publication Data Government and public enterprise: essays in honour of Professor V.V.Ramanadham 1. Government business enterprise—Addresses, essays, lectures I. Reddy, G.Ram II. Ramanadham, V.V. 338.6 HD3842 ISBN 0-203-98877-9 Master e-book ISBN

ISBN 0-7146-3258-9 (Print Edition) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Publishers.

Affectionately presented to Professor V.V.Ramanadham

Preface

The idea of producing a volume in honour of Professor V.V. Ramanadham, one of the earliest researchers on public enterprise, emerged from an informal exchange of views among several persons in different countries, who are interested in this subject and closely acquainted with him. The theme of the volume suggested itself fairly easily, for a major determinant of the efficiency of public enterprise lies in how the government’s relationships with it manifest themselves. An effort has been made to invite papers on different aspects of the theme from authors well known for their expertise on public enterprise. The first part, by and large, focusses on the major aspects of the problem and the second on regional experiences in both developed and developing countries. In the opening paper, Professor Maurice R.Garner makes a broad statement on the complexities of the problem of government-public enterprise relationships. Mr. A.Premchand examines the public exchequer aspects of public enterprise operations. Professor David Chambers focusses on corporate planning which has received special emphasis in recent times and looks at its role in setting the government-public enterprise interface. Professor William Glade reviews the emerging trends of privatisation in public enterprise. Professors Leroy P.Jones and Gustav Papenek enunciate certain “policy” conditions that can be conducive to the promotion of efficiency in public enterprise. And Dr. Martin J.Boodhoo looks at the place of an appropriate management information system in streamlining the concerns of the government and public enterprise towards each other. The second part begins with Professor John B.Heath’s review of the rather farreaching, if complex, developments that have been taking place in the United Kingdom, where large-scale nationalisation measures took place in the forties. Professor Ivan Turk throws light on the public approach to performance indicators in the case of the enterprises in Yugoslavia. Dr. Horacio Boneo documents the experience of several Latin American countries in governmental control of public enterprises. Similar and in greater detail is Professor Yash Ghai’s analysis of African experience. Dr. Robert Floyd provides a richly empirical analysis of government policies towards, and control of, public enterprises in the small-island economy of Papua New Guinea. Dr. Tan Chwee

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Huat gives an interesting account of how the government acts towards what, in many cases, constitute mixed enterprises in the high-growth-oriented Singapore. Professor Laxmi Narain discusses the experience of India, with its large and diversified public enterprise sector, in a specific segment of the public, viz., Parliament’s, interface with it. Part three provides a concluding review inspired by the two parts. It tries to bring out some commonalities and contrasts and draws broad observations of policy interest in the light of the analyses and the regional experiences contained in the earlier parts. A brief note is included on the academic contributions of Professor Ramanadham over nearly four decades, which have had a direct or indirect seminal influence on academics in India (of whom several occupy professorial chairs today) and have also attracted significant attention of researchers and policy makers in many other countries—particularly in the third world. The response I received from the contributors, who have all distinguished themselves in academic work and policy formulation in the field of public enterprise, reflects not only their cordiality to me but also their friendliness and regard for Professor Ramanadham whom all of them have known for many years and with whom most of them have been associated in the context of some academic activity or other. I offer my grateful thanks to them and, in particular, to Professor Maurice R.Garner whose substantive help in shaping the material for this volume has been as meticulous as it has been generous. I express the hope that the volume will prove useful to those interested in understanding the intricacies of public enterprise as an institution and of the determinants of its efficiency, and that it will constitute a tribute to Professor Ramanadham to whom it is affectionately presented. All of us sincerely convey our good wishes to him on his full-time reversion to academic pursuits at the invitation of the London Business School, after a long tour of service in the United Nations, which closely drew him to the core of the socio-economic problems of many developing countries—especially in the context of public enterprise as an instrument of progress. And we look forward to his further contributions on the subject. Hyderabad October 1983

G.RAM REDDY

A Tribute to Professor Ramanadham

In Willy Brandt’s introduction to the Report of his Commission on International Development Issues (the famed North-South Report), there appears the remark that “the new generations of the world need not only economic solutions, they need ideas to inspire them, hopes to encourage them, and first steps to implement them. They need a belief in man, in human dignity, in basic human rights; a belief in the values of justice, freedom, peace, mutual respect, in love and generosity, in reason rather than force.” With the holding of such humane and civilised beliefs, so greatly needed in the world today, but not so greatly found, but of which he is a very embodiment, V.V.Ramanadham combines a profound knowledge of the theory and practice of public enterprise. For all concerned about the future of the developing countries, it must therefore be a matter for regret that he is leaving the U.N. administration. But development’s loss is scholarship’s gain. At the London Graduate School of Business Studies he will have the time and facilities to put to good use his exceptional knowledge— possibly, even, unique knowledge—of public enterprises in so many different countries, his practical experience in the direction of public enterprises in India, and his grasp on the problems of public enterprise acquired from past teaching and research. Practitioners and students of public enterprise throughout the world will wish to congratulate Professor Ramanadham on his work at the United Nations. His friends in Britain will wish to make known their pleasure that he has honoured their country by choosing to come to London to write and teach. I am happy on behalf of both groups to have the opportunity to express these sentiments here.

MAURICE R.GARNER

On Professor V.V.Ramanadham

Professor V.V.Ramanadham has been engaged in studies on public enterprise for over four decades now, ever since he came up with his first dissertation on nationalised road transport. This was followed, in the context of his early interest in transport economics, by an in-depth review of Indian railway finances with a focus on policy issues concerning fares, freights and surpluses, and an intensive study of the economics of road-rail policy. Opportunities came his way for utilising his academic expertise in the context of policy formulation when he was commissioned by the Government of Andhra to report on road transport in the State and was appointed by the Government of India as Honorary Adviser to the (Neogy) Commission on Transport and, later, as a member of the Major Ports Commission. His concentration on public enterprise studies had its distinctive beginnings during his doctoral tenure (1949–51) at the London School of Economics when he researched into the (just nationalised) British electricity supply industry. When he returned to the United Kingdom a few years later as a Nuffield Fellow, he authored a study entitled Public Enterprise in Britain, which was published simultaneously in London (under that title) and in Chicago (under the title of Problems of Public Enterprise). This contained an incisive analysis on questions of economies of scale, pricing (of electricity— an interest extending from his earlier researches into British electricity—making a reasoned case for “clear rules”), cross-subsidisation, capital allocation and self-financing. It was during his Deanship of the Faculty of Commerce at Osmania University (1959–70) that the Faculty not only gained a perceptible slant towards research activities but experienced an emphasis on public enterprise studies. Apart from organising national seminars on public enterprise, which attracted participation from the highest levels of civil servants, enterprise managers and academics, Indian and foreign, Professor Ramanadham directed research projects on the Control of Public Enterprise, and Top Management Structures of Public Enterprise under the sponsorship of the Planning Commission. His attempt to institutionalise research, consultancy and training in the field of public enterprise bore fruit as he became the founder-director of the Institute of Public Enterprise located at Hyderabad in 1964 and promoted extensive activity ranging over research, advisory service to enterprises and training of middle and

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senior managers in the public sector. He took care to ensure a mixture of enterprise managers, civil servants and academics in most discussion fora, so as to create opportunities for the first and the second groups to understand each other and for them both and the third group to appreciate each other’s thoughts and constraints. Several publications resulted under his editorship: e.g., Pricing and Investment in Public Enterprise; Incentives in Public Enterprise, and Financial Organisation in Public Enterprise. He maintained constant contacts with enterprise management and economic administration by virtue of his association with a number of advisory panels of the Government (and of the Planning Commission) and his membership on the boards of Bokaro Steel, Ltd. and Andhra Bank, Ltd. He had occasion, besides, to sit on such bodies concerned with wage and other labour matters as Wage Boards of Cement, Chemicals and Fertilizers and chair the sub-group of the Labour Commission on Public Enterprise. One of his major initial assignments at the United Nations, where he served from 1970 to 1982 in capacities largely concerned with public enterprise and with technical assistance projects, was the preparation of a comprehensive work entitled Organisation, Management and Supervision of Public Enterprise in Developing Countries, incorporating the experiences of many countries in the instrumentality of public enterprise in national socio-economic development. This contains a wealth of material making possible a comparative perspective on the institution of public enterprise in different regions. His involvement in the subject was intensified in the course of his official function of offering advisory services to developing countries on public enterprise and allied matters. This took him to countries with different social systems and at varying stages of growth and presented him with the rare opportunity of observing closely the intricacies in the manifestations of public enterprise in the developing countries (such as Somalia, Ethiopia, Tanzania, Liberia and Nigeria; Peru, Venezuela, Trinidad and Tobago, Uruguay and Mexico; Nepal, Malaysia and Indonesia); and he availed of these opportunities for enriching his knowledge of economic— in particular, public enterprise—affairs in developing countries. His was a key role in the formulation of the work programme of the Economic Commission for Latin America in the field of public enterprise as early as in 1972. His assistance in delineating the public enterprise programme for the Asian and Pacific Development Administration Centre in 1974 was noteworthy; and he continued to be associated with the implementation of the activities chalked out —especially those on Investment, Prices and Returns. His association with the International Center for Public Enterprises in Developing Countries, ever since its inception, has been very close, continuous and substantial. It ranged over project and programme formulation and active participation in expert group discussipns. His assistance to the Center has won him immense acclaim from the President and the Executive Director of the Center. Among his publications through the Centre are Joint Ventures and Public Enterprises (edited) and The Yugoslav Enterprise which resulted from

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discussions with Yugoslav enterprise managers, academics and high government officials over a long period and from an empirical analysis of a sample of enterprises in Yugoslavia. This not only brings out the distinctive economic features of the Yugoslav enterprise but provides a comparison of it with public enterprise elsewhere. A special aspect discussed in this work relates to the nature of “external” influences on the working of a Yugoslav enterprise. Another international institution that has received Professor Ramanadham’s assistance, almost continuously, in its programmes on public enterprises, is the Commonwealth Secretariat. He acted as a resource person at its seminars at Kingston, New Delhi, Mauritius and Colombo and contributed many discussion papers. Among the many academic invitations he fulfilled during the past several years the following may be highlighted: lectures at the Indian Institute of Public Administration, New Delhi, on The Finances of Public Enterprises (issued as a book under that title); lecture at the National Bureau of Economic Research, New York, at the invitation of Professor Arthur Burns, on “The Tax and Subsidy Elements in Public Enterprise Prices” (which appeared in the Review of Economics and Statistics, Harvard); a course of lectures for a semester at the University of Pittsburgh on “Public Enterprise and Economic Development”; lectures at the Hungarian Institute for World Economics, Budapest, on “Developing Countries and Public Enterprise”; and the D.S.Reddi Memorial Lectures at Osmania University, Hyderabad, on “Public Enterprise and Income Distribution.” While at Osmania University, Professor Ramanadham edited the half-yearly research journal Applied Economic Papers which attracted scholarly papers from India and abroad. Besides, his involvement in the promotion of research in social sciences got strengthened with his membership of the Research Programmes Committee of the Planning Commission and (later) of the Indian Council of Social Science Research on its formation. He acted as the Convener of the Economics Subgroup of the Council till he left for the United Nations in 1970. On retirement from the United Nations in 1982, Professor Ramanadham has chosen, as expected, to continue academic work on public enterprise, along with the training of public enterprise managers, with the London Business School as his base. His activities include the fulfilment of several outstanding obligations as Honorary/Visiting Professor and of invitations to deliver lectures—in particular, the Shoaib Memorial Lecture in Pakistan and the Lai Bahadur Shastri Memorial Lecture in India. One of his activities at the London Business School was the conduct of a weekly Seminar on Public Enterprise and the Developing World, at which many eminent experts presented papers. These are appearing as a book. His interest in serving the cause of developing countries continues. He has been on mission thrice in Kenya since retirement from the United Nations to advise the Government in the field of public enterprise.

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The Editor of this volume, along with the contributors, considers the presentation of this volume a fitting honour to Professor V.V.Ramanadham, who richly contributed to the promotion of serious study on public enterprise for over four decades now. The following is a select list of Professor V.V.Ramanadham’s publications. Papers: “Tax and Subsidy Elements in Public Enterprise Prices,” The Review of Economics and Statistics, Harvard, November 1964. “The Role of the Financial Adviser in Indian Public Enterprise,” Management International, Volume IV, No. 2, Germany, 1964. “The Structure of Indian Industry During Depression and Boom,” Journal of Industrial Economics, Oxford, November 1963. “Certain Aspects of the Industrial Structure of India,” Journal of Industrial Economics, Oxford, November 1963. “Size and Efficiency in Indian Industry,” Applied Economic Papers, September 1963. “The Pricing Systems in Indian Public Enterprise,” The Developing Economies, Tokyo, March 1968. “Regulation of Pricing by Public Enterprises,” International Review of Administrative Sciences, 1971, No. 3. “The Financing of Public Enterprises” (Financing of Public Enterprises in Developing Countries, ICPE, 1978). “A Control System for Public Enterprise” (Control Systems for Public Enterprises in Developing Countries, ICPE, 1979). “Underpricing in Public Enterprise” (ICPE Seminar, 1980). “The National Economic Context of Corporate Planning in Public Enterprise” (ICPE Seminar, 1980). Books: 1.Public Enterprise in Britain (Frank Cass, London, 1959). (Problems of Public Enterprise, Quadrangle, Chicago.) 2.The Structure of Public Enterprise in India (Asia Publishing House, New York, 1961). 3.The Finances of Public Enterprises (Asia Publishing House, 1963). 4.Control of Public Enterprises in India (Asia Publishing House, 1964). 5.The Structure of the British Electricity Supply Industry (Kamath, Mangalore, 1954). 6.The Economy of Andhra Pradesh (Asia Publishing House, 1959). 7.Nationalised Road Services in Hyderabad (Orient Publishers, Tenali, 1955). 8.Indian Railway Finance (Atma Ram, Delhi, 1956). 9.The Economics of Road-Rail Policy (MSR Murty, Visakhapatnam, 1959). 10.The Yugoslav Enterprise (ICPE, Ljubljana, 1982). 11.Parliament and Public Enterprise (ICPE, Ljubljana, 1982). (With Professor Yash Ghai).

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12.Organisation, Management and Supervision of Public Enterprise in Developing Countries (United Nations, 1974). 13.The Nature of Public Enterprise (Groom Helm, London). 14.Public Enterprise and Income Distribution (Frank Cass, London). (In press). Books Edited: 1.Pricing, Labour and Efficiency in the Public Sector (Osmania University, Hyderabad, 1962). 2.Efficacy of Public Enterprise (Allied Publishers, Delhi, 1963). 3.Financial Organisation in Public Enterprise (N.M.Tripathi, Bombay, 1967). 4.Incentives in Public Enterprise (N.M.Tripathi, Bombay, 1969). 5.Pricing and Investment in Public Enterprise (Oxford IBM, 1974). 6.Joint Ventures and Public Enterprises in Developing Countries (ICPE, Ljubljana, 1980). 7.Public Enterprise and the Developing World (Croom Helm, London). 8.Public Enterprise: Studies in Organisational Structure (Frank Cass, London). (In press).

The Contributors

MAURICE R.GARNER Visiting Professor at London School of Economics; formerly Under-Secretary, British Treasury. A.PREMCHAND Adviser in the Fiscal Affairs Division of International Monetary Fund. DAVID CHAMBERS Professor at London Business School, with many writings on corporate planning. WILLIAM GLADE Professor and Director of the Institute of Latin American Studies at the University of Texas, Austin. LEROY P.JONES Professor at Boston University; consultant on Public Enterprise to several governments and international institutions. GUSTAV PAPANEK Professor at Boston University; formerly in Harvard Institute for International Development; consultant to several governments. MARTIN J.BOODHOO Regional Adviser, ILO, in the Southern African Region; formerly U.N. expert on Public Enterprise Management in Malaysia; earlier, taught at the Universities of Leeds and Manchester. JOHN B.HEATH Professor at London Business School; Board Member of British Airports Authority; associated with the work of National Economic Development Office on nationalised industries. IVAN TURK Professor of Accounting at the University of Ljubljana, Yugoslavia. HORACIO BONEO

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Senior Researcher at CEDES, Buenos Aires; formerly U.N. expert/consultant in Peru, Venezuela, ICPE, etc. YASH P.GHAI Professor at Law School, Warwick University. Member, Board of Trustees of International Center for Law in Development; adviser to governments of Solomon Islands, Vanuatu, Papua New Guinea, etc.; edited Law in the Political Economy of Public Enterprise: African Perspectives. ROBERT FLOYD Senior Economist in International Monetary Fund. TAN CHWEE-HUAT Vice-Dean, Faculty of Business Administration, University of Singapore; consultant to international organizations. LAXMI NARAIN Professor of Business Management and Principal, College of Commerce, Osmania University; Director of State Bank of Hyderabad; author of several books on Public Enterprise in India.

Contents

Preface G.RAM REDDY A Tribute to Professor Ramanadham MAURICE R.GARNER On Professor V.V.Ramanadham The Contributors

vi viii ix xiv

PART I 1.

The Relationship Between Government and Public Enterprise MAURICE R.GARNER

2

2.

Government and Public Enterprise: The Budget Link A.PREMCHAND

21

3.

Target-Setting and Performance Assessment in Public Enterprises DAVID CHAMBERS

42

4.

The Privatisation and Denationalisation of Public Enterprises WILLIAM GLADE

60

5.

The Efficiency of Public Enterprise in Less Developed Countries LEROY P.JONESGUSTAV PAPANEK

88

6.

Management Information Systems in Public Enterprise MARTIN J.BOODHOO

102

Public Enterprise in Britain Today JOHN B.HEATH

115

PART II 7.

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8.

Efficiency Analysis Through Interrelated Indicators: The Yugoslav Approach IVAN TURK

127

9.

Government and Public Enterprise in Latin America HORACIO BONEO

143

10.

Executive Control Over Public Enterprises in Africa YASH GHAI

166

11.

Government Relationships With Public Enterprise in Papua New Guinea ROBERT H.FLOYD

201

12.

Public Enterprise and the Government in Singapore TAN CHWEE-HUAT

231

13.

Parliament and Public Enterprise in India LAXMI NARAIN

246

A Final Reckoning MAURICE R.GARNER

266

PART III 14.

PART I

1 The Relationship Between Government and Public Enterprise MAURICE R.GARNER

To many people, standing on the threshold of the penultimate decade of the twentieth century, it may appear that public enterprise is on the verge of triumph. Even in the already-industrialised economies that prefer to deem themselves privately oriented, public enterprise generally accounts for some ten per cent or more of their gross national production; in the developing economies, including those amongst them that are favourable to private enterprise, this percentage is generally exceeded; and there are numerous economies, both relatively developed as well as developing, in which private enterprise, if not virtually eliminated, is manifestly the junior partner with a highly uncertain future. Persons lacking a sense of history may be content to attribute this expansion of the public sector to the Communist Manifesto of 1848, to Karl Marx, and the mistaken teachings of the universities; but people having a better knowledge of the past will be aware that state enterprise (for the term public enterprise had, perhaps, better be reserved for the time when governments are in some degree answerable to their populations) has a history stretching back over hundreds, indeed, thousands of years.1 Because the influence of Adam Smith on the development of economics and of Herbert Morrison on the public corporation may initially have focussed disproportionate attention upon British ideas and practice, the fact that British experience with state enterprise was unrepresentative may, perhaps, not have been sufficiently remarked. Whilst, prior to the arrival of municipal gas and water undertakings in the course of the nineteenth century, Britain had little to show in the way of state (or public) enterprise, by the time of the Renaissance the continent of Europe had in many places seen mining and metallurgy dominated by state undertakings, the France of Louis XIV and Louis XV had seen its “Maisons Royales”, inspired successively by Colbert and Madame de Pompadour, producing amongst other more mundane articles the famed Gobelin tapestries, St. Gobain glass, and Sevres porcelain; and the Prussia of Prince Bismarck, characteristically, had seen the Prussian State Railways.2 Nevertheless, if not the novelty often represented by unsympathetically disposed

1. K.A.Wittgofel, “Oriental Despotism”, (Yale University Press, 1957), p. 45.

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observers, public enterprise until the period between the first and second world wars was a distinctly minor phenomenon and only since the second world war, with the expansion of the Soviet bloc, the victory of Chinese communism, the breakup of the former colonial empires, and the many transfers, both deliberate and unintended, of enterprises from private to public hands, has public enterprise moved into its present position as a potentially equal partner with, and possible successor to, private enterprise. At which point precisely on the S curve of development, public enterprise stands today must be a matter of debate—some, indeed, may question whether the concept of S curves is applicable to the expansion of public enterprise; probably most of those who would accept the applicability of the concept would be disposed to regard the position of public enterprise on the graph today as somewhere in the stage of the soaring upward thrust, well short of the stage of levelling off. At a phase of such rapid expansion and seeming success, it is, therefore, strange to have to recognise that, as an institution, public enterprise faces profound problems, that there is often widespread dissatisfaction amongst consumers with its services and, sometimes, with its products, and amongst the general public with its performance, that there is disillusion amongst its employees with the enterprises’ structure, and that, in consequence, even those welldisposed towards public enterprises are conscious of shortcomings, although divided on the changes they would wish to recommend in the enterprises’ operations and structures. There are, accordingly, many questions affecting public enterprise that might usefully be selected for examination—for example, the role of public enterprises might be examined: whether, for example, public enterprises are more appropriate to developing than to developed countries or more appropriate to the supply of certain monopolistic services, such as water and electricity, than of competitive manufactures like ships and machine tools; or the internal organisation of public enterprises might be studied, whether, for example, they should for preference be provided with two-tier, representative boards of directors, rather than unitary boards. These, and many other questions, are all matters meriting attention. Why, then, from the great variety of issues that might have been selected is this collection of essays centred on the question of the relationships of public enterprises with their governments and on the efficiency of the enterprises and the reconciliation of their financial performance with their social obligations? The choice of these relationships as the central theme for this book is based on the hypothesis that a decisive influence upon the enterprises’ efficiency, financial performance, and social obligations —each a matter of vital significance for the enterprises themselves and for the politics within which they

2. John V.Nef, “Mining and Metallurgy in Mediaeval Civilisation”, in the Cambridge Economic History of Europe, Vol. II (C.U.P., First Edition, 1952), pp. 480–89.

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operate—is exercised by the enterprises’ relationships with their governments, so that, if these relationships are wrong, little will come right. For this first essay the correctness of this hypothesis is provisionally assumed; the reader, as he or she advances through the book, will be able to test its correctness or incorrectness and ultimately to compare his or her opinion on this (and other matters) with the conclusions on the hypothesis (and other general issues) that will be submitted in the final essay. In as much as these relationships are clearly destined to occupy a central position in this book, the reader will wish to know the sense in which the term is used—a glossary for this and a few other expressions, such as public enterprise itself, is accordingly appended at the end of this first essay. A consequence of the connotation given to the term requires notice forthwith. If there are to be relations between a government and a public enterprise— certainly, relations involving interactions between two distinct parties such as are implied by the extended definition of the term—the enterprise has to be external to the government. Enterprises organised as departments or departmental agencies are internal to government and cannot therefore have relationships with it. In such cases, it is plain that efficiency of operation and the reconciliation of social obligations with financial performance cannot be dependent on relations with government and that the hypothesis is to that extent invalid. Form of organisation thus emerges from the outset as a factor of paramount importance that the reader will wish to carry in mind in his or her study of the essays that follow and as an issue to which it will be necessary to return in the concluding essay. There are, as is well known, believed to be certain disadvantages in the departmental form of organisation of public enterprises, a belief evidenced in the conver sion of the American and British Post Offices about ten years ago from departments into public corporations; and there are few sizeable public enterprises that have anywhere come into being in recent years that have been allowed the departmental form; so, although by having only one authority—the minister—and not two—the minister and the board of the company or corporation, as is the case with the non-departmental form of organisation—the departmental form avoids the division of responsibility and the possible conflicts of judgment and objectives that are inherent in the non-departmental form, the current tide of opinion and practice is overwhelmingly in the direction of this latter. Accordingly, this is the form that should, in the rest of this essay, be assumed to apply unless there is express reference to the contrary. “In all pointed sentences,” observed Dr. Johnson, “some degree of accuracy must be sacrificed to conciseness.” This is a reservation of singular importance in a discussion of relationships between institutions. For purposes of exposition and analysis, it is highly convenient to be able to speak of the relationships of a government with a public enterprise. We are, however, all aware that this is unreal. The relationships—insubstantial as they must in any case be—are between people. The chairman and members of the boards of companies and corporations meet, talk to, agree with, and oppose ministers, civil servants and

MAURICE R.GARNER 5

parliamentarians.3 The differences observable in these relationships are to some extent, sometimes to a large extent, the consequence of the personalities of the individuals involved, ministers especially.4 Nevertheless, whilst the importance of the human factor in the relationships between government and public enterprise must be kept constantly in view, it seems advantageous to enquire whether there are impersonal factors capable of decisively influencing these relationships. To do so is the purpose of this essay. 1. The Psychological Factor There are four factors that appear to be decisive in their influence upon the relationships of governments with their public enterprises. The first will be designated the political factor; the second will be designated the institutional factor; the third, the technical factor; and the fourth, the psychological factor. As there is least to say about the last, it will be convenient to dispose of it first. The particular psychology it is desired to stress as a factor in the relationships of governments and public enterprises is the psychology of the enterprises’ managements. Given that most of the managerial personnel will necessarily have professional backgrounds very different from that of governmental personnel, having been trained as engineers, accountants, and marketing executives, rather than as administrators and political advisors, and given that many of them may have worked in private enterprises before taking posts in public enterprise, it is only natural, in the absence of correcting circumstances, that most of them will be imbued with the ethos and norms of the private sector.5 The teaching they will have had in their business schools and professional institutions, their business experience, the attitudes of their professional colleagues, and, probably, their personal preferences, will all combine to bring this about. The consequence of this professional orientation is that management’s dominant objective and criterion of performance will be the profitability of their enterprise rather than its contribution to the public interest. The extent to which this is so will, of course, vary from country to country. The higher educational system and the practice of appointing members of the public services to the top offices in public enterprise constitute important correctives in France, as is the case with the constitutional system in Sweden, which aligns the major public enterprises with the country’s administrative agencies, so that the enterprises’ personnel are classed as public servants and are therefore naturally concerned for the public interest. Equally, there can be countries in which a fixation upon the profitability of the enterprise

3. P.Self, “Administrative Theories and Politics” (George Allen & Unwin, 1972), p. 258. 4. See, for example, the varying ministerial attitudes reported by the Select Committee on Nationalised Industries in its Report on “Ministerial Control of the Nationalised Industries”, H.C. 371-I, 1967–68 (H.M.S.O., 1968) in paragraphs 51 to 55.

6 GOVERNMENT AND PUBLIC ENTERPRISE

will not be out of place. If the political factor is operating in such a way as to make profitability the principal desideratum in public enterprises, a management fixation on profitability will serve the public interest and contribute to good relationships with government. (This could also be the case with individual enterprises within a public sector that is generally devoted to objectives of public policy other than profitability.) Broadly speaking, however, the bias of managers towards profitability as the goal and measure of performance and towards identifying themselves with their individual enterprise is usually, as between the enterprises and governments, a source of misunderstanding and therefore a potentially adverse factor in their relationships. At this point, provided he is sufficiently grounded in The Bible, the fairminded reader will recollect Christ’s question: “Why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye?” If managerial psychology is detrimental to the enterprises’ relationships with government, is not ministerial (and civil service) psychology also detrimental? Certainly, there are forces that condition ministers (and civil servants) to think and act quite differently from managers. For ministers, power substitutes for profitability as the central objective and ultimately critical determinant in decision-taking. Precisely what this means for the bias in their decision-taking depends on the type of regime the ministers are operating. In a parliamentary democracy, the bias is towards a comparatively short time-scale, the cynics alleging that ministers’ time-scale is effectively limited to the period up to the next election. Ministers are required, too, to calculate the consequences of their responses to pressures from, possibly, numerous and disparate groups and special interests who will frequently take their stand on political and social considerations, such as human liberty or the protection of the environment, far removed from, or even antithetical to, the economic and financial considerations foremost in the minds of management. The way such pressures can operate to undermine an intended constitutional relationship between ministers and public enterprises is shown in the following passage discussing Questions in a certain Parliament: “in the final analysis the will of the house is likely to prove decisive since a minister will not dare to refuse to answer a question of a member who is supported by a large majority of the house, even if he thinks that the question is one of administrative detail and that he is not statutorily bound to answer.”6

5. In the developing countries, particularly the “Least Developed Countries”, this is less likely to be true than in the industrialised countries, because of the limited extent of private enterprise and of manufacturing industry.

MAURICE R.GARNER 7

However, though it is desirable for ministers and managers to recognise the differences in their psychologies and to seek to reconcile them, “one must”—as the National Economic Development Office in Britain sagely observed “recognise the realities of our political system”.7 Governments exist to govern so that, in a clash of psychologies, managements of public enterprises must expect that it will be they who will be required to adapt themselves. An over-rigid managerial psychology can thus become a specially adverse factor in the relationships of public enterprise with government. 2. The Political Factor By “the political factor” is meant the decisions taken (and the failure to take decisions) determining the scope of a government’s relationships with its public enterprises. Clearly, it is open to a government to decide to deal specifically with its public enterprises on a wider or narrower range of issues; it may, alternatively, decide not to deal specifically with its public enterprises on some matters but to deal indiscriminately with public and private enterprises alike (by means such as general legislation or changes in the rate of interest); or it may decide to treat some matters as not for governmental attention at all. Admittedly, to imply that the strain on relationships between government and public enterprise is directly proportionate to the number of issues made the subject of specific dealings between them would be misleading; if this were so, it would follow that the extensive system of a priori controls in France would ensure that the French government’s relationships with its public enterprises would be outstandingly bad —and this is far from being the case. Nevertheless, it seems reasonable to assume as a general rule that, by multiplying the occasions for possible conflicts, governmental decisions increasing the number of issues on which the Government deals specifically with its public enterprises are liable to strain relationships between them, so that the operation of the political factor merits consideration. The two following official statements, when juxtaposed, provide a clear illustration of the political’ factor in operation. The first comes from the then British Government’s White Paper on the Nationalised Industries, issued in 1978; the second comes from a speech made in 1975 by a senior West German civil servant about his Government’s attitude to public enterprises: (1) British White Paper

6. C.J.Bias, “Public Corporations in India” in “Law and Public Enterprise in Asia”, edited by International Legal Center, New York (Praeger Publishers, 1976), p. 80. 7. National Economic Development Office, “A Study of U.K. Nationalised Industries”, (H.M.S.O., 1976), p. 9.

8 GOVERNMENT AND PUBLIC ENTERPRISE

“The central problem in evolving an acceptable relationship between the Government and the nationalised industries has always been how best to reconcile the boards’ need for sufficient freedom to manage the industries with the Government’s legitimate interests in them. The Government must be concerned in the strategies, and operational decisions of public importance, of industries which are basic to the national economy; in seeing that these industries, which are not subject to the private sector discipline of the threat of bankruptcy, and are in some cases relatively free from market pressures, are efficient; and in ensuring that there is an acceptable return on the public capital invested in them.”8 (2) West German speech “If I have understood you correctly, governments intervene more with the enterprises of your country and other member countries than is the case with us. In Germany, matters are rather different. Industrial enterprises of the Federal Government find themselves, in our economic system, in competition with other enterprises, both German and foreign. They must, therefore, like their competitors be managed on commercial principles. These give absolute priority to the maximisation of profits. Without profits, there can be no investment, and, without investment, no guarantee of employment. This policy of gearing Federal shareholding to the principles of the private economy has proved itself in practice. That is why it is for us the main instrument of direction. We refrain deliberately from impairing the freedom of decision of the enterprises so that the directing boards shall have the full responsibility for the results of the enterprises’ activities.”9 It will be seen that the first statement expresses the intention— it is a political choice—to be concerned about the strategies, operating decisions, efficiency, and return on capital of the individual enterprises; the second expresses the intention —a no less political choice —to stand aloof and rely on the forces of competition to safeguard public interests. Both seem reasonable positions for governments to adopt, especially when considered in relation to their enterprises’ differing circumstances; but there cannot be much doubt which of the two intentions is likely to place the greater strain on the relationships between the parties. The decision to rely upon the forces of competition is, in fact, a more farreaching determinant of these relationships than may, at first sight, appear— indeed, it is probably correct to see it as the crucial expression of the political factor as, if competition is to be effective, this decision, of itself, will, practically determine the scope of the relationships that it is possible for the governments to have. It is instructive to examine why this should be so.

8. White Paper on “The Nationalised Industries”, Cmnd. 7131 (H.M.S.O., 1978), para. 3.

MAURICE R.GARNER 9

There can be little doubt that prices and efficiency are two of the principal problem areas in the field of public enterprise. It is a virtue of the competitive principle of industrial and commercial organisation that it furnishes a pragmatic solution to these problems. An enterprise that in competition with other suppliers can earn a satisfactory return on capital is, by a generally approved convention, deemed to be pricing fairly and operating efficiently. (That the reality may be otherwise and that there may be circumstances, such as “freight protection”, that enable an enterprise to overcharge or to remain inefficient are immaterial.) Society is thus enabled to sidestep the problems of defining fair pricing and efficiency. By placing their public enterprises in competitive rather than monopolistic situations, governments can thus similarly spare themselves the task of establishing principles for fixing prices and measuring efficiency. So far, it is all downhill and, with the going so easy, it is natural to ask why competition is not more commonly used in relation to public enterprises. One obvious impediment—the natural monopolies in the public sector—will be referred to later. The problem for governments with those enterprises that are not natural monopolies is that if they are to answer to the competitive imperative, they have either to be relieved of all social and political obligations from which their competitors are free or to be fully compensated financially for such obligations upon them as the government decides to retain. The logic of the first of these courses is to convert the public enterprises into enterprises, private in spirit though publicly-owned, so that they become mere demesnial assets of the state instead of agencies of public policy; this negates most of the arguments for the establishment of public enterprises. The logic of the second course is towards the conversion of public enterprises into state pensioners; this is because the enterprises’ general well-being and overall financial performance could come to depend on their skill in negotiating advantageous settlements with government as much as on their ability to serve and satisfy their customers. Readers may, perhaps, be surprised at this possibility, compensation having so long and so often been put forward as the device enabling public enterprises to combine competition and commercial calculation with public policy. It is, therefore, appropriate to explain that no particular difficulty is foreseen in the negotiation of compensation for the performance of services not involving public enterprises in much in the way of capital expenditure or changes in technology and the existing pattern of operations. It should be possible, for example, for a state railway to agree without much argument with the government on the compensation for providing cheap travel for the aged or for military personnel. It will, however, be quite different when the judgments and interests of enterprise and government conflict over the expediency of a major project or the choice of

9. E.Pieper, Ministerial direktor, Bundesministerium der Finanzen, in a speech to the 7th Congress of the European Centre for Public Enterprise, London, 16th–18th June, 1975— author’s translation from p. 84 of the French text of the proceedings.

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an appropriate technology. Suppose, for example, that the state airline and the state railway both wish to provide a passenger service to a newly-developing region. To provide both services may require more capital than the government cares to devote to transportation or it may risk the under-utilisation of the duplicated facilities; yet, through shifts in traffic resulting from the introduction of the new route, the service that is not extended may suffer more than just the loss of profit on the new investment. If the government intervenes to authorise the one and to prohibit the other, is the enterprise whose plans are frustrated to receive compensation; is it to be compensated by the government or the enterprise that is preferred; on what basis is the compensation to be calculated; is it to be a lump sum, or is it to be calculated annually; is the compensation to be fixed or is it to be variable in the light of changing circumstances (e.g. on the basis of actual traffics as against forecasts of traffics)? Whatever the answers given to these particular questions, it is plain that there will be scope for wide differences of opinion and that, in its effect upon the net out-turn of the profit and loss account, a good settlement may have a value to the enterprise “far above rubies”; it is plain, too, that the legitimate differences of opinion may also place a heavy strain on relationships between the enterprises and government. Acceptance of a competitive environment, with its consequential obligation on government to accord equality of treatment to all competitors requires, moreover, a very sturdy belief in the superior virtues of long-term benefits (such as the enhancement of national productivity) over short-term rewards (such as the maintenance of employment at a particular plant). Whilst a government, like the West German Government, that is intellectually and politically committed to the market philosophy and confident of public support for this commitment, may feel free to lay only minimal social obligations upon its public enterprises and may see political advantage, rather than embarrassment, in non-intervention when businesses are overwhelmed by market forces, governments committed to economic planning and “social engineering” will find this posture neither pleasing nor politically practicable.10 The problem for the public enterprises of such governments is that, whilst the governments will give directions on the issues of policy causing them concern, they (normally) will not take the consequential steps required to relate these directions to the enterprises’ commercial objectives and situations.11 The competitive imperative (basically, profitability) is thus undermined without being displaced. Whilst, therefore, the adoption of a competitive environment has the advantage from the point of view of the scope of a government’s relationships with its public enterprises that it absolves the government from the onerous task of defining principles for pricing and measuring efficiency and of ensuring their observance by the enterprises, it has the disadvantage that it narrowly restricts

10. The “Least Developed Countries” in particular will find this posture outside the realm of practical politics.

MAURICE R.GARNER 11

the government’s ability to enlist the enterprises in the pursuit of just those objectives of general public policy that will normally account for the enterprises’ presence in the public sector. Failure to recognise the limitations on the government’s freedom of action that should follow adoption of the policy of competition is a major cause of bad relationships between enterprises and their governments. In relation to some enterprises, governments do not really have the option of adopting a competitive environment. There must be few countries amongst whose public enterprises there are not to be found some, more or less, “natural monopolies” —activities, that is to say, for which, by reason of physical circumstances or the economies of scale or the wastes from the duplication of facilities, the creation of more than one enterprise would seem perverse. For such activities, recourse to the competitive principle is evidently precluded; but this does not mean the exclusion of the political factor. It may still be open to the government to introduce general legislation on monopolies, as much applicable to public enterprises that are monopolies as to private enterprises; it may still be possible to create institutions, perhaps of a quasi-judicial character, to deal, in respect to certain sensitive issues like prices or wages, with all monopolies; and it will be always be desirable, if not invariably feasible, to inculcate a strongly-held ethic of public service into the managements and staffs of public monopolies so that they become “inner directed” and thereby absolve the government from the necessity to intervene to give frequent guidance as to the public interest.12 Even in the case of natural monopolies, therefore, where the will to do so exists, something can be done to diminish the scope of the government’s relations with its public enterprises. The relationships of government with public enterprise are thus not accidental or indeterminate but highly sensitive to the political decisions, or evasions of decisions, which in this essay have been compounded in the term, “the political factor”.13

11. For a characteristic example of a government failure to cope with this problem, see the case quoted by a governmental spokesman “of an Agricultural Marketing Corporation which had the contradictory objectives of providing farmers with reasonable prices for agricultural produce, presenting consumers with best prices, keeping a certain number of people on the pay-roll and living within a budgetary provision”. Report on “National Policies and Programmes for Public Enterprise Management Training”, (Commonwealth Secretariat, 5th–7th November, 1979), p. 17. 12. For examples of this “inner direction” in action, see Chapter I of “La Liberte de Reussir”, (Simoën, 1977), by Pierre Dreyfus, the former

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3. The Institutional Factor A large measure of autonomy is commonly conferred upon public enterprises, either explicitly by the statutes by which they are created or by the political concepts regarded as applicable to them. Sound reasons, according to the “conventional wisdom”,14 exist for this autonomy. Put shortly, they are that the conduct of industry and commerce requires a speed of decision, a readiness to run risks, a degree of decentralisation of authority, a flexibility of financial procedures that are not reconcilable with the practices of government departments, evolved with the aim of ensuring ministerial control and parliamentary accountability. It is possible that considerations of this sort have been accorded more weight than they deserve15 and that they rationalise a reluctance to see business operations placed in the hands of government and, in consequence, directly exposed to the political pressures of work people and consumers.16 Whether or not such arguments springing from concern for the enterprises’ efficiency suffice of themselves to make the case for managerial autonomy, they are buttressed today by the concern that must increasingly be felt for the efficiency of government itself. In many countries, some devolu tion of responsibilities is nowadays a necessity if the machinery of government is not to seize up under an overload of issues for decision. The non-departmental form of organisation of public enterprise (that is to say, companies and public corporations) is a means of effecting this devolution and a variety of considerations, some political and some technical, have hitherto favoured its use when it has been a matter of devolving governmental responsibility for business operations. For the devolved decisions to be made responsibly by the decision-takers (i.e. the enterprises’ managements), it is the consensus of experience that the

President-Director General of Renault. As an illustration, see p. 35 where he reports how, at a time of a run on the French franc, Renault on its own initiative supported the national currency by accelerating the conversion into francs of receipts in foreign currencies. 13. The relationships are clearly highly sensitive, too, to the political structure in each country, that is to say, whether, for example, there is a one party regime or a, more or less, permanent two-party coalition, and whether there is any real possibility of accurate knowledge and uninhibited criticism of the plans and performance of public enterprises in Parliament and the Press and amongst the public generally. In this essay, the political structure has been disregarded but it is the intention in the final essay to return to this aspect of the political factor in the light of what is said, and not said, in the intervening essays on particular subjects and particular areas. 14. This gem of encapsulated irony is, of course, owed to J.K.Galbraith. 15. It is difficult to see for example, that the conversion of the British Post Office from a department to a public corporation had any beneficial effect upon efficiency or service. 16. See, for example, the arguments deployed by H.Morrison in “Socialisation and Transport” (Constable, 1933).

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managements should have control over resources commensurate with the tasks to be performed and a fair measure of discretion in choosing between available options, technical, industrial, commercial, and social, and in determining the optimal combination from amongst them. This is what is meant by managerial autonomy. In the case of a government, like the West German Federal Government, which, as has been explained, is able to keep the political objectives for the generality of its enterprises to the virtual minimum and to treat the enterprises virtually as demesnial assets whose function is limited to producing an acceptable financial return, the concession and observance of this autonomy are not a source of friction; but, in the case of a government whose political aims or circumstances require the public enterprises to align themselves with its policies and objectives, managerial autonomy generally tends towards conflict. Whether these potentialities for conflict develop to the point of seriously impairing the enterprises’ efficiency and the fulfilment of their political and social obligations inevitably depends on circumstances. Succeeding essays will provide the reader with insights into some of those varying circumstances. It seems right, however, in this opening essay to remark upon the increasing strains that are falling upon the institutional structure of public enterprises. The interests involved with that structure—managements, workers, consumers, suppliers, and in some cases, governments themselves—all appear to have grounds for growing dissatisfaction. To function effectively, managements, as has been explained, require a fair measure of autonomy. Frequently, they are imbued with the belief that it has been accorded to them; psychologically, as we have seen, they are conditioned to expect it. This expectation is nourished and encouraged by developments in the private sector; there, managerial autonomy, already firmly established, is growing in importance, whilst the shareholders’ power, though still legally paramount, is really declining, being compelled more and more, in Hirschman’s terminology, to express itself by exit rather than voice.17 The individual private enterprise is thus becoming more endocratic18—vesting more power in the hands of its management, including the crucial power of self-perpetuation by way of self-appointment. This is at a time when the generality of public enterprise is being taken in the opposite direction. In the latter’s case, appointment of top management is almost always exocratic and governments are either tending to place increasing pressures on management to make their decisions in accordance with government interests or are arrogating the decisions to themselves. Whilst the forms of organisation of public and private enterprise appear to be similar, the realities of power and autonomy for the managements are thus very different. The issue of workers’ participation, though less insistent at present in Europe than would have seemed probable a few years ago, is an additional source of latent strain. In Europe, much of the early support for, and pressure towards, the extension of the public sector came from industrial workers, many of whom were hoping for a syndicalist form of public enterprise, rather than state control. These

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aspirations, perhaps unexpectedly, seem to have been extensively realised in Yugoslavia;19 elsewhere in Europe, however, they have had little direct reflection in the forms of organisation of public enterprises. Generally, the degree and manner of workers’ participation in the management of public enterprises are very much what they are in the different countries’ private enterprises—that is to say, though this can be no more than a subjective generalisation, significant in Austria, Sweden, and West Germany, for example, though in no case dominant, and, in France and Britain, negligible. The question of workers’ participation and its impact upon the institutional structure of public enterprise nevertheless became a divisive issue amongst the parties on the left wing in the crucial French election in 1978 when a substantial enlargement of the public sector was the central political proposition; it is therefore, a question that seems likely to re-surface (and not just in France), if and when there is an end to the current industrial recession and working class opinion feels free to concern itself once again with issues other than employment and prices. Consumerism, as a movement, developed comparatively late in the day in Europe; the special interests of consumers are accordingly not much represented in the decision taking processes of most European public enterprises.20 Consumers, it seems, have responded to this exclusion by acquiring a less than enthusiastic regard for their public enterprises.21 Suppliers of capital equipment and of major consumable materials also tend to be left outside the decisiontaking chambers of the enterprises. Whether admission to these chambers would dissuade workers, consumers, and suppliers (and other potentially affected interests, such as local authorities or farmers and land-owners) from seeking to pressurise governments and parliaments to influence the enterprises in directions favourable to their special interests must be regarded sceptically; there seems to be no limit to the readiness of particular groups to politicise an issue if they think that will work to their advantage; yet the present institutional structure of public enterprises, which generally makes little provision for the participation of these divers interests in the enterprises’ decision-taking, does appear to encourage such politicisation and thus to call the structure into question.22

17. A.O.Hirschman, “Exit”, in brief, means that a participant in an organisation makes his viewpoint felt by withdrawing, or threatening withdrawal; “voice” means that a participant makes his viewpoint felt by entering into discussion or negotiation with other participants. 18. L.Tivey, “The Politics of the Firm” (Martin Robertson, 1978). At p. 111, Tivey draws a distinction “between the endocratic forms of government found in managerial firms, in co-operatives, in workers’ control and in co-ownership, and to a certain extent in codetermination, and the exocratic forms in most public corporations, government companies and, in another way, in pre-managerial capitalist firms where policy might be shaped outside the industrial organisation”. 19. Bogden Kavcic, “Self Management in Yugoslavia”, in Public Enterprise, Vol. 1, No. 2, 1980.

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These considerations point to the conclusion that public enterprise is now dependent upon an institution—the legally separate, managerially directed firm— that in the private sector is evolving in the direction of a growing autonomy for management, at least in relation to the firm’s owners (whatever the constraints that have increasingly to be accepted from other quarters, such as employees) and which, for commercial efficiency, requires a fair measure of managerial autonomy (though not necessarily to the extent that managements are increasingly assuming to be their due). By contrast, in the public sector, though the case for a considerable measure of managerial autonomy is frequently recognised in principle and, in form, quite widely conceded, the political imperatives in most countries operate towards the reduction of autonomy; simultaneously, interests other than government are less and less willing to accept managerial autonomy on matters of concern to them. Except, therefore, for the countries where, as in West Germany, the political factor has spared governments the necessity of withdrawing their enterprises from fully competitive conditions, it has to be asked whether, in the case of public enterprises, the concept of autonomy is still viable and whether, in consequence, their traditional non-departmental form of organisation can be retained without imposing immense strains upon their relationships with governments. 4. The Technical Factor In the discussion of the political factor, stress was placed upon the ability of competition to sidestep the problems of fair pricing and efficiency. In this part of the essay, the situation is examined when side-stepping is no longer possible. In the case of prices, if they cannot be determined primarily by reference to the enterprise’s long-term profitability, by what criterion are they to be determined; and, similarly, in regard to efficiency, how is this to be measured, once profitability relative to similar enterprises is no longer a sufficient indicator? If, in relation to pricing, one adopted the dominant opinion amongst economists, one would reply: by reference to marginal costs; but, to calculate a price based on marginal costs, it is necessary to have a price for the capital

20. The Consumers Consultative Councils established in the case of the British nationalised industries are exceptional in that they exist; but they have a distinctly minor part in the enterprises’ decision-taking. 21. See, for example, the attitude of the French public towards public enterprises reported in “Le Service public industriel et commercial dans la Societie francaise Aujourd’hui”, Actes du Colloque de Rouen, 21st–28th May, 1980, (Supplement aux Dossiers et Documents du Monde, Paris, 1980). See also C.J.Dias, op. cit., at pp. 85–86. 22. Governments are, perhaps the one interest that in most European countries, other than Britain, have ensured for themselves some access to the public enterprises’ decisiontaking process.

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employed and this price is not self-evident; it is necessary, too, to select the particular unit that is to be taken as marginal (in the case of a coach service, for example, is the unit a single passenger, a coach load, or a particular coach schedule for a season?); it is necessary furthermore, to take a view upon the pace of technological advance as this has an influence— it may be a significant influence—upon the assumed life of the capital equipment and the assumed future trend of prices, both of which must enter into marginal cost calculations. To settle prices using marginal costing is evidently no easy matter—which is, perhaps, one reason why in Britain, eight years after marginal costing had been formally proclaimed as the appropriate basis, an official enquiry into the pricing practice of four major public enterprises found that not one of them based its prices on either short-run or long-run marginal cost.23 Marginal cost pricing is, moreover, no guarantee of efficiency of operation in an enterprise. If the enterprise is wasteful, marginal costing will result in prices high enough to cover the costs incurred; if the enterprise has costs that are controlled but not so tightly as to cause discomfort, prices will be lower, but not so low as they would be at the levels of efficiency attainable if the management were to introduce new methods and tighter controls. In the case of public enterprises not operating under fully competitive conditions, there is, therefore, a need for measures of efficiency that will enable their performance to be appraised and controlled. At one time in Britain it was thought that this requirement would be (largely) met by the establishment of financial objectives. Only a few years were necessary for recognition that such objectives were too partial a measure to be effective. Certainly, by means of financial objectives a government can define the minimum return on capital employed that it is ready to accept; but, as, under non-competitive conditions, enterprises can achieve such objectives by price increases as much as by improvements in efficiency, a government has to concern itself, not only with the principles of price-fixing but with the standards of efficiency. Unfortunately for governments seeking to give expression to such concern, efficiency is not an absolute but has to be defined by reference to the objectives that it is sought to achieve—for example, a decision that an enterprise should aim to give its customers polished rather than primitive standards of service would raise costs and prices and lower labour productivity; but such changes would not of themselves demonstrate that the enterprise’s efficiency had diminished. Efficiency, therefore, is dependent upon the determination of objectives and, so that all concerned may know how much of each objective is regarded as desirable, whether it relates to profitability, stability of employment, increase in output, improved quality of product, or independence of foreign sources of equipment or raw materials, the objectives must be quantified. In the case of some

23. National Economic Development Office, op. cit., Appendix Volume, p. 100.

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objectives, quantifying the objectives satisfactorily may cause difficulties; generally, however, this should be feasible. Their articulation, however, into a balanced combination is likely to be more troublesome, necessitating an extended process of iteration and refinement. The resulting combination will constitute a standard that will in due course answer the question whether the enterprise has succeeded or failed in its mission; but, in the eventuality that some objectives have been achieved and others have not, it will not settle definitively the degree of overall success (unless there has been some agreed subjective weighting beforehand of the individual objectives) and it will certainly not answer the questions whether the enterprise is improving its efficiency and, if so, at what rate. For this, some index in relation to each enterprise will have to be established of the ratio of total inputs to total outputs and subjective adjustments made to the index to allow for changes in the objectives as they are introduced. France has made some progress in this direction by the development of the concept of “productivité globale des facteurs” but, elsewhere, little, if anything, seems to have been attempted that would throw light on the changes in efficiency in public enterprises. As with the weather (about which, as it will be recalled, everyone talks but nobody does anything), so with the efficiency of public enterprise, there are constant complaints but no sustained interest in establishing the true situation. It is tempting to surmise that, because the problem of assessing efficiency has been solved in the private sector by a convenient convention, it is imagined that the same convention will operate in the public sector. Similarly, in relation to pricing, whilst economists develop abstract theories of supposed applicability to both public and private enterprises, those private enterprises not subject to the dictates of the market administer their prices highly pragmatically and with little regard to the theories; consequently, they develop little in the way of a corpus of ideas and practice that is germane to the public sector. In much the same way, therefore, as the central institution of private business (the managerially controlled company) is becoming less and less valid as an exemplar for public enterprise, so the concepts and practices of the private sector in relation to the estimation of efficiency are of little utility to public enterprise, whilst, in relation to pricing, the theories of the economists appear to be either too abstract or in their application too dependent on subjective judgments to constitute a clear guide to decision-taking. This want of authoritative concepts and workable techniques in the fields of pricing and efficiency means that, for governments and public enterprises not operating under fully competitive conditions, these matters almost inevitably become subjects of dispute and suspicion and thus a cause of strain upon the relationships between them.

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5. Conclusions In the light of the foregoing review, it cannot be seen as surprising that relationships between governments and public enterprises often appear to be under stress. From the standpoint of the administration of government there is an insistent need for increased delegation of responsibility; but, in the case of the public sector’s business activities, the institutions to whom the delegation is made (the companies and corporations) appear as increasingly anomalous— they do not fit into any logical pattern of constitutional accountability and the ethos of the institutions, drawn from the private sector, encourages management to expect a growing autonomy at a time when the requirements of government policy tend towards clipping management’s wings. Many public enterprises, not always necessarily, are, moreover monopolies or quasi-monopolies and, as such, are bound to pose problems for government that do not arise in the case of competitive enterprises. The remaining public enterprises in most countries are, by their nature, likely to be subject to multiple objectives, of which some will be commercial and some political and social; whereas private enterprises can normally be managed and evaluated by the single test of profitability, for these public enterprises it is an inadequate criterion; but there is no practicable authoritative substitute available; and the ancillary concept of financial compensation looks a broken need. If the foregoing analysis is correct, matters are clearly moving, if not towards a break-down, at least towards an impasse. Is there any way of escape from the impasse? Again, as a hypothesis, this first essay puts forward as an answer: some form of corporate planning. Like most short and simple answers, this conceals as much as it reveals. Corporate planning, it is true, even in countries with an interventionist style of government, should assure to management the unrestricted exercise of its authority over a substantial part of its present supposed area of autonomy; however, it would confine this authority within the limiting framework of a set of policies and objectives that government would specify—it is to be hoped, of policies and objectives government would specify in the light of informed and unconstrained discussion with the management. The fundamental difficulty with this proceeding is that it compels government to take decisions whose economic and social consequences, judged to be beneficial but inevitably uncertain, lie in the medium —and long-term future, but where the political consequences, highly predictable and mostly adverse, are immediate. Successful politicians—that is to say, politicians who instinctively “know a hawk from a handsaw”—are not normally going to poke into hornets’ nests in this way. The overall political situation thus has to be highly favourable to long-term economic planning before corporate planning is likely to be feasible. This is the first obstacle. The second obstacle is technical. If managements are to have an assured area of autonomous decision and if they are subsequently to be held accountable for

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the performance of their enterprises within this area, the limiting framework of policies and objectives has to be sharply defined—essentially, this is a matter of specifying assumptions and quantifying objectives. The required degree of precision may sometimes prove unattainable. There is one more matter to which it is appropriate that this initial essay should invite attention. That is the accountability of the governments themselves for their policies and interventions in relation to their public enterprises. Throughout this essay, it has been the recurrent theme that governments will impose on the enterprises political and social obligations that the managements would not normally take upon themselves voluntarily. From the point of view of Ministers, it is a convenience that the mechanisms for the imposition of these obligations are often informal and confidential and that frequently the financial consequences are inextricably mixed with the enterprises’ operational expenditures so that they do not emerge in the budgets that they themselves have to lay before, and justify to, the legislature. The development of corporate planning with its precedent agreement with Ministers on an integrated set of commercial and social objectives will make the role of Ministers in relation to the enterprises’ success or failure yet more significant than hitherto. It ought, therefore, to become standard practice for Ministers both to report and justify their interventions to the legislature and to have to obtain the legislature’s endorsement for the patterns of objectives that are settled with the enterprises as the basis for their corporate plans.24 The final essay will return to this point in the light of what is said, and not said, in the succeeding essays in their discussion of particular countries and particular problems. To sum up: this essay assumes the crucial importance of the enterprises’ relationships with government. From succeeding essays, the reader will be able to see whether this assumption is valid. This essay suggests that these relationships are shaped by four interacting factors—they have been denominated the psychological, the political, the institutional, and the technical factors. From the copious data about individual problems and individual countries in the succeeding essays, the reader will be able to test the correctness of the suggestion. This essay also suggests that corporate planning may be a solution to the problem of the enterprises’ relationships with government; but it recognises the difficulties. From the succeeding essays, the reader will be able to form a view on this suggestion, too. The final essay will itself look at all these matters in the light of the intervening essays and offer a re-appraisal. Reader, until that final essay, au revoir!

24. For this point in more general terms, see V.V.Ramanadham, “A Control System for Public Enterprise” in “Control Systems for Public Enterprises in Developing Countries”, edited by P.Fernandes (International Centre for Public Enterprises in Developing Countries, 1979) at p. 136.

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GLOSSARY OF TERMS Relationship. This term is intended to comprise the manner, scope, character, and mode of the interaction of a government with an enterprise that is under its control to at least that extent required for it to be regarded as a public enterprise. By “manner” is meant the way in which the government gives effect to its purposes for the public enterprise—that is to say, whether it proceeds by way of strategic directions or tactical interventions, by a reliance upon a priori controls or upon a posteriori account-ability, whether, in short, it is generally trustful or mistrustful. By “scope” is meant the range of the enterprises’ affairs of concern to government— that is, whether the controls are many and wide-ranging or few and limited; it includes the policies, principles, guidelines, and indicators by reference to which governments seek to influence or control the enterprises’ investment, pricing, efficiency, and direction generally. By “character” is meant whether the interactions between government and enterprise are informal or formal and legalistic; whether they are at arm’s-length or collaborative; and whether they are habitually authoritarian or consultative. By “mode” is meant whether the interactions are multi-faceted (involving dealings between officials of government and enterprise at various levels and in various functions) or closely confined (for example, to exchanges between the government minister and the enterprise chairman and, possibly, a few of their top advisers). Enterprise. A managerial entity engaged in the production or distribution of goods or services, the demand for which it is able to influence by way of the charges for them that, to some extent at least, it is free to determine. Public enterprise. An enterprise which, on the facts of its particular case is or, on the basis of existing rights or powers, could be under the general direction of a government, or of some body created by a special statute, or of some other public enterprise, or of some combination of these. Social obligations. Duties, objectives, or constraints accepted by, or imposed upon an enterprise on grounds of advantage of the public generally, or of some section of the public, that are not undertaken by the enterprise’s management with a view to financial or commercial advantage.

2 Government and Public Enterprise: The Budget Link A.PREMCHAND1

The relationships between government and public enterprises have traditionally been examined in terms of provision of finances, their forms, and the a priori and a posteriori controls exercised in the process of release of funds and their utilisation by enterprises. Available literature indicates that the structural relationships between government and enterprises in the budgetary area have not received due attention, presumably because these form part of the administrative processes found in the cloistered confines of government. While this neglect may not have created major problems in the past, a stage of development has been reached where a careful and detailed analysis of the budgetary relationships is essential for a comprehensive understanding of the finances of enterprises. The manner in which budgets are compiled has a substantial impact on the flexibility and coherence with which enterprises are managed and the dynamism shown by them. Annual budgeting, which during the recent past has virtually become a substitute for annual review and policymaking, is a unique opportunity for formulating the government objectives and for evaluating the adequacy of the operational management of enterprises. Procedures and practices vary in some detail from country to country; but underlying this diversity, there is a unity of purpose and policy. The central issue in budgetary relationship between government and public enterprises is the tenor of financial control exercised, the attitudes revealed on what is considered as important, and the general approach to all matters concerning the finances of enterprises. Institutional practices and traditions generate their own systems of values. Values, in turn, may contribute flexibility or rigidity to the institutional approaches. The interaction between these two sets of factors influences the budgetary process and the emphasis at various stages of work. This paper is devoted to an analysis of the institutional, technical, and policy factors in the government budgetary process in relation to enterprise finances. The structural aspects relating to government and enterprise budgets are considered first. The shortcomings of the existing processes and the directions of

1. The views expressed in the paper are personal and should not be considered as official views of the International Monetary Fund.

22 A.PREMCHAND

future reform are indicated in the concluding section. A caveat should be noted, however, in that, while the paper covers the experiences of industrial and developing countries, generalisations drawn from the diverse experiences may not be applicable to all. 1. Preliminary Considerations The growth of public enterprises has contributed to a change in the character of government budgeting. The concerns of the government budget traditionally were in regard to the allocation of resources to government functions, such as administrative, social, and economic services; but now they relate to a host of issues including the financing of enterprises, appraisal of investment and pricing policies, and rate of return. Governments routinely review the budgets of the enterprises to serve a twofold purpose—first, to determine the role of enterprises in the allocation, distribution, and stabilisation aspects of the management of the national economy, and second, in a narrower sense, to determine the level of resources to be transferred to enterprises. These, in turn, are based on a review of the validity of the estimates of production, sales, and related finances of enterprises. The use of public enterprises for purposes of stabilisation of the economy is not of recent origin. Following World War II enterprises were used for reconstruction of the economy and as tools for fighting recessions. The countercyclical role envisaged for enterprises was based on the belief that action through the market mechanism was not adequate, as “pushing the string” had its limitations, and that more active and direct participation in the economy was essential. While the countercyclical role of enterprises continues through the takeover of sick units or selective expansion of capacity, they have also been used since the early 1970s for reducing the rate of inflation through price restraint. 2 More recent experience, however, indicates that this measure did not have the desired effect and that, on occasion, it exacerbated the inflationary pressures through increased government budget deficits and that the fine tuning of demand management was not altogether successful. A recognition of these limitations has led to the recent revival of supply economics, which, in budgetary terms, implies a shift from the aggregate aspects of the economic impact of enterprise and government budgets to the industry-by-industry analysis of the problems, linkages, and prospects for improvement. This shift in emphasis gives an added dimension to the budget links between government and enterprises! Government is both the major shareholder and generally the principal banker of enterprises. The main link that provides a continuing relationship with the

2. For a case study of this specific aspect in regard to the United Kingdom, see National Economic Development Office, A Study of the U.K. Nationalised Industries, Vol. 9, HMSO, London, 1976.

GOVERNMENT AND PUBLIC ENTERPRISE 23

enterprises through various stages of policy formulation and execution is the government budget.3 Public enterprises are distinguished from others mainly in terms of the financial significance inherent in their permanent relationship with government. The permanent relationship has two important aspects that merit recognition. First, since the government provides all the money either from the budget or through its financial institutions, there is, in general, little likelihood of a threat of liquidation of enterprises.4 Although this is not universally correct, it has contributed to the perception that the financial problems of the enterprises become, in due course, the problems of the government budget contributing to higher deficits and increased domestic and foreign borrowing. This imposes the additional responsibility on the government budget not merely to invest or approve specific expenditure proposals but to anticipate the problems of enter prises and the impact of their operations on government budget. Such anticipation, in turn, generates some institutional and procedural imperatives that are reflected in the budgetary process. Second, from the enterprise point of view, the parameters of its budget other than sales revenue, are exogenously determined by the constraints characterising the government budget. Income policies, resource mobilisation measures, perceived rate of growth of expenditure, or the ratio of budget deficit to the gross national product, all tend to influence the transfers to and from the government budget. These constraints, it may be argued, would not be felt if enterprises were to be dependent on the banking system rather than on government. It has to be noted however, that this approach is not tenable as in some countries banking institutions are also owned by government and often function in close harmony with the budget and a joint determination is made of the fiscal and banking resources to be made available to enterprises (for example, Korea). Moreover, in the context of the pursuit of a, stabilisation programme, credit limitations apply equally to all enterprises and the public enterprises may not fare differently in getting loanable funds.

3. Transfers from government budget to its nonfinancial public enterprises (NPEs), as illustrated further on, take a variety of forms and contribute to difficulties in presenting an inter-country comparison. In India, the annual government investment from the budget in its NPEs was more than a quarter of the total government capital expenditure during 1975/ 76–1978/79. As a percentage of total expenditure, it was more than 10 per cent. During the fourth plan period (1969–74), about 8 per cent of the total plan resources were contributed by all government enterprises. Subsidies provided by Central Government were on an average about 6 per cent during the late 1970s. In Korea, the annual government investment in its NPEs during 1975 and 1976 was about a quarter of its development expenditure which declined to about 9 per cent in 1979. As a share of total government expenditure, it was 12 per cent in 1975 and declined to 3 per cent in 1979. These transactions illustrate the magnitude of the budgetary relationships between government and enterprises. Similar magnitudes are observed in other countries, too. 4. In some countries part of the resources may come from other sources. There is, however, an implicit guarantee that in the event of financial distress funds would be made available by government.

24 A.PREMCHAND

Specifically, in developing countries, where the public sector tends to play a larger role, greater reliance is placed on fiscal policy which, in turn, affects the budgetary prospects of public enterprises. The intimate relationship and the complementarity between government and enterprises leads to a policy framework in which there is little option for enterprises but to work in tandem. 2. Structural Aspects Budgetary relationships between government and enterprises are dependent on the form and nature of the latter and to that extent the budgets of the former may not fully reflect the activities of enterprises. Broadly, however, three types of budgetary relationships can be distinguished. The typology is not rigid and there may be cases that have all the following features but in varying degrees. First, there are systems where enterprise budgets are included in the government budget or where the dividing line between the government budget and enterprise budget is rather thin. Enterprise activities that are organised on a departmental basis or those whose budgets are annexed to the government budget belong to this type. In countries that follow the French tradition of limite de caisses, public enterprise budgets are subsumed in the national budget and financial transactions of the enterprises are carried out through a special account established in the Treasury and are managed by it on behalf of enterprises. In some countries, such as the United Kingdom and Germany, financial requirements of the enter prises are included in the medium-term (five-year period) expenditure plans of the government: In countries with economies that are structured on socialistic lines, the enterprise budgets, while not formally included in the central budget, are considered in close conjunction with the government budget and are subjected to the same rigorous review as those of the departmental budgets. Formal administrative procedures may differ among countries but these relationships imply a greater degree of integration between government budget and enterprise budgets. Second, enterprise budgets in some countries are formulated under the direction of the government but are not included in the government budget and, to that extent, the relationship may be described as directional. In Mexico, for example, the budgets of 16 major enterprises are considered and approved by the Programming and Budgeting Department of the Ministry of National Economy. Also, in countries that have formal economic development plans, the capital outlays of enterprises and the pattern of their financing are viewed as integral parts of the development plans. Third, there are some countries where enterprises formulate their own budgets and are subjected to government review only in regard to specific aspects such as capital expenditure financed by plan allocations or subsidies given for specific purposes (for example, Kenya and Tanzania). This type of relationship is less formal and enterprises are generally endowed with a greater degree of autonomy.

GOVERNMENT AND PUBLIC ENTERPRISE 25

In these cases, the capital transfers from government may not fully reflect the capital budgets of the enterprises for there are other sources of financing. In some countries (for example, Papua, New Guinea, Zambia), project loans received from abroad may be on-lent to the enterprises through government budget, while in some Latin American, Asian, and African countries, loans may be received directly by enterprises on the basis of government guarantees. During recent years, a tradition has developed to indicate such contingent liabilities in the budget memoranda or in the annual accounts. The form of budgetary relationship is also influenced by the structures of the government and enterprise budgets. The government budget is usually subdivided into receipts, expenditure (subdivided into several segments), and borrowing. The budgets of enterprises are mostly organised, like commercial budgets, on a dual basis, viz., revenue and capital. The revenue budget in turn consists of the sales and income budget, production, research and developments budgets, selling expenses, and administrative overheads. The capital budget consists of the proposed outlays on plant and machinery, and buildings. Supplementing these two, a cash budget indi cating the flows of receipts and disbursements is also prepared. The transactions between government budget and enterprise budget, however, receive asymmetrical treatment in that an expenditure item in the former will be a source of revenue to the latter. (This is evident from the Chart on p. 29 which illustrates the budgetary relationships between government and enterprises.) These procedures have some exceptions. In the case of departmental enterprises, whose budgets follow the conventional budget structures of government, estimates of receipts and outlays may not follow commercial formats and may be in total conformity with government budget. In some countries, for example, Sudan, even the commercial public enterprises may prepare their budgets in terms of the government budget chapters, viz., salaries, material, and capital equipment. The budgetary structures of enterprises, unlike those of the government, would not appear to have received serious scrutiny and were generally assumed to be adequate as they conformed to the commercial formats. The links of public enterprises with government are, however, such that some modifications would appear appropriate for a variety of considerations. First, strategy or corporate planning and budgeting would appear to follow two different paths in most public enterprises, the former emphasising product development and diversification and the latter tending to be a purely financial exercise.5 An integration of these two aspects is essential to serve the internal management as well as for rendering greater accountability to government in the prebudget scrutiny stage.6 A recognition of this aspect induced some governments to adopt a type of performance budgeting for public enterprises.7 A continuing experiment undertaken in this respect in India indicates that performance budgets vary widely in quality, and have become perfunctory routines rather than significant inputs into the decisionmaking of government or enterprise management. Second, since the overall non-financial public sector is the key

26 A.PREMCHAND

factor in national economic management, and since national income accounts and related forecasts are used as the basis for policymaking, it would appear

5. This problem may not arise in some traditional public utilities (for example, electricity) that have only one product and as such physical and financial planning go together.

GOVERNMENT AND PUBLIC ENTERPRISE 27

essential that enterprise budgets are improved to facilitate quick compilation of national income accounts.8 Experience, however, suggests that difficulties are experienced in this regard primarily due to the fact that enterprise budgets are not structured to facilitate the compilation of national income accounts. A number of different practices also contribute to some confusion and error. For example, consumption of fixed capital or current and capital transfers are interpreted by enterprises differently from the system of national accounts approaches. Detailed data, such as employee compensation which are needed for national income accounts, are not available in the enterprise balance sheets and income and expenditure statements. This situation, which differs from country to country, may have been the result of lack of central guidance and initiative and leaving the responsibility for evolving the structure of budgets and accounts to the enterprises themselves.9 3. Budgetary Process The budgets of public enterprises are prepared within the time dimensions and the processes specified by government. The operational procedures found in various countries reveal different institutional factors and decisionmaking approaches. In all countries public enterprises draw up their own annual budgets which after approval by the boards of directors are sent to the sponsoring ministries which, in turn, process them for the approval of the central agencies such as finance and planning. In some countries only capital budgets of enterprises are needed to be submitted to government while in some others both revenue and capital budgets are needed to be submitted. In countries which have large holding companies (Spain, Italy, Korea) or sector corporations (Bangladesh, Pakistan), a considerable role is played by the intermediate level of enterprise in co-ordinating the budgets of their enterprises. In some cases, the budgets of subsidiaries are also submitted to government; but it is largely an area where much is dependent on the specific situation and initiative of government. The relationships between the sponsoring ministry and finance and planning agencies differ from country to country. In Portugal, the budgets are approved by the sponsoring ministry and only the relevant transfers on the current account are shown to the Finance Ministry while the capital budget and its relevance to the 6. Considerable emphasis is laid on the formulation of corporate plans in both industrial and developing countries. These plans are reviewed and approved by government. 7. In India, the Administrative Reforms Commission first suggested file introduction of a comprehensive budget to compensate for the short-comings of the commercial type of budgets. For a critique of this approach, see A.Premchand, Performance Budgeting in Public Sector, Economic and Political Weekly, February 22, 1969. 8. To some extent this was achieved in the General Accounting Plan implemented in France.

28 A.PREMCHAND

development plan are reviewed by the planning unit. In Tanzania, only projects involving additional transfer of funds from government are considered by the finance and planning agencies, while in India the financial adviser (who works for the sponsoring and the Finance Ministries and who also functions as a director on the enterprise board) is associated at every stage of budgetmaking from inception to eventual acceptance by government. The approaches to decisionmaking reveal some departures from the traditions of budgeting. The allocative problem in regard to enterprises is viewed differently from that of the allocation of resources to other services, or for public goods. Unlike public goods, where the evaluation of the costs and benefits is difficult and resort has to be made to imputations, allocations to enterprises involve a more tangible terrain in which the likely rate of return can be identified with some precision. Although frequent efforts are made in countries to undertake a social appraisal of investments and related aspects, they also have shortcomings.10 For one thing, there are mostly feasibility studies in support of a particular project rather than exploration of alternatives. Also, the rates of interest chosen for such appraisal may not reflect the scarcity value, and the opportunity cost of capital both in its broad context of alternative uses in the private sector, or in the more limited context of alternative uses within government. There is, however, a general recognition of the shortage of capital and the need for making sure that the appraisal reflects an implicit capital rationing. The review of the budgets within government varies considerably. While in some countries all aspects of enterprise budgets are reviewed, the typology of the enterprises and their financial status would appear to determine the approaches in a few others. Public utilities, trading and marketing, and mineral and extractive enterprises are given substantial consideration, while the industrial and manufacturing enterprises are given lesser attention. This approach reflects the general belief that the former set of enterprises are more dependent on the government budget (or the government budget is dependent on the enterprise, as for example, in Saudi Arabia and Zambia) for subsidies and price support measures. It is also the general experience that deficit-running enterprises receive more attention than others, even if they are not making profits. During the budget execution phase, government departments are endowed with powers to regulate the release of funds, to monitor cost variations, and generally to review the working of the enterprises. Not infrequently, it is found that slippages in the enterprise performance and non-repayment of loans by them contribute to expenditure overruns in the government budget.

9. Frequently, the relative legislation may merely indicate that “enterprises shall keep proper accounts and adequate financial and other records in each financial year.” This has also contributed to situations in which practices differ among enterprises. 10. This reference is primarily to the experience of developing countries.

GOVERNMENT AND PUBLIC ENTERPRISE 29

The budgetary process within governments reveals numerous weaknesses in dealing with enterprise finances. First, although enterprises have become a major element in the government’s economic strategy, in the budgetary process proper, little or no advance indication is given to them about the likely availability of the magnitude of funds. Budgeting has therefore become a process of aggregation rather than an iterative one with interface of central guidance on overall resource constraints on the one hand, and enterprise requirements on the other. Enterprises formulate their budgets on a need-based approach, and governments often work on a resource-based approach. As the initial level of resource availability is not too clear, the review within government proceeds in an ad hoc manner and resort is made at a later stage to across-the-board cuts in allocations when the actual resource levels are lower than the estimated ones.11 Second, no specific guidance would appear to be given on the allowance for the degree of inflation or the assumptions to be made on general level of prices. Frequently, such an approach had the effect of budgets missing their targets by a substantial margin, to overruns in government and enterprise budgets, and to greater budget deficits that further accelerate the rate of inflation. The response of governments to inflation has been to restrain price increases or to cutbacks in enterprise investment budgets. Experience shows that the former contributed to higher government budget deficits and the latter to crises in enterprise management. It is significant to note that financial control mechanisms and related approaches of government generally assume that the cuts in investment would somehow be adjusted by enterprises and pay no attention to the effects on enterprise performance. Third, the budgetary process which is expected to pay attention to the mobilisation of revenues (return on investment or as proxy for indirect taxation), or to the development process (full utilisation of installed capacity), or to the stabilisation aspects (impact of enterprise operations on the economy), would not appear to have achieved these purposes as often the purview of governments is limited either by legislation or tradition. The budgetary policy cannot clearly be a substitute for a comprehensive industrial policy. Where industrial policy is lacking, the burdens of the budgetary process become even more onerous and, ironically, its approaches tend to be more ad hoc and oriented to crisis management. Fourth, the nature of the financial control exercised by government in the budgetary process is tactical rather than strategic, short term in its orientation,12 and narrow in its focus rather than taking a systematic and objective look at the operation as a whole. Financial control, which is to be predictable, therefore tends to become arbitrary and in the process the wider linkages between enterprises

11. The reformulation of the budget in the enterprises in terms of the reduced allocations takes time, and often the fiscal year may start with notions of budget allocations rather than in terms of actual fund availability.

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and government and the national economy tend to be ignored. The areas given special attention and the degrees of emphasis vary widely. In India, it is on the resource mobilisation; in the United Kingdom and Korea, it is on external financing and the limits on borrowing; and in Tanzania, on project financing. Thus, budgetary allocations tend to develop their own bases and narrow rationality rather than concern with the overall performance of enterprises. Fifth, the unpredictability of government allocations is not mitigated by the adoption of constructive approaches on the part of enterprises. They, for their part, continue to rely on the conventional approaches which reveal an undue optimism in their corporate plans, and faith in their estimates and generally argue that their requirements are not substantial, and that variations in their estimates are well within the margin of error of government estimates or, alternatively, stress the strategic nature of their requirements. Recognising the total dependence on the exogenous variable of government resources, they believe that the special place assigned for them in the plans would insulate them against short-term changes. In practice, however, the short-term orientation, the narrow focus of the government budget and the absence of pre paredness on the part of enterprises to minimise fluctuations in their allocations implied that instability became a characteristic of both levels. Institutionally, too, the process reveals some shortcomings’. Experience of a number of countries reveals that the planning agencies often concentrated on the investment appraisals and on sectoral aspects, production targets, and the material balances that emerge in a framework of interindustrial relationships. In the process, financial aspects, particularly those from resource constraints and those that relate to domestic funding, were not given due attention. While some of these aspects did receive attention when considered by the finance ministry at a later stage, the process encouraged fragmented decisionmaking and in the absence of requisite co-ordination devices, led to avoidable problems. On the whole, it would appear that there was no single corporate presence in government.

12. In some countries such as the United Kingdom, the recent introduction of cash limits on the resources to be obtained by enterprises and limits en external financing (grants and borrowing) which an industry can raise in any financial year, would appear to have changed the focus of financial control. To an extent, the control on programmes is supplemented by a limit on the resources and when the rate of inflation turns out to be higher than estimated in the budget, the cash limits are enforced and adjustments are expected to be made by enterprises within the limits. For a discussion of this system in the United Kingdom, see “Financial Control of Nationalised Industries,” Economic Progress Report, Treasury, HMSO, London, September, 1980. In theory, such limits are expected to reduce the administrative dependence of enterprises on government and promote more responsible management. In practice, however, because of initial under-estimation of the rate of inflation or sudden changes in the market climate, the financial dependence of enterprises came to be even more. In the event, it also contributed to more budget expenditures and increase in the Public Sector Borrowing Requirement in the United Kingdom.

GOVERNMENT AND PUBLIC ENTERPRISE 31 13

Evidence of this is to be found in the determination of the total investment which is generally under-estimated and annual allocations that are grossly overestimated. Even in regard to the planning of physical aspects, experience indicates that many enterprises had excess capacities in relation to demand. The product mix is not always planned and slippages in the construction schedules are common. It could be argued, in extenuation, that these phenomena were the products of several factors and could not be ascribed to the budgetary process only. But the fact that the budgetary process has a strong role cannot be overemphasised. Over the years the separation of planning and budgeting functions in government has also contributed to the prevalence of an institutional dualism14 and a vast vital area that seems to fall between the concerns of finance and planning agencies has emerged. This area, the size of which is proportionate to the size of the public sector itself, includes internally funded investment operations of enterprises and the financial implications of current operations. Yet another aspect that has not received attention is an evaluation of the financial operations in terms of the ex ante estimates and actual experience. While in a few countries annual data are assembled on the financial performance of enterprises, they do not reveal whether the original intentions have been fulfilled and, in any event, profits in current monetary terms reveal only a partial picture. Since most public enterprises are established after a review of the feasibility studies, it is to be expected that the short-term changes in demand and production and their impact on pricing and rate of return are reviewed and problems identified. Such a review is not, however, undertaken in any country. In India, an effort is made to review them when further expansions are proposed to the enterprise activities. In several countries, annual additional outlays are proposed for the enterprises in a routine manner and in the absence of a review of the previous experience, they strain the financial management capabilities of enterprises further. Moreover, factors of x-efficiency,15 such as organisational slack manifested in different ways, also fail to receive attention. In some countries, the budgetary procedures are found to be time-consuming because of the insistence on producing vast information that is not always fully utilised. There is frequent duplication of effort between the sponsoring ministry and finance and planning agencies. Sponsoring ministries have a number of enterprises that cover various fields but lack specialized staff to review the enterprise budgets. These factors have affected the approaches of government and enterprises. The ability of a central agency or its staff to judge the quality and practicability of thousands of plans covering complex areas is severely

13. For a recent exposition of the diversity between ownership and single corporate presence, see J.B.Heath, Management in Nationalised Industries. Nationalised Industries’ Chairman’s Group, No. 2, London, 1980. 14. This dualism refers to the distinctive approaches that have come to be respectively identified with finance and planning agencies.

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limited in terms of knowledge of local environment, administrative efficiency, or the economics of specific proposals. Similar problems are faced in the accounting field. The details or specific requirements are not always guided by the ministries of finance. Information systems tend in the circumstances, to be general and structurally incapable of reflecting the nuances of each enterprise; depreciation practices differ and, in an inflationary context, accounts do not reveal the true picture. 4. Budgetary Issues The receipts side of the government budget includes taxes paid, interest payments on loans, repayment of loans, dividends on equity, and contributions by enterprises. On the expenditure side of the budget the transactions are more numerous and include proceeds of earmarked revenues (which may be shown as reductions in revenue or, retaining the gross basis of the budget, as transfers in expenditure), grants or subsidies, investment in equity, loans on-lent, and other loans including short-term advances by government. Although provided under different heads in the budget, the sum total of these parts reflect the concerns, priorities, and strategies of government. These are further supplemented by the arrangements in regard to borrowing from internal and external sources. The use of these instruments and the determination of the amounts to be given or received has, over the years, given rise to important issues some of which are considered here from the point of view of the budgetary process. In considering the issues two points need restatement to provide a perspective. First, the objectives of public enterprises are varied and they are expected to maximise profits as well as social welfare. Fulfilment of these objectives could occasionally involve one instrument being loaded with more than one purpose. Although it is generally desirable to choose one instrument for one purpose, it is an aspect of public policy that it is not always feasible to do so, and a trade-off needs to be made among the objectives at various; stages. These trade-offs should as far as possible be explicit, clear, and should have a degree of stability. Absence of these features cannot admittedly be compensated by virtuous utilisation of the instruments. Second, the objectives of government aim at allocative efficiency between the public and private sectors, and among the enterprises and departments within government. The achievement of technical efficiency or minimising the cost of services is, however, a matter for public enterprise. This function is appropriately supplemented by government through a

15. The x-efficiency theory proposed by Liebenstein refers to firms as individuals and examines the factors contributing to gaps between decisions and actual implementation. See Harvey Leibenstein, General X-Efficiency Theory of Economic Development, Oxford University Press, London, 1978.

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mix of market tests and performance measurements. Such measures in turn form the basis for the allocation of government funds. (a) Transfers to Government The magnitude of enterprise contribution to government budget is determined by the exogenous factor of rate of growth in revenues mandated by government and by the endogenous factor of enterprise performance. The former is decided as a part of the plan exercise and within that framework the levels of resources to be generated by public enterprises are estimated. These estimates, experience indicates, are made at a highly aggregate level. The determination of the annual budget requires however that the magnitudes be specified, formally or informally, to the enterprises. In India, the contributions from enterprises, other than departmental,, are indicated informally, while in Sri Lanka, they are specified formally for each enterprise. Recent experience suggests that some practical problems are experienced in specifying enterprise contributions. For example, not all governments are empowered to receive contributions from enterprises. In Sri Lanka, specific legislation had to be enacted in the early 1970s to permit the enterprises to make contributions. In Korea, no dividend is payable to government under the legislation and surpluses are retained by enterprises for further investment. Elsewhere, the determination of contributions became a major problem as the budget review within government did not cover the revenue budget of enterprises. In some countries, (for example, Somalia), the exercise lacked realism and enterprises had to borrow funds to pay the contributions.16 In monocultured economies, reliance was placed on a few enterprises as the major contributors of government revenue. As the cyclical factors influencing the enterprise performance were not taken into account, contributions to the budget suffered and in the absence of short-term adjustments in expenditures, led to inflationary financing. These aspects, while not universal in incidence, underscore the need for a careful and continuous review of the working of the enterprises and to a government budgetary process that recognises the complementary fiscal agent role of enterprises. (b) Transfers from Government Traditionally, resource allocation within government is viewed from three angles. The normative theory of resource allocation views government budgeting as an optimising process that aims at maximising social welfare and the community utility function. Another school views resource allocation to be determined by external variables such as the size of the population and its ability to pay. The costs of services have also a decisive role in the determination of the aggregate of expenditure. The third school views budgeting from a behavioural point and

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considers that budgets are the result of several bureaucratic factors at work. The applicability of these approaches, excepting the second one, is limited in the context of enterprise budgeting. Enterprises budget within the parameters of their estimated demand and production capacity, and it is only when they are set up initially or when they seek expansion that cannot entirely be financed from internal resources or when such investment decisions have to be co-ordinated with other elements of the public sector, that they need to be approved by government. The determination of the overall levels of resources to be transferred to public enterprises is done with reference to the framework of sociopolitical approaches of government and the role assigned for enterprises in development plans. Goals specified in the plans are subject to change and the needed annual correctives are provided through the budget. The magnitude of resources transferred annually to enterprises is based on the expansion envisaged and the price and capacity utilisation policies expected to be followed by enterprises. If, for example, price restraint is to be adopted, more resources may need to be transferred to enterprises. The transfers from government budgets are influenced by financial and economic constraints. In countries that are strong financially (some OPEC countries, for example), budget transfers are likely to be more influenced by economic or stabilisation constraints. While a neat classification of these constraints is somewhat difficult, political, administrative, economic, and financial limitations are recognised in the budgetary process and all these factors influence the size of the annual transfers. Three major issues are encountered in the transfer of funds to enterprises and these relate to (a) the purpose of transfer and its place in the national priorities, (b) the form of the transfer, and (c) the conditionality of transfers. The first aspect, which is a complex task, is assumed here, for analytical convenience, as being resolved in the development plans or other machinery and, as noted earlier, the initial and subsequent capital injections are subjected to degrees of investment appraisal. Our concern, at this stage, is with the second and third aspects. The form of transfer may be a capital grant or a loan or equity participation in the initial stage, or a subsidy during the operational phase. The application of a specific nomenclature may not however fully denote the implications or the actual nature of the transaction. For example, in several countries, initial capital may be made available in the form of an advance. In Italy, enterprises derive their capital from endowments (dotazioni) on which no interest is paid and repayment is made only when net profits are made by enterprises. In practice, however, repayments rarely occur and the endowments become grants. In Korea, the initial capital and annual injections of capital for meeting losses are made in the form of equity which in effect are not different from a capital grant as no

16. Similar problems are experienced in the identification and utilisation of internal resources of enterprises. This frequently contributed to investment in low priority areas.

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dividend is payable. Grants imply that they are provided to the enterprises without cost and as such are unlikely to induce a strong financial discipline. Government equity participation brings with it some managerial participation while a loan is a mere financial transaction. Since public enterprises are anyway subjected to government controls, there is no significant advantage in acquiring additional management rights. The issue of the choice between equity and loan is not to be seen in terms of managerial involvement by government but is to be analysed in terms of their impact on the enterprise and government finances. From the economic point of view, both are resources with a price tag and have to earn their return in order to be allocatively efficient. From the government’s point of view, equity has an uncertainty about the yield and the period over which it will be earned. Government loans, to the extent financed from borrowing, may be properly serviced if re-lent to enterprises. From the enterprise point of view, equity is a more flexible instrument while loans add to the costs, that in turn affect pricing and the competitive status of the firm.17 These aspects reflect the inherent conflicts that do not lend themselves to easy solutions. The enterprises hold that fixed interest charged by government on loans can be onerous, and that capitalisation may lead to severe problems. The government’s point of view is that there are limits to the tax-payer meeting the expenses of the enterprises and that easy finance would imply a built-in easy option for enterprises and that in any event interest, being an expense, is tax exempt and therefore does not burden the enterprise. The practical problems relate to the ratios between equity and loans and the conditions of loans. Although some ratios are established, notably in the Commonwealth countries, in some countries loans far outweigh the equity funds. It would also appear that in some cases, debt-equity ratios are fixed in too rigid a manner and are not varied with the changing requirements of industries. Shortand longer-term loans are advanced without prior determination of their amortisation terms; and interest rates, contrary to expectations, are substantially lower than the market rates, and in several cases, when confronted with the possibility of default, loans are converted into equity. Partly to mitigate the adverse influences of these factors on allocative efficiency and partly with a view to inducing market-test-based financial discipline, it is frequently suggested that the enterprises should depend on the commercial banking system.18 This approach, as noted earlier, has some practical limitations. A major issue of transfer relates to the quantification of the subsidy. Such a determination is rendered possible only when there is a clear indication of the nature and the conditions in which the subsidy is to be operational. In most

17. For a more detailed discussion of these aspects, see “Capital Structure of Public Enterprises in Developing Countries” in Financing of Public Enterprises in Developing Countries: Coordination, Forms and Sources, United Nations (New York), 1976, pp. 33– 63.

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countries, subsidies are given for three major purposes: (a) to compensate for non-commercial objectives specified by governments, (b) for price restraint in regard to essential and strategic items of consumption, and (c) for financing operational losses through ex-post transfers. Compensation for the pursuit of non-commercial objectives is a wellestablished practice and is mostly found in the transportation sector for plying on non-economic routes, for transport of school-children, for haulage of freight to backward regions, etc. During the last decade, compensation for observing price restraint, particularly during an inflationary period, has become a common occurrence. In some countries, in addition to the planned subsidies of the preceding type, operational losses are fully covered by current transfers from government budget. The determination of the magnitude of the first two types is undertaken through three broad techniques— recoupment of the actual expenditure of enterprises, adjustment in the rate of return and specific compensation. The first approach has the inherent disadvantage of the government being at the receiving end and the enterprises for their part do not have any major inducement to pursue cost reductions. The second method, although practised in some arbitrary form, is possible only when there is a determination of the presumptive rate of return. The third approach, which has several advantages, is adopted infrequently and to minor specific purposes such as cost differentials (for example, purchase of ships from enterprises) and is intended to promote an activity even when its financing is higher than comparable products. A necessary consequence of the first approach is that subsidies tend to be determined, not in advance, but after the event. Even where precise indications are given (as in the case of fertilizer subsidy in India and Korea), the eventual magnitudes would not appear to lend themselves to precise controls as prices of inputs and world prices vary from the estimates. More significantly, the actual eventual subsidy is determined by the demand for the product which itself is somewhat difficult of forecast precisely. In some countries, subsidies are budgeted initially on a notional basis with a “token” provision and are revised later on the actual basis. To the extent that operational losses and other subsidies are financed on an ex post-facto basis by transfers from government budget, there is little compulsion for enterprises to improve their efficiency. In an inflationary context and where such transfers are of a sizeable magnitude, government budgetary outcomes tend, as a consequence, to be vastly different from estimates.

18. For a recent discussion of these aspects, see John Redwood, “Government and Nationalised Industries,” and “The Future of Nationalised Industries,” and Michael Lipton’s “What is Nationalisation For?” in Lloyds Bank Review, April 1976, October 1976, and July 1976, respectively. It is to be noted that market mechanism may not fully serve the stated goals of the society. For example, left entirely to the market mechanism, enterprises may show a proclivity to oversubstitute capital for labour, which, while rewarding the enterprise, may hurt the growth of employment in the economy.

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Transfers concerning the provision of capital grant, working capital and subsidies, often have conditionality. The provision of additional capital is frequently contingent on a specified share of self-financing19 and working capital and subsidies are similarly governed by some conditions. In practice, the resources of enterprises are fungible and the use of capital transfers for current purposes is quite normal. This freedom and lack of continuing ex post review on the part of the government, endows enterprises with greater operational flexibility than is normally believed. (c) Borrowing An important area where the budgetary relationship generates leading policy and institutional issues relates to borrowing by enterprises. During recent years two schools of thought have emerged—those that advocate freedom to borrow internally and externally, and those that support an integrated or co-ordinated borrowing programme for government and enterprises. The former school holds that (a) there is a need for diversification of sources of borrowing, (b) that the purposes for which enterprises borrow are different from those of government, and (c) that it is healthy for enterprises to borrow on their own to keep their standing in the market. Such independent borrowing, it is suggested, would reduce dependence on government budget, induce a better financial discipline, and might be helpful in preventing acceleration of the yields of gilt-edged securities. The second school’s opposition to this approach has ideological and practical underpinnings. Issue of a debenture by an enterprise would imply payment of a return to the holders and such payments, it is contended, are contrary to the purpose for which government funds have been utilised for establishing the enterprise in the first place. This of course is the ideological part of the argument. From a more pragmatic point, it is argued that centralised government borrowing both for government and enterprises has a number of advantages: (a) from an economic policy point of view, such centralised borrowing is easier to control in terms of timing and for assessing its impact, (b) that it could be costlier for enterprises to borrow independently as their borrowings are often for shorter periods than that of the government and the yields have to be higher, (c) that as these borrowings carry an explicit or implicit

19. Self-financing is dependent on the past performance of enterprises. Investment is forward-looking. An appropriate coordination of these two aspects would require detailed review of the revenue budgets of enterprises and their priorities. In practice, however, this has not been well-served owing to inadequate attention to the revenue budgets. Investment proposals are examined in many countries from the point of view of economic feasibility of the projects, and the role assigned to them in development, plans. Specific capabilities of enterprises to raise resources are assumed rather than being examined in terms of pricing and related policies.

38 A.PREMCHAND

government guarantee, they would not attract new risk capital other than those already destined for the public sector, (d) that if the enterprises borrowed in the form of stock issues, it would complicate the management of the gilt-edged market particularly when the government budget is to be financed by non-bank borrowing, and (e) that centralised borrowing offers a facility to enterprises in that they can make a premature payment to government, which they could not if they borrowed from the public in the form of stock or from a bank except with a penalty.20 In regard to foreign borrowing, public enterprises now borrow almost a quarter of the annual Euro dollar loans, and it is suggested that centralised borrowing either by government or by its designated financial institutions would facilitate a better appraisal of the market opportunities and servicing capacities. Actual practices, however, vary and indicate that this is an area where more concerned efforts are indicated. In the United Kingdom, borrowing is done centrally and controls are exercised in the form of limits on external finance. In France, enterprises borrow in domestic and foreign markets but always with the approval of the Ministry of Finance and National Economy. In India and Korea, enterprises cannot issue stock to the public and all long-term capital is provided by government or its financial institutions. In respect of foreign borrowing, similar restrictions apply and approvals of government are needed. In Portugal, enterprises can borrow externally after informing the Central Bank but without any specific approval from the Ministry of Finance. In some cases, controls on foreign borrowing would appear to be lax. For example, in Ivory Coast, although regulations require consultation, the Caisse Autonome d’Amortissement had not been effective in preventing borrowing from abroad. In some countries, finance ministries became aware of foreign borrowing only after the event and arrangements had to be made for the servicing of debt. 5. Problems and Perspectives Several of the problem areas and shortcomings have been considered above. Some of the themes are institutional, while some relate to the approaches to decisionmaking. On the institutional side, it would appear that the coverage of enterprises in the budgetary process is limited to the, major ones or to those that are financially dependent on government. The budgetary procedures are routinised and the emphasis during budget review differs widely. Part of the problem is due to the fact that budget organisations have not adequately been strengthened to deal with the complex range of issues of enterprises. The budgets of government and enterprises are limited to one-year span and no corporate plans linked with government medium-term planning are generally available.

20. See HMSO, The Nationalised Industries, Cmnd 7131. London, 1978, for more arguments of this type.

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The approaches to budgetary decisionmaking reveal that dualism is extensive, that there is no guidance to enterprises on financial aspects, and that the problem of inflation had not been met through comprehensive industrial strategies. The enterprises, for their part, frequently complain about the lack of stability, about the choice of financial instruments that tend to affect the enterprises’ finances adversely, about lack of freedom in borrowing and above all against excessive programme controls that come with each additional injection of capital. In view of the immense importance of enterprise finances to the overall government finances, it is essential that the budgetary process is strengthened to serve policy formulation purposes. The central policymaker should know the implications of enterprise finances for the national fiscal policy. Government budget is the final point where the financial burdens of enterprises are met and prudent budgeting requires that these be identified, analysed, and policy responses evolved. Specifically, in the context of efforts at stabilising the economy, it becomes even more important to identify them clearly for the success of the anti-inflation strategy would depend on the extent to which resources have been mobilised, investment controlled, and external borrowing contained within manageable limits. The full pursuit of these objectives implies that more attention needs to be paid to five major areas. First, the budget agency of the government requires strengthening in the sponsoring ministry, finance, and planning agencies. A frequent suggestion in this regard is the need for a separate budget agency to deal with enterprises. Such an agency, while having some inherent appeal, has also the potential for problems. As a separate agency, it can develop its own imperatives of power, and may contribute to problems of co-ordination with other parts of the budget and the plan. These are, however, matters of design that can be taken care of and do not in any way reflect structural bottlenecks. The actual pattern of the separate budget agency, its staffing, location, and co-ordination with other wings of government are matters that would vary from one country to another depending on the specific situation. Along with the establishment of the central agency, organised efforts would also need to be made to strengthen the capabilities in sponsoring ministries. Second, the budget agency should offer guidance in the formulation of budgets through an indication of resource ceilings and through specific recognition of inflation. Guidelines are also needed on the determination of surpluses, subsidies, and capacity utilisation. Such guidance should preferably be industry-oriented, if not enterprise-wise, rather than an analysis at an aggregate level. Third, the resource constraints would be better recognised and policymaking would be more stable and less ad hoc only when financial planning is done on a medium-term basis. Strategic planning done purely in financial terms has inherent limitations. Further, it should not be considered as an end in itself or as a panacea but only as a means. The government’s policy purposes would be better served if enterprise finances are included in the medium-term expenditure

40 A.PREMCHAND

forecasts of government. These plans should not be rigid or be overstructured as is practised in some East European countries but should be flexible. As probabilities change each year, expenditures would also need to be re-estimated. In a system of rolling expenditure planning, opportunities would, become available to envisage changes over a medium-term period. Such a procedure has advantages to enterprises as their investment plans, which have long leads and gestation periods, may not lend themselves to short-term reductions except at considerable cost. Medium-term expenditure planning of government and the enterprise’s strategic planning should go together and be integrated; such a process would have the inherent advantages of emphasising the process of planning and gearing the plan to events. More important, the plans of government and enterprises would be congruent and facilitate the smooth functioning of the expenditure process. The strategic plans of enterprises should also include the preparation of contingent plans for initiating or abandoning projects. It should be added that the strategies cannot be so comprehensive as to envisage every situation or develop capabilities for full forecasting. What is needed is a selective approach to bottlenecks. To reduce the uncertainty of resource availability to enterprises, they should develop variant growth forecasts and variant policy assumptions that would enable formulation of different scenarios. Recent experiences in budgeting in the governments of France, Canada and the United States suggest that different assumptions of resource availability lead to better preparedness and stability in policies. It is to be recognised, however, that the inclusion of enterprise budgets in government expenditure plans21 is viewed with concern in certain quarters. For example, the NEDO inquiry into the Nationalised Industries in the United Kingdom (1976) took the view that such inclusion in the national aggregates is questionable as enterprise finances constitute a different category. Exclusion would, however, imply a total negation of the fiscal role of enterprises which requires its consideration within the parameters of government budget policy. It could also be argued that preparation and publication of such forecasts could induce an element of rigidity, and the enterprises might feel that the outlays shown in medium-term expenditure plans as the “floors” of future resource requirements. While such approaches are not totally avoidable in the short term, it is to be hoped that with experience and strengthening of the budgetary mechanisms in government and in enterprises, a better dialogue between government and enterprises would ensue. Fourth, the above approaches may imply a certain degree of centralisation, which may be debatable in a context where it is held to be, among others, responsible for the lackluster performance of enterprises. In considering centralisation of controls, a distinction should be drawn between co-ordinated central policymaking on the one hand, and well controlled “command systems” solutions imposed from the top. Admittedly, the latter approach has many limitations. The economic forces in the current context imply a centripetal decisionmaking, as individual units working on their own could work at crosspurposes and defeat the overall fiscal goals. It is important that such central

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policymaking is done in concert with units rather than being devolved. The rolling expenditure planning of the type described above permits the forging of a concerted way. Some hold the view that financial discipline in enterprises can only be enforced through competition in the market. While this view has some appeal, it is in part based on the neo-classical concept of the firm which is not a perfect parallel to public enterprises. In public enterprises and in the area of budgetary relationships with government, the key factor lies in internalising the market forces for decisionmaking. But such internalisation, if done centrally, could contribute to greater tensions and lack of trust between enterprises and government. This can only be mitigated through concentration. At the same time, it has to be recognised that the enormous growth in controls during recent years, which largely consisted of government interventions as substitutes for clarity in policies, has also ignored the penalties they had on enterprises. Control, which has become endemic, needs to be balanced by clarity in policies and provision of appropriate incentives. Incentives have so far only emphasised the worker productivity at the factory level. Similar incentives introduced at the management level and in terms of budgetary allocations could effectively minimise costs and x-inefficiency factors. Greater attention would need to be paid to such incentives in the future. Finally, it is appropriate that ex post evaluation of enterprises is undertaken, not in the financial sense of effectiveness audit, but in terms of the gaps between original intentions stated in the feasibility reports, and the actual experience with particular emphasis on the impact of short-term adjustments on costs, pricing, and capacity utilisation of enterprises.

21. The plea here is for inclusion of enterprise plans in detailed rolling expenditure plans of government and not in its budget.

3 Target-setting and Performance Assessment in Public Enterprises DAVID CHAMBERS

1. Scope for Empirical Research In the introductory essay, Maurice Garner refers to four factors which appear to be decisive in their influence upon the relationships of governments with their public enterprises. One of these which he lables “the technical factor” covers specific activities of operating managements: the appraisal of options, the balancing of objectives, the control of performance. These activities have been the subject of a programme of research on which we have been engaged at the London Business School. The present essay gives an overview of this work, and refers to other papers in which we have reported in more detail the individual parts of the programme. We undertook studies in four of the U.K.’s nationalised industries: Electricity, Gas, Rail and Coal. We were given very generous access to internal records and working papers in these industries, and we used this as an opportunity for developing and testing propositions about the management of public enterprises which might have further application beyond these specific industries and outside the U.K.1 Our topic is one which a business school ought to be well-placed to tackle. We chose to study certain key management activities inside these public enterprises, and the circumstances in which these activities have flourished or have failed to take root. From this base in the direct observation of management practice inside the industries, we then drew inferences about the wider framework of relationships with central government. What must be the character and mode of these relationships, for there to be a feasible management task, that is to say, an attainable set of operational goals for those charged with managing the industry?

1. This essay is written by David Chambers but the research it describes is the joint work of a team consisting of: D.J.Chambers, T.C.Evans, S.K.Lioukas and S.N.Woodward. A parallel essay which draws on further aspects of this research is: T.C.Evans “Dilemmas in Corporate Planning”, I.C.P.E., Ljubljana, 1981.

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This seemed to us to be an important direction from which to look at public enterprises, because we had already come across examples where the sum total of requirements, targets and constraints imposed on some management group would, if taken literally, have posed a management problem to which there could be no possible solution. Maurice Garner’s example of an Agricultural Marketing Corporation which was expected to be all things to all men must strike a responsive chord in many of those who have worked in public enterprises. There has been a fashion among political scientists in recent years to debate the hypothesis that with the proliferation of government responsibilities and of the consequent governmental bureaucracies, conditions have been created in which in some respects our nations are ‘ungovernable’. Looking at the recent history of public enterprises in the U.K. we wondered if here there might not be a symmetrical hypothesis, that institutions have been set up with conditions, terms of reference and procedures which render them in certain respects ‘unmanageable’. In our case the question was perhaps asked tongue-in-check. It serves however to flag a most important practical issue. If the conditions, terms of reference and procedures pertaining to a particular enterprise do indeed define a task which in some respects is unmanageable, then we ought to be able to turn the argument round in order to identify and challenge the offending components in these conditions, terms of reference and procedures. For detailed study we chose three inter-linked management activities, each of which would be acknowledged generally as being critical to any working relationship between government and nationalised industry: target-setting, the appraisal of performance, corporate planning. We proceeded to study these activities as they are conducted within the several industries. We chose cases where there seemed to have been a harmonious and effective process of targetsetting and performance appraisal. We used these to identify supporting conditions which would seem to be required if a particular process of performance appraisal is to carry credibility and authority. We then asked whether these conditions were present in the prevailing relationships between U.K. Government and particular nationalised industries: had the necessary framework been established within which there could be a credible external appraisal of this industry’s performance? A preliminary indication of our conclusions will give the reader advance warning of the destination to which the individual studies are leading, and will perhaps therefore help him or her to appraise the studies with a more critical eye as the journey proceeds. Our conclusions will bear on the related topics of corporate planning and financial targets. Corporate planning. We argue that the interesting question to ask about corporate planning is not: should a public enterprise adopt it? but rather: what specific attributes must the corporate planning process possess, in order to be capable of creating a plan of action which will carry the commitment of all its participants? Like Maurice Garner we see “some form of corporate planning” as offering a way forward for building better working relationships between public

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enterprises and their government. Like him we believe that blanket endorsements of ‘corporate planning’ serve no purpose, since the term means so many different things to different people. Politicians and officials in the U.K. have displayed a rare degree of unanimity in advocating corporate planning for the nationalised industries but remarkable differences of opinion emerge when they are asked who actually is doing corporate planning and who is not. We attempt therefore to spell out what form corporate planning will have to take if it is to be a main channel for good working relationships between government and a nationalised industry; and we conclude by proposing certain key attributes which would seem to be required of such corporate planning. Financial targets (specifically a minimum return-on-capital-employed for each nationalised industry). In place of the familiar debating topic: should nationalised industries have specified financial targets? we propose the substitution of questions such as: where did this industry’s financial target come from? Was it arrived at through a process of negotiation in which all the main stakeholders took part, and does it carry their commitment? Did the negotiations cover also the neighbouring targets relating to pricing and the quality of service? We here identify conditions under which a financial target constitutes one of the important elements in the relationship between a nationalised industry and government, and other conditions under which its role is no more than ornamental. 2. The Individual Research Studies This section describes five of the investigations carried out in the course of the research programme. References are given at the end of each sub-section to the publications in which these studies, are presented in full. (i) Planning and Budgeting in the Electricity Supply Industry In two linked studies, we present a statistical analysis of the capital budgeting record in the electricity supply industry for the period 1960–78. We were fortunate in being allowed access to data on budgetary submissions as well as on the targets finally approved, for certain major budget centres. This provided direct evidence on the process of compromise and adjustment which leads up to final budgetary commitments. The evidence shows that these targets are set by means of a negotiating process whose nature varies with the category of expenditure. The results distinguish between two distinct processes of budgetary decision making. In one system, targets take the form of mutual commitments between central (or higher) management and sub-units (or the periphery), expressed as limits to the subunits’ permitted expenditure. Successive annual allocations are incrementally

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linked, and are determined independently of the expenditure profiles of the underlying projects and of the patterns of work-load which the projects imply. A second system deals with the allocation of resources in terms of specific projects and the projects are often subject to technical and economic review at many levels of the management hierarchy. The evidence shows that allocations in the latter system respond to changed expectations concerning future levels of activity and that while financial limits constitute a formal control, they have often been supplemented or over-ridden. In each system, the targets are set through negotiation between different levels of management each possessing its distinct body of knowledge concerning constraints, problems and opportunities. In particular there are limits to the volume of information which can usefully be scanned at top levels of the management hierarchy, as much previous research has demonstrated. The two studies hypothesise that the routing of a particular category of expenditure through one or other of the budgetary negotiating processes is to be explained as the attempt to make best use of the management’s finite analytical capacities; i.e. that in this sense it is “intendedly optimal”.2 (ii) Management of a Technological Change in the Gas Industry This study first identifies aspects of management performance in a nationalised industry which are detected by neither of the sets of constructs most commonly employed in looking at these industries from the outside: financial measure using a derived concept of “profit”, or detailed estimates of individual factor productivities. The paper proposes a way of appraising performance directly in terms of the actual problem-solving strategies used by management. It illustrates this through an analysis of the problem-solving activities of managers in part of the gas industry at the time of its transition, circa 1970, from manufacture and sale of a relatively expensive fuel (town gas) to distribution and sale of a relatively cheap one (natural gas, from the North Sea). For example in opening up a new market in sales to bulk users, management needed to estimate sales without detailed estimates of future prices; it was difficult for them to establish minimum prices without knowing where the supply mains would be; and the best position for the mains depended in part on the location of potential demand, and would in turn affect demand. The study demonstrates that the set of interconnected problems which management faced can be bounded and simplified with the help of models developed in the economics literature, but that the “problem” which remains belongs to a class which no one has yet been able to formulate analytically.

2. The studies are given in full in references (6), (7).

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Hence, the managers are not to be seen as having implemented better or worse approximations to a theoretically-optimal solution. On the contrary, considered simply as problem-solvers, they faced the task of finding feasible solutions to a problem which is multivariate, stochastic and incompletely specified. It would be impractical to appraise their performance in this episode through either financial outcomes or factor productivities. No benchmark of ideal or optimal outcome is available. The paper therefore turns from the evaluation of outputs to the direct assessment of the problem-solving strategies employed by management. This is easier, since a literature on problem-solving exists from which criteria may be derived for identifying better or worse problem-solving strategies. The paper uses very simple criteria: quality of problem representation (or “representation of the task environment”) and quality of the search processes employed; and suggests how these might be further elaborated. It illustrates the use of these criteria by making a direct evaluation of managers’ performance in solving a series of connected problems over this period.3 (iii) An Investment Project in Rail: Internal Planning and Targetsetting This paper reviews two complementary approaches to performance assessment in complex organisations, as covered in the literature, one concerned with outputs and the other with process; and identifies the methods actually employed in the particular setting of the planning of a large project in British Rail. The paper highlights the special difficulties of appraising achievement where (i) there are potential conflicts between project-related goals and the goals of the functional groups in the organisation, and (ii) new tasks mean that the target-setting activity is a key preoccupation for management. It identifies a list of criteria used in the process of performance appraisal in the chosen case, together with some important pre-conditions: a well-developed characterisation of the task environment against which performance is to be assessed, and the existence of a well-informed peer group. It uses the example to specify boundaries to the domain over which familiar methods of performance appraisal can usefully apply.4 (iv) Government-Nationalised Industry Linkages (a) The Government Role in Rail Planning. The study chronicles the attempts to establish an acceptable set of arrangements for resource management in the

3. This study is presented in reference (2).

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specific setting of British Rail (B. R.). It considers whether there has been a differentiation in function between industry board and supervisory Government Department corresponding to the often cited model in which ministers approve explicit corporate objectives and strategic choices but avoid detailed monitoring and intervention. The paper reviews the attempts by government and the industry, after 1968, to cascade resource management decisions in the manner assumed in the model: and notably, government’s attempt to settle together with B.R. management the key question of the future scale of railway network. Analysis of the failure to resolve this demonstrates that “strategic guidance” was not attempted in the sense of (i) setting particular guidelines in advance. An attempt was made at giving guidance in the sense of (ii) establishing new positions through a long-drawn-out process of negotiating with the main stakeholders. The paper uses evidence taken partly from interviews with those engaged in planning, and partly from documentary material. It shows that Government did not succeed in devising a means for giving B.R. adequate guidance even in sense (ii), where strategic objectives are to be reached through negotiation. Failing to find a way to exercise arms’ length strategic guidance, Government fell back on the detailed interventions which according to the model it should have been able to avoid. The paper places the specific issue of B.R.’s resource management in the wider context of building, in any organisation, a system of commitments and relationships within which agreed objectives can be determined and performance assessed with measures which command acceptance. It identifies alternative metrics around which, in this setting, assessment of achievement could be built.5 (b) The Government Role in Monitoring Electricity Investment. This study is concerned with the forecasts of the dates when new plant will come into commission in the Central Electricity Generating Board (CEGB). This is an instance where sponsoring Government Department and industry board work together to reach an agreed view of the future. This view might then be passed down in turn to the industry’s managers, in the form of guidelines for their operating and investment decisions. Whether or not it is so conveyed is a question for empirical investigation. The dates at which new plant will become available constitute a very important parameter for management’s operating plans in this industry, and the interval between investment orders and deliveries has been one of the industry’s major fields of uncertainty. The paper uses the industry’s annual “Capital Investment Memoranda” (C.I.M.) for its evidence on the view of the future agreed between Government and the industry board. These documents are the vehicle with which the industry secures approval for investment plans and capital allocations; they incorporate the estimates, endorsed by government department and industry board, of the anticipated completion of capital investment projects to enter into commission.

4. This study is presented in reference (8).

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The evidence shows that (i) the anticipation data in the C.I.M. consistently understate the time to completion, but that (ii) the difference is well-explained as a function of information concerning current slippage of aggregate capital expenditure. Managers in the industry have good reason to want accurate projections of the dates at which new plant will become available. They have ready access to the slippage data, and they must therefore be in a position to make significantly better estimates for operating purposes than those contained in the C.I.M. Hence it is not the case that agreed projections are here passed down to the next level of decision makers by Government and industry board in the manner of a cascade. The projections agreed in the C.I.M. appear to belong within a system of formal routine exchanges between industry and government satisfying the rubrics of public accountability. This is distinct from the system of operational decision-making.6 (v) Partly-decentralised Planning within the Electricity Supply Industry Writers dealing with control in large public organisations have often drawn attention to the case where particular units or divisions are themselves the principal repositories of the knowledge with which their own performances is to be judged. The paper refers to separate arguments advanced by Wildavsky and Arrow. This study covers one specific process of planning and performance assessment which fills a key place within the CEGB’s management of its operations. It is chosen as an example because this process appears to work felicitously and because it depends for its assessments upon local knowledge possessed by the units themselves. The Megawatt Commitment process covers the task of rolling forward a proposed profile of available generating capacity for a period extending from six weeks to about six years ahead. Successive versions of this profile are derived through a continuous negotiation between Regions (via their resource planning departments) and the board (via its operations department). The focus is upon the next two years and the most active negotiations concern the capacity which each Region will be able to make available for power generation week by week through the coming year. The board’s task is to compare these offers, which together constitute the aggregate planned supply, with its projections of week-by-week national demand over the corresponding interval. It aims to achieve consistency in the capacity margins across different periods in the year so that equivalent cover will be

5. The study is presented in reference (1).

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provided against unforeseen events. At each iteration, unsatisfactory periods are traced and Regions are asked to increase availability for these critical periods. A Region’s task, in making its commitment, covers decision on the timing of plant overhauls, the balance between the duration of an overhaul and its cost, allowances for over-run, estimation of breakdown frequency, routine maintenance and the timing of plant retirements. When it moves away from its preferred initial offer in the course of negotiations with the Board, it will make corresponding changes in the supporting plan of overhaul, retirement and routine maintenance. The negotiations culminate each March in a firm offer by each Region giving the “Plant Readily Usable” which it undertakes to provide at each week for the coming year. This in turn defines an envelope for the short-term management of supply to the national grid. The latter process has a horizon of six weeks, it is operated centrally through the national Control Room and it is very clearly differentiated from the MW-Commitment process; it is not considered directly in this paper. The paper’s findings cover specific attributes of the process through which commitment is achieved. It is a negotiation between well-informed peers. The tradeoffs are usually specified in some technical detail: e.g. I will agree to increase my Region’s availability by 1% for this critical period if you will agree to a stated increase in my “spares” budget. Performance is assessed by the informed group in terms of actual deliveries, once the budgetary framework has been agreed. If a Region fails to deliver up to its commitment it imposes a burden on the other Regions which must pick up the load. A Region which is able in emergency to deliver more load than it had offered, earns itself some kudos. A Region’s performance is judged in this process without first having to be mapped on to some financial measure. The system of performance assessment appears to be relatively free from opportunistic or “gaming” behaviour on the part of participants; it appears to have avoided the well-known problems of “moral hazard”. The main management effort in the MW-Commitment process is devoted to establishing the agreed targets. Once the commitments have been established, evaluation of performance against target is relatively straightforward. This unified process of objective-setting and performance appraisal was expressly designed (in the early 70’s) as the means of devolving an important set of responsibilities away from the board. This was not a matter of deciding in principle on a policy of decentralisation. The question

6. The study is presented in reference (5).

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was one of manage-ability: could a devolved system be devised within which this particular set of responsibilities could be discharged effectively? In a wider comment on this example, the paper proposes criteria for judging that a particular unified process of commitmentbuilding and performance appraisal works “felicitously”. In summary these are: that it commands assent, that it is seen to be fair and that it engages the problem-solving capacities of a wide range of individuals in relevant roles through the organisation.7 3. Inferences from the Studies (a) Performance Appraisal What precisely is the “problem” of performance appraisal in public enterprises? What is so special about public enterprises, when it comes to assessing performance? The difficulty of assessing performance has been a refrain repeated in a series of reports and enquiries in the U.K. Each in turn would support NEDO’s conclusion that “there is no effective system for measuring the performance of nationalised industries and assessing managerial competence” (NEDO 1976). Commentators agree in attributing the special difficulty of assessing a public agency’s performance to the fact of its being public. But what are the particular aspects of performance appraisal which prove more problematic in the institutional framework of the public than in that of the private sector? Our studies illustrate two such aspects: the familiar fact that there may be more dimensions to assess in the case of a public agency, and the more elusive fact that means have to be devised, in a public agency, for assigning relative weights to achievement on the different dimensions. Consider for example the electricity supply industry. There the many dimensions of performance include security of supply, plant availability and manning levels, as well as the various basic cost indices. They also include other components of customer service; environmental effects; some degree of consideration for the long-term interests of suppliers. In any period, the industry might be judged to have performed well on some of these dimensions and badly on others. There is however no convention nor any regular operational requirement for which these would need to be collapsed to one single dimension on which “overall” performance might be measured. In contrast, the stock market provides the private sector with a mechanism through which continuous evaluations take place, and here all the dimensions of performance are in the end reflected in a company’s share price or (which comes to the same thing) in the market value of the company’s equity. Stock market

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valuation has the well-documented property that it takes into account a wide spectrum of information on boardroom disagreements and on the state of wage negotiations as well as the financial data in the latest audited accounts. In market jargon it is affected by the “quality” as well as by the expected value of the stream of prospective earnings. Hence in the private sector there is at once a reason and a mechanism for arriving at a single overall measure of a company’s performance. Moreover, the mechanism is external to the firm; the individual firm does not have to devise its own machinery for arriving at agreed relative weights for achievement on the different dimensions.8 This comparison focusses attention on whether a particular public corporation has itself created effective machinery through which agreement on the relative weights may be reached. There are some settings (pace NEDO) where performance assessment in the public sector does work smoothly, i.e. where managerial competence can be confidently assessed on particular dimensions and where well-established negotiating conventions exist through which the participants are able to reach agreement on trade-offs or relative weightings. NEDO eludes a concept which in the public sector is always slippery (appraising the performance of an industry) and one which is sometimes difficult, sometimes easy (assessing managerial competence). This diverts attention from what must be the key discrimination, namely whether or not the particular industry (and its sponsoring Ministry) has been able to create machinery within which the relative valuation of different elements of performance can be agreed. We now turn back to the case studies, in order to build up a composite picture of the “machinery” through which agreement was reached on the relative values of the different elements of performance. In those cases where the task considered was a continuous or rolling one performance appraisal did not stand on its own but was part of a wider system of “target setting and performance appraisal” specific to the task. In all cases, the targets to which commitment was eventually given had been arrived at through a process of negotiation between the interested parties, in the course of which often there were appreciable shifts in position. In no case did a “target” appear as a fixed set of instructions handed down for subdividing and implementation. We were able to identify and characterise different types of process for arriving at commitment, varying with the type of activity or resource to which commitment related. Positions shifted and in some cases targets were revised. Operational targets, which managers

7. The study is presented in reference (3). 8. It is in this sense that “market discipline” would provide valuable information for operating management. “Market discipline” is often taken simply to mean exposure to the risk of bankruptcy; for example “the Government must be concerned…in seeing that these industries, which are not subject to the private sector discipline of the threat of bankruptcy …are efficient” (White Paper, para. 3). But the lack of a public system for continuous external evaluation of the corporation is at least as significant a difference, at the level of operating management, as the absence of an ultimate sanction of bankruptcy.

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accepted as the standard against which their subsequent performance would be assessed, were set in negotiation among identified participants in the course of which the participants assigned responsibilities and undertook mutual commitments. In the cases where the task was novel or where it was a once-for-all project (such as opening up new industrial markets for gas), key aspects of performance could be identified which would not have been captured by summary indicators of financial outcome or factor productivity. No clear benchmarks existed here for ideal or optimal performance. For the purposes of internal planning and control there was heavy reliance on judgments of a well-informed peer group. From outside the organisation it was possible to assess in broad terms the quality of problem solving tactics employed by management in these cases. A further noteworthy characteristic of all the cases considered is that invariably, performance was appraised in more than one dimension. In no case had management collapsed a more complex description of performance down to a single financial measure or a single input/output ratio. These characteristics of performance appraisal may be drawn together in the general statement that where a recognised system of appraisal is associated with a particular task, two supporting conditions are found: (i) the targets carry the commitment of the participants (the routes by which this is reached are considered below); (ii) those charged with judging the performance against target take account of various special factors which were not explicitly provided for in the commitment, and there is therefore the further condition that participants accept the evaluating group as well informed and fair. Together these correspond closely to the conditions found in more formal settings where some contractual agreement relates to the subsequent performance of specified activities. Typically, the commitment referred to in (i) will include some conditional provision to cater for specific eventualities, i.e. the targets will be flexed with respect to a few major parameters identified in advance. But the commitment will be incomplete in the sense that realistically, it cannot make explicit provision for every eventuality. The practical impossibility of specifying exhaustive conditional commitments has the further implication that opportu nities are legion for bluffing, evasion and selective reporting in the course of the actual performance. That is why the complementary condition (ii) is also required. Incompleteness in commitments means that performance evaluation must also rely upon appraisers who are seen to be (sufficiently) capable and trustworthy. This closely parallels the argument which Williamson (Williamson 1975) makes in his discussion of advantages associated with having durable management hierarchies. The condition also puts teeth into the otherwise vacuous exhortation

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that there should be a greater degree of trust between Nationalised Industries and external evaluators of their performance, notably sponsoring Ministries. Much of the literature on appraisal of public agencies’ performance has been directed at the case where condition (ii) is only partly met, i.e. where the members of the appraising group are not closely informed about the operations they are charged to evaluate. For example, Wildavsky and Lindblom have identified many instances where there is a disparity of information between appraisers and appraised. In the U.S. setting Wildavsky suggests that there is sufficient overlap between the fields of operation of different government agencies for the Bureau of the Budget to be able to use data produced by one to check the performance of its neighbour (Wildavsky 1964, 1975). In other cases, performance appraisal will typically rely on the cobbling together of a set of measures which may be local, partial or temporary. Lindblom has made it his business to collect an extensive set of examples of this kind (Lindblom 1977). In all of these situations the review of performance is opportunistic, relying on suitable combinations of circumstance, and critics have argued that such methods cannot be a sufficient basis for systematic appraisals. As Arrow wrote in the early 1960’s, “this theory of the invisible hand in government, though a significant contribution, is as limited a view as the earlier theory of the allknowing Budget Bureau” (Arrow, 1964). Because of this preoccupation in the published literature, there is a need to emphasise that the conditions (i) and (ii) for credible appraisal of an agency’s performance go beyond the question of availability of information. Appraisal of performance is, admittedly, very difficult where information is scrappy, and there is much to learn from studying the ad hoc methods devised in different settings. But appraisal of performance is also very difficult in cases where the planning process has not generated targets which carry the commitment both of appraiser and appraised. In our view this is a category of “planning failure” no less significant than failure through lack of information, and the problems it poses for construction of ad hoc measures of performance are perhaps even more daunting. We have identified certain well-behaved systems of target-setting-andperformance-appraisal within the public sector. But such systems do not spring up of their own accord, they have to be designed. Devising them and getting them to work is a substantial management achievement which in the management field perhaps corresponds to more widely known examples of successful design in engineering and the applied sciences. Such systems exist; they do not however exist in all those settings where performance appraisals are carried out, and we believe that much confused debate can be traced to a failure to distinguish between those acts of performance appraisal which are grounded in credible supporting systems for target-setting and those which are not. These studies help us to draw the distinction between “phantom” appraisals of performance and “substantial” appraisals, according to whether or not a supporting set of

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arrangements (a target-setting-and-performance-appraisal system) existed for that task. In this section we have focussed on one key difficulty associated with performance appraisal in the public sector, namely that the machinery for reaching agreed relative valuations of performance in different dimensions is not given but has to be constructed. We have proposed necessary attributes for this machinery, in the form of the “supporting conditions” (i) and (ii), in order for there to be a credible process of performance assessment in these public sector settings. (b) Corporate Planning To what extent does the target-setting and performance appraisal activity, exhibited in these examples, correspond to “corporate planning” as that term is used in official U.K. documents? The Report of the Select Committee on Nationalised Industries on “Capital Investment Procedure” gave a fairly detailed account of the central role which corporate planning was expected to play (SCNI, 1973), and this was then carried over to the White Paper of 1978 “The Nationalised Industries” which we will use as source document for the official view (Cmnd. 7131, 1978). The Select Committee refers to corporate planning as “a technique”. It was “regarded as something novel” within the nationalised industries in 1973, although it was then “of quite long standing in certain sectors of private industry” (Para 30). Corporate planning in a nationalised industry would lead to submission of a unified “corporate plan” once a year to the sponsoring Ministry. The two “leaders among the nationalised industries” in the introduction of corporate planning (British Gas and British Rail) had produced their first corporate plan in 1971; by implication, “corporate planning” did not happen before that time. In contrast, the electricity supply industry was “behind others in the development of corporate planning”. The White Paper offers the following examples of advantages which are expected to flow from corporate planning (para 43): “harmonisation of planning timetables and procedures” “understanding the industries’ and Government’s medium-term forecasting methods” “joint examination of the implications of alternative…sector strategies for the plans and prospects of the industries” These are activities aimed at improving information and communication, ironing out inconsistencies, promoting understanding. Useful and necessary as such activities may be, they differ in major respects from the activities of targetsetting and performance appraisal reviewed earlier in this essay.

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Establishing an agreed set of targets is a process of negotiation in the course of which each participant incurs responsibilities, and imposes obligations on others. This is a fundamentally different activity from merely communicating and exchanging information.9 Assessing performance involves two sets of participants: the appraised and the appraisers. For an assessment to have substance and credibility the targets against which actual performance is compared will carry the prior commitment of both appraised and appraiser. But in the corporate planning process as expounded in the White Paper, commitment stops short of the sponsoring Ministry; i.e. Government does not take responsibility for the objectives ultimately adopted. Ministries do not treat the submission of a corporate plan as part of a negotiation to reach a coherent and comprehensive set of “agreed targets” to be used in subsequent performance appraisal.

If there is to be a credible system of target-setting-and-performance-appraisal at the level of a whole nationalised industry, this would imply that in some forum, negotiations take place to lead to agreement among the participants over the selection and levels of the industry’s targets. It would be difficult to dispute the proposition that government and the industry itself must be the principal participants in these negotiations. If the purpose is to find arrangements within which there can be a credible process for assessing the industry’s performance, this points to a forum in which the industry and its sponsoring ministry negotiate to reach agreement on the selection and levels of a set of targets. This is much more substantial than the function given to “Corporate Planning” in official U.K. documents. What of the White Paper’s offer to alter the composition of Boards? “Government will continue to appoint part-time non-executive members who are not representative of interest groups but who have the experience to make an important contribution to the running of the industries. The Government has also decided that in some industries a civil servant from the sponsoring department, and in a few cases from the Treasury too, will be appointed to boards. The purpose is to give the department a clearer understanding of the industry, and a better insight into its problems… It will be worthwhile where it means that the Government can be aware at an earlier stage than now of the thinking of the boards and, for their part, the boards can have a clearer view, at a formative stage

9. i.e. it conforms to different rules and there are different tests for determining whether it has been successfully executed. The Select Committee offers a much less restrictive definition of “Corporate Planning” in its Glossary (page xliii) than it does in the text. Presenting a single document to the sponsoring ministry is no longer the sine qua non and indeed if it had followed the Glossary definition the Committee would have had to place the Electricity industry some way ahead of British Rail.

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of their planning, of the wider objectives and implications of Government Policy” (White Paper paras 27–8). Considered simply as a contribution to finding arrangements within which nationalised industries’ performance can be assessed, this does not so much address the problem as exhibit it. Our studies demonstrate that the management and control of an industry involves building commitments and assessing performance against commitment. To represent this as no more than a matter of information and communication is to mis-specify an important function, and hence to mis-direct the consequent policy debate. 4. The Step from Diagnosis to Prescription In the opening section we asked: what conditions must be present, for there to be a credible process of external appraisal for a nationalised industry’s performance? Our case studies and the subsequent discussion identify conditions under which performance appraisal within public enterprises can be credible, notably that the evaluation is against targets which carry the commitment of the participants and that the evaluating group is seen to be fair. Our data refer to the actual characteristics of target-setting and performance-appraisal activities within the organisation, and to the calendar of budgeting and corporate planning within which these activities recur. When we move on to consider questions of external appraisal, notably by government, we ask what characteristics a system of external appraisal would need to possess, in order to carry credibility. Here again we emphasise the structure of conventions and procedures which would appear to be needed, for those inside and outside the enterprise to be able to progress to binding agreement on target values on each of a set of dimensions. We also use secondary sources in the form of official reports to demonstrate that ‘corporate planning’, as that term is used in U.K. public debate, falls short of providing the supporting conditions for credible performance appraisal. How is this analysis to be mapped on to the urgent practical questions facing those who manage and control the industries? What signals or methods do they now use which perhaps they ought not to use, and what new signals or methods might they adopt? These questions take us beyond the strict limits of that which can be inferred from the research findings. However, the opinions which we now proceed to state were formed in the course of carrying out these research projects; they differ in major respects from the answers we would have given at the outset of the programme. First, we consider that the corporate planning process could be used as the framework within which there would be a credible routine process of external performance assessment. For this to happen, corporate planning would need to be the medium for reaching agreement in each period between an industry and its sponsoring Ministry on the target values for each of a set of dimensions, i.e. as a negotiating process leading up to binding mutual commitments between the

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participants. The earlier sections of this paper have set out the fairly severe supporting conditions for corporate planning to function in this way. Second, we believe that there is a very important role for the ‘financial objective’ of an industry-specific target return on capital employed. We do not accept that the financial objective can be regarded as a guarantor of efficiency in a particular industry, nor as a mechanical test of optimality in the allocation of national resources. We see it instead as one of the main focussing topics in the negotiation between an industry and its sponsoring Ministry within the framework of the corporate planning process. In Posner’s words “planning for financial targets, talking about financial targets, and agreeing a value for financial targets, is the essence of the dialogue between the public’s agents who run those industries on their behalf and the public’s representatives (Government and Parliament) who are essentially the owners of those industries” (Posner 1981). But here again important conditions must be met, if these are to be substantial rather than phantom targets. The negotiations again need to lead to firm commitments between the participants; the targets need to be flexed with reference to the major economic parameters outside the control of the industry’s managers; there must be a mutually acceptable set of supporting arrangements to take account of unanticipated contingencies. The figure finally arrived at for a particular industry’s financial objective must reflect the myriad of constraints, statutory obligations and feasible opportunities peculiar to that industry, and there is no reason at all to suppose that the same figure should transpire from negotiations in different industries. Third, we would like to see the “External Financial Limit” or Cash Limit handled in broadly the same way that we propose for the financial objective; i.e. that it should be a focussing topic in the overall negotiations over the corporate plan; that it should be flexed and that there should be routine arrangements for handling unforeseen contingencies. For reasons whose analysis would go beyond the scope of this essay, the British have been making very heavy weather of this question of projecting and securing agreement concerning a nationalised industry’s external financing needs. Fourth, we have proposed as one of the supporting conditions for a credible system of target-setting and performance appraisal, that there must be an evaluating group accepted by participants as well-informed and fair. We consider that in practice this must mean the establishment of a permanent, specialised institution with responsibility for auditing the efficiency and effectiveness of public enterprises. Here we endorse the very strong case argued elsewhere by Maurice Garner (Garner 1979). If such an institution existed, it would also become the advocate and guardian for the “supporting conditions” whose key role has been emphasised in this essay. We conclude that a framework of corporate planning, with the focussing topics of financial objective and cash limit, is capable of being used in such a way that external appraisal of a nationalised industry’s performance can be feasible and credible. This conclusion does not hold out the promise of any new

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simplification of the administrative or managerial task: indeed, reforming administrative procedures is usually harder than acquiring new machinery. Instead, the contribution we would hope it makes is in helping direct the inventive capacities of officials and managers towards the main task: namely to develop the necessary structures within the framework of corporate planning, to support appraisals which will be credible and targets which will carry commitment. REFERENCES (a) Reporting Findings from this Programme: 1. M.Beesley & T.C.Evans (1981). “The British Experience: The Case of British Rail” in “State-Owned Enterprise in the Western Economies” ed. R.Vernon & Y.Aharoni, Croom Helm. 2. D.J.Chambers & M.A.Lehmann (1978). “Problem-Solving Performance inside a Publicly-Owned Corporation”. Human Relations, Vol. 31, No. 10,. pp. 863–884. 3. D.J.Chambers and S.K.Lioukas (1981). “The Partly-decentralised Planning of Powerstation Availability”. Working paper, London Business School. 4. T.C.Evans (1982). “Dilemmas in Corporate Planning” (Monograph U.N. International Centre for Public Enterprise, Ljubljana). 5. S.K.Lioukas (1981). “The Order-Delivery Lag in Electricity Investment , Applied Economics, Vol. 13, pp. 35–49. 6. S.K.Lioukas & D.J.Chambers (1981). “The Boundary Between Planning and Incremental Budgeting: Empirical Examination in a Publicly-Owned Corporation”. Management Science, December, pp. 1421–34. 7. S.K.Lioukas & D.J.Chambers (1982). “Areas of Local Discretion in a CentrallyPlanned State Enterprise”. Journal of the Operational Research Society, forthcoming. 8. S.N.Woodward (1982). “Performance in Planning a Large Project” Journal of Management Studies, April. (b) Mentioned in the text: 1. 2. 3. 4. 5. 6. 7. 8.

K.J.Arrow (1964). “Control in Large Organisations”, Management Science, April, pp. 397–408. Cmnd. 7131 (1978). The Nationalised Industries, H.M.S.O. (The “White Paper”). M.R.Garner (1979). “The White Paper on the Nationalised Industries: Some Criticisms”, Public Administration, Spring, pp. 7–20. C.E.Lindblom (1977). Politics and Markets, New York, Basic Books. National Economic Development Office (1976). A Study of U.K. Nationalised Industries, H.M.S.O. M.V.Posner (1981). “Nationalised Industries and Government Controls”, Public Money, September, pp. 11–12. Select Committee on Nationalised Industries, (1973). Capital Investment Procedures, HC65. A.Wildavsky (1964). The Politics of the Budgetary Process, Boston, Little Brown & Co.

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9. 10.

A.Wildavsky (1975). “Budgeting: A Comparative Theory of Budgetary Processes”, Boston, Little Brown & Co. O.Williamson (1975). Markets and Hierarchies, New York, The Free Press.

4 The Privatisation and Denationalisation of Public Enterprises WILLIAM GLADE

1. Introduction Until nearly its last quarter, the twentieth century has been characterised by an almost universal and uninterrupted trend of increasing government involvement in economic processes. From even before the turn of the century, in fact, this policy trend has entailed growing indirect intervention through an expansion and elaboration of the regulatory scope of government—supplemented, perhaps even overshadowed from the great depression onwards, by an active role for public authority in macro-economic management. Alongside these developments, at least three other general trends have also operated to enhance the size and importance of the public sector. For one thing, the social welfare programmes pioneered by Germany almost exactly a century ago have, together with popular education systems, taken root in country after country leading to a considerable growth in the scale and complexity of social administration. For another, on-going processes of industrialisation and: urbanisation have steadily enlarged the range and scale of the assorted public services, both “public” goods and publicly produced private goods, that commonly figure prominently in urban industrial society and the supply of which has accounted for no little portion of rising government expenditures. To these two phenomena may be added, again on a widespread basis, the impact of substantial military outlays of an increasingly capital-intensive and technically complex character. The foregoing stimuli to expansion of the state sector have, it should be noted, cut across both geographical and economic boundaries, ranging, say, from advanced industrial economies like those of Sweden, France, or the United States to countries which, like early twentieth-century Uruguay, were in, at most, a still incipient stage of industrial development when they introduced social welfare schemes and an augmented array of urban amenities. But for reasons adduced by Gerschenkron and Eckstein,1 state-expanding factors have operated with special force in late developing areas, not least in defining an enlarged arena for direct intervention. In such regions, state capitalism or mixed economies have

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flourished as a form of economic organisation in which, using a modified market context, the state becomes the centre of capital accumulation in key branches of industry and replaces private ownership in significant parts of the corporate sector. Direct state participation in industrial, commercial, and financial enterprises came indeed to be a hallmark of policy in much of the third world as the twentieth century moved along. Mexico, after the 1910–17 upheaval, and Turkey, after the fall of the Ottoman Empire, were but two of the early instances of this pervasive new policy style. Thereafter, as governing elites of varied complexions committed themselves to instigate broad socio-economic transformations at an accelerated pace, the entrepreneurial state became a commonplace. Of course, in respect of the Soviet Union, China, and their associated states, the element of ideological preference has figured centrally in the turn towards comprehensive state responsibility in economic matters. Elsewhere (e.g., India, Israel, Venezuela, Western Europe) doctrinal inspiration of a democratic socialist nature or, perhaps less frequently, some variant of fascism has, on occasion, probably reinforced the historical drift into statist approaches to development and macro-economic management.2 But while the embracing of state-led development has differed from country to country, in policy configurations as well as in time of inception, and while there are exceptional cases and discontinuities, it seems reasonable to ascribe the origins of this augmented interventionism, at least outside the Soviet-style economies, more to structural and circumstantial factors than to ideology or political orientation. We do well to keep this aspect in mind as we try to assess the events and trends of more recent years. 2. Policy Shifts in the Past Decade In view of the longevity and prevalence of the foregoing trend, the most notable policy developments of the past ten years or so would seem to be altogether 1. Alexander Gerschenkron, “Economic Backwardness in Historical Perspective,” in B.F.Hoselitz, ed., The Progress of Underdeveloped Areas, Chicago: Univ. of Chicago Press, 1952; Alexander Eckstein, “Individualism and the Role of the State in Economic Growth,” Economic Development and Cultural Change, VI (Jan. 1958), pp. 81–87. The literature on the rise of interventionism or étatism is now vast and ranges from theoretical works such as M.Kalecki’s “Social and Economic Aspects of Intermediate Regimes,” (in Essays on the Economic Growth of the Socialist and Mixed Economy, Cambridge: The University Press, 1972) to historical case studies such as those presented in Hugh G.J.Aitken, The State and Economic Growth, New York: Social Science Research Council, 1959. 2. Arab Socialism, African Socialism, Peronism, and such like would represent still other variants of the doctrinal preference factor, most of which appear to be related to some form of populism and/or bureaucratic authoritarianism.

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anomalous. Privatisation, denationalisation, attempts to impose limitations on public spending and/or taxation, monetarist policy prescriptions, and deregulation are but different guises of programmes with a common aim: that of contracting the state sector or at least braking its further expansion. Moves toward relatively greater reliance on market based allocational processes and relatively more decentralised decision-taking have here and there come to be viewed as increasingly attractive options to the management of economic life by bureaucracies of the public and parastatal sectors. On the world scene, the two most conspicuous examples of this newer policy style are embodied in the supply-side strategies and deregulation movement the Regan administration has adopted in the United States, along with its proclamation of the virtues of voluntarism in the area of social services, and in not dissimilar efforts to arrest the growth of public spending the Thatcher government has made in the United Kingdom. In the latter country, consideration has also been given to the sale of public enterprises to private investors. But these are by no means the sole instances of this policy shift in the North American and European regions. In Portugal, too, the current government has begun the process of shrinking a public sector grown suddenly larger in the immediate aftermath of the Salazar régime. Next door, in Spain, the 1970s saw efforts by the government, in a number of instances, to return individual companies to the private sector. Adopting a somewhat different approach, the Italian Government announced in early 1982 plans to pursue joint ventures in partnership with foreign concerns as the keystone of its programme to save its deficit-plagued state industrial sector. Although the extensive welfare system put in place in Norway over five decades by social democratic governments will doubtless remain largely intact, the Conservative-led coalition which came to office under prime minister Willoch in 1981 has already initiated a programme to cut taxes, deregulate the economy, privatise banks and strengthen the position of private companies in the development and production of North Sea oil resources. In this connection, it is worth noting that even the October 1981 victory of the Socialist Party in Greece brought to power a leadership ostensibly pledged to reduce the size and cost of the notoriously inefficient public administration of that country, to decentralise decision-making, and to promote small and medium scale enterprises by providing incentives for individual initiatives. For that matter, the attempted roll-back of the state has, in another permutation, also appeared in eastern Europe, and not just in Yugoslavia which first started on the quest for alternatives to comprehensive state control. In Hungary, the economic reforms promulgated in recent months have, essentially, amounted to an evolving redefinition of the state’s function in the economy that got underway with installation of the New Economic Mechanism in 1968.3 Policy debate in Poland during the crisis of 1981 likewise began to pick up on some of the themes of Lange’s market socialism and, until the debacle of military intervention, seemed to hold forth promise for contracting the state’s directing role at least in certain sectors of the economy.

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The same general kind of movement is observable elsewhere in the world, though it is far from being universal in its geographical incidence. Programmes of this sort have been introduced during the past decade, for example, in Turkey, Sri Lanka, and, still more vigorously, Sadat’s Egypt, and a bit later, Begin’s Israel. A decrease in active government involvement in productive enterprise came about in both Tunisia and Mali in the late 1960s and early 1970s, when poor performance by the parastatal sector impelled the governments to encourage a greater role by private enterprise. Even in the Chinese Peoples’ Republic the pruning of the bureaucracy became a priority consideration, with the admission of foreign capital participation in assorted industrial ventures a further step in diminishing, however slightly, the weight of the state in economic decisiontaking. But perhaps nowhere more than in Latin America have there been instituted as many policies designed to effect a partial withdrawal of the state from the regulatory sphere and to deemphasise the state’s entrepreneurial role. Most notable, in all likelihood, is the Chilean case in which amid the growing disorder of the Allende period there had occurred an abrupt acceleration of the country’s deeply rooted tradition of interventionism. With the military overthrow in 1973, however, a radical reorientation of policy took place. A version of monetarism came into vogue, with reductions of protectionist measures and subsidies and reprivatisation of substantial por tions of the economy constituting other key features of the new free-market policy package. From shortly after the coup, in fact, the Pinochet government moved steadily to divest the public sector of many firms acquired in the early 1970s. The magnitude of these shifts is illustrated in the holdings of CORFO, a state development corporation and holding company that had been established at the end of the 1930s. In 1970, forty-six firms were included in the CORFO equity portfolio. During the Allende episode, the number leaped to 460 non-banking companies and nineteen banks. By 1979, all but two of the banks had been disposed of and only thirty-one non-banking firms remained under CORFO control, the rest having been sold at heavily discounted prices.4 Meanwhile, to deal with the hyper-inflation that resulted from uncontrolled deficit financing during the Allende administration, public expenditures were choked down, falling from 41 per cent of G.D.P. in 1973 to 18.6 per cent in 1977.5 During the same decade a less statist policy was also emerging in Uruguay following an interlude of urban terrorism and the suspension of constitutional government. In the Uruguayan case, however, the actual outcome of the ostensible turn toward a free-market orientation was much more uneven than in Chile.6 More or less concurrently, the removal in 1976 of Mrs. Perón from the

3. A particularly authoritative account of the Hungarian experience is found in Paul Hare, Hugo Radice, and Nigel Swain, eds., Hungary: A Decade of Economic Reform, Winchester, Mass.: Allen & Unwin, 1981.

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presidency installed in Argentina, too, a military régime dedicated to reduced protectionism, greater restraint in fiscal and monetary policies, and a hiving off of government-owned companies, dozens of which were (and are) money-losing. The last of these measures became a particular point of emphasis after Roberto Alemann was appointed economics minister late in 1981, at which time the government also announced its intent to pare back the number of public sector agencies as well.7 The issue of optimal public sector size, incidentally, has been a recurrent one in Argentina. Approximately a decade earlier the Onganía government, which seized power in 1966, sought to curtail the chronic current account deficits of state enterprises through reducing employment in these firms by about eleven per cent. This was, however, largely negated by an increase in employment in the rest of public administration. 8 Even before the Onganía effort though, one of the chief features of policy in 1955–58 was an attempt to move from the pervasive interventionism of the first Peronist era to a more market oriented style; restraint on the growth of public expenditures actually shrank public investment from nearly 5% of the G.D.P. in 1953 to 3.4% in 1957. The most recent state shrinking campaign in the Argentine, however, has thus far not been altogether successful. Partly this has resulted from the level of public spending required to manage a national security state, and partly it has reflected the political difficulty of restructuring a parastatal sector a substantial segment of which is under military management.9 Additionally, the government

4. In 1981, two developments occurred to interrupt, at least temporarily, the denationalisation programme. First, discussion of a new mining code revealed the presence within governing circles of some with a continuing preference for Chileanisation of the copper industry. This was not surprising in that the earlier imposition of national public ownership on the chief copper mining operations had been immensely popular over most of the political spectrum. What came out of the discussion was a gradualistic denationalisation policy in which existing government-owned mining companies would continue to operate but the initiation of new mining operations would be left to private capital. More interestingly, the economic crisis that developed after September, 1981, brought with it the collapse of several major financial conglomerates with their associated industrial holdings. This necessitated renewed state intervention to salvage the failing banks and investment and insurance companies in an effort to shore up business confidence (although some observed at the time that the state’s rescue programme violated the canons of laissez faire economics). As the crisis deepened numerous other enterprises went under and provoked an intensified questioning, evidently even within the ruling groups, of the desirability of a free-market programme. 5. A particularly helpful review of the post-Allende period is found in Alejandro Foxley, “Toward a Free Market Economy: Chile, 1974–1979,” The Wilson Center Latin American Program Working Papers # 72, Washington, D.C.: The Smithsonian Institution, 1980. 6. For an interesting account of the rise of statism and its relative decline in Uruguay, see M.H.J.Finch, A Political Economy of Uruguay since 1870, London: Macmillan & Co., 1981. Finch updates and expands the analysis of Simon Hanson’s earlier work, Utopia in Uruguay.

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has for mixed motives sought to minimise the outright unemployment that would have been the logical result of its exchange rate and tariff policies.10 Thanks to the convergence of policy objectives, failing companies have been propped up by a variety of governmental stratagems: subsidies, credits, loan guarantees, and public receivership management. It remains to be seen how the overall policy inconsistency of this approach will be resolved. In the event, the combination of factors just mentioned produced an exceptionally high growth rate in public consumption spending, 12.1%, for the 1970–79 period at the end of which public consumption reached 24% of gross domestic product.11 In Mexico, the sharp criticism in the mid-1970s by prominent business interests of the expansion of the public and parastatal sectors was an almost unprecedented development. It led nowhere in terms of privatisation, owing to resumption of a relatively painless growth of direct state intervention when petroleum export earnings (and the foreign borrowing these facilitated) poured enormous new resources into the treasury. What did occur, though, as a reflection of some of the concerns that had been expressed, was a reorganisation and strengthening of the administrative structure within which the large Mexican state sector operates. While controversy over the public/private mix could conceivably surface again in the 1980s if the global oil market remains weak for a protracted period, it is relevant to note that much of the free market advocacy in Mexico was historically centered on the Monterrey business community. There, during the 1970s, the government acquired a large stake in the important “Fundidora” steel company as part of a financial rescue operation and in 1981 government loans (and other measures of assistance) were also required by the huge Grupo Alfa interests to maintain the solvency of their conglomerate empire, a manoeuvre which may, in the longer run, integrate Alfa’s iron and steel operations into the state-owned holding company’s structure. In other words, the chances seem slight that draconian policies like those of the southern cone countries would ever be seriously considered in Mexico, but semi-

7. Roberto Alemann’s negative assessment of the state enterprise sector is longstanding. See, for example, his bitingly critical judgments in Roberto Alemann et al., Economic Development Issues: Latin America, New York: Committee for Economic Development, 1967. 8. See R.D.Mallon and J.V.Sourroville, Economic Policymaking in a Conflict Society: The Argentine Case, Cambridge: Harvard University Press, 1975, p. 150. 9. This aspect of the Argentine parastatal sector may not be the norm for all countries, but it highlights a problem that is likely to be encountered by privatisation programmes in a number of instances; namely, the political power of the higher managerial cadres of the state enterprises. In Brazil, for instance, there are also important connections between the military bureaucracy and the top administrators and technocrats of key public firms. So far as is known, this interpenetration of bureaucratic structures is less elsewhere in Latin America although in Guatemala state-owned coffee fincas were long used to provide sinecures for influential military officers. The point merits examination elsewhere in the Third World.

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privatisation in the Italian mode (i.e., through a proliferation of joint ventures) remains a distinct possibility. The mid-1970s also witnessed mounting verbal attacks from the local business community on the vigorous estatizaçāo of the Brazilian economy. Nevertheless, it was not until 1981 that, subsequent to its establishment of a ministry of debureaucratisation, the government announced plans to sell some 100 of the 564 state-owned companies and to limit credit expansion by state-controlled financial institutions as part of a larger campaign to dismantle the heavy state bureaucracy. Undoubtedly, the controversy over the public/private shares in the Brazilian economy was to some extent triggered by a slow-down in the aggregate growth rate after imported petroleum prices began to undermine the so-called Brazilian miracle: more than previously the struggle over national income shares began to approximate a zero-sum game. But perhaps to a greater degree than in any other Latin American country the clash over policy has also been a function of the very success of past growth-promoting policies of the state. Notwithstanding the flourishing of a new Brazilian public sector technocracy so distinctive that it gave rise to extended commentary on the role of a “state bourgeosie”, several decades of catalytic intervention had also had as a major result (and social contradiction) the nourishing of a dynamic private sector that could eventually contest the claims of the state apparatus to control over the economic opportunity structure. To be sure, a paler version of this same policy tension can be detected in, say, Mexico, Venezuela, and Peru, but in each of these countries the autonomous assertive power of the private sector remains rather more ambiguous than it has come to be in Brazil, not to mention in the more advanced industrial states north of the equator where, historically, capitalism secured a firmer foot-hold. In the Caribbean region, the election in 1980 of Seaga in Jamaica, while not placing (as was claimed in some quarters abroad) a devotee of laissez faire at the helm, did nevertheless bring in a commitment to diminish state intrusion in economic activity and to re-open the economy to foreign capital inflows. Hence, this development too could be considered another instance of the policy shift under review even though a reprivatisation of the bauxite industry does not seem to be in the cards. Even in Venezuela, where, thanks to the petroleum market of the 1970s, the public sector was generally buoyant (if eventually overextended), the government of Herrera Campíns announced in October, 1980, that some sixty state-run companies would be sold to private investors. No such policy option is

10. That faction of the military inclined to seek a political alliance with the workers has favoured measures to maintain employment as a type of “safety net.” The more right-wing military are believed to favour the same policy as a mèans of forestalling social unrest and the revival of urban terrorism, i.e., as a national security measure. 11. World Development Report, 1981, New York: Published for The World Bank by Oxford University Press, 1981, Tables 4 & 5.

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available to Costa Rica, where balance of payments problems led by 1981 to acute economic difficulty. Nevertheless, it can be predicted with reasonable certainty that in that regional paragon of progress the debate over the size of governmental programmes will heat up over the next several years. It is obvious that these several policy experiences are not all exactly congruent, although they do generally imply some attenuation of state economic guidance and at least a relative retrenchment in the public sector. It is also plain that they have taken place in widely varying contexts, economic as well as political. Just as there was considerable difference between, say, Chile’s awkward and disorganised lurch into socialism and Costa Rica’s and Uruguay’s more measured evolution of welfare-oriented mixed economies, so also has the shift of policy in a more market constrained direction displayed a generous heterogeneity in form and tempo. The assortment of contextual variations is in fact such as to suggest that no single explanation is likely to be adequate for understanding the social dynamics of every situation. Nevertheless, it may be possible, through close examination of a well-chosen case, to glimpse more clearly the main factors and forces that today appear to favour privatisation and to sort out a number of considerations that should tend to recur as public policy is adjusted in a contra-statist direction. 3. Peruvian Experience as an Exemplar A case that is particularly instructive, not least because it has been so widely observed and reported,12 is that of Peru, where a deliberate weakening of state control in the late 1940s and 1950s ran counter to most contemporary policy trends in Latin America.13 This somewhat anomalous episode, however, ran its course and was in the 1960s superseded by a moderately rising and much more typically Latin American interventionism, the desarrollismo policy style. Thus, from having been, up through the 1950s, an almost classic illustration of an export-oriented, dualistic, and oligarchically controlled underdeveloped

12. Apart from the large number of reasonably objective studies which are now available, the Peruvian public sector has also been closely examined by the research unit of the Institute of Latin American Studies of the University of Texas. Among the more helpful published works are; Rosemary Thorp and G.Betram, Peru 1890–1977: Growth and Policy in an Open Economy, London: Macmillan & Co., 1978; E.V.K.FitzGerald, The Political Economy of Peru, 1956–1978: Economic Development and the Restructuring of Capital, Cambridge: Cambridge University Press, 1979; Richard C.Webb, Government Policy and the Distribution of Income in Peru, Cambridge, Mass.: Harvard University Press, 1977; Abraham F. Lowenthal, ed., The Peruvian Experiment: Continuity and Change Under Military Rule, Princeton: Princeton University Press, 1975; David Chaplin, ed., Peruvian Nationalism: A Corporatist Revolution, New Brunswick, N.J.: Transaction Books, 1976; and Alfred Stepan, The State and Society: Peru in Comparative Perspective, Princeton: Princeton University Press, 1978.

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economy, Peru emerged comparatively rapidly in the 1960s as an example of an “intermediate régime” in which, organised by professional classes and the military (with passive support from part of the rural population, urban whitecollar workers, and some blue-collar workers), the state enjoyed, thanks to prevailing political conditions and the heterogeneity of interests, a relative autonomy from various factions of capital and other interest groups. With the change of government in 1968, public policy veered leftward and an even more rapid extension of the state sector was accompanied by essentially peaceful but substantial institutional reform, including the expropriation of major foreign holdings and erection of a parastatal sector made up of state-supervised co-operatives, communal enterprises, and “social property” firms as well as public enterprises. Moreover, in larger and medium-sized private sector enterprises, workers were slated to share increasingly in profits, ownership, and control. In keeping with the standard specimens of state capitalism, the expanded public sector was used to stimulate economic growth and structural change, especially through state control of infrastructure and key industries, to set development goals and plan the strategy for implementing those goals, and to control the structure of ownership. Non-renewable resources, public utilities, key service sectors such as banking and insurance, major foreign exchange earners and critical industrial linkages passed into state ownership in greater or lesser degree. Among the major state holdings by mid-decade were: AEROPERU (aviation), Banco Agrario (agricultural credit), Banco Central de Reserva, Banco Central Hipotecario, Banco Continental (commercial banking), Banco de la Nación (banking services for the state sector), Banco de la Vivienda del Perú (housing credit), Banco Industrial (industrial development), Banco Internacional (commercial banking), Banco Minero (mining credit), Banco Popular (commercial banking), CENTROMIN (mining), Compañía Popular y Porvenir (insurance), COFIDE (investment banking), CORPAC (airport authoity), C.P.V. (shipping), ELECTROPERU (electric power), EMADIPERU (real estate company), ENAFER (railways), ENAPUPERU (national port authority), ENCI (marketing of industrial supplies and other products), ENTELPERU (communications), EPCHAP (foreign trade in staples, fishmeal, fish oil, coffee, cotton), EPSA (marketing of staples), EPSEP (marketing of fishmeal, food fish), ESAL (Lima water and wastewater company), HIERROPERU (mining), MINEROPERU (petroleum industry), MINPECO (trade in minerals), PESCAPERU (fishmeal and fish oil), PETROPERU (petroleum industry), and SIDERPERU (siderurgical industry). By one count, the number of public

13. See Manuel Fuentes Irurozqui, Una experiencia interesante en el Perú: del intervencionismo a la libertad económica, Madrid: Ediciones Cultura Hispánica, 1952. This early turn toward what was, for Latin America, an economic system unusually open to market forces involved less the denationalisation of state companies than the abolition of measures of indirect intervention.

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enterprises rose from six (plus several small service companies) to more than 170 during the phase of major expansion. The elaboration of the state sector was considerable—and, as it turned out, far overshot the ability of Peruvian public administration to develop adequate budgeting and control techniques to monitor the spending, borrowing, and general performance of the state’s many agencies and firms. By 1975, the current expenditures of the total public sector (owing partly also to a steady rise in military spending) reached 32.5 per cent of G.D.P.; public capital outlays reached 10.1 per cent of G.D.P. Overt opposition was, all things considered, relatively modest and in any case muted by government domination of the media of communications. Further, in spite of some sabre rattling along the Pacific littoral there were no international crises of note to “contaminate” domestic policies. Indeed, it is the relative absence of acute domestic strife and foreign contention, in either this or the subsequent phase of state shrinking, that makes the Peruvian experience so appropriate for examination; it is comparatively free of severe conflietive repercussions on other social, economic, and political processes. The growth rate of real G.D.P. averaged 5.4 per cent over 1971–73 and rose to 6.6 per cent in 1974. In 1974, however, the inflation rate began to accelerate, to more than double the 8% average of 1971–73, and in 1975 it reached 25%. Imports were rising sharply, but weakness in the overseas markets for minerals undercut production in part of the export sector while a marked drop in the fish catch contributed further to the widening current account deficit. Foreign private investment, which had begun to slacken in the 1960s, proved even more hesitant in the 1970s to continue its historic function as an engine of growth for Peru, and domestic private investment was likewise falling as a percentage of G.D.P., as indeed it had been since the early 1960s. Although adverse external developments played a role in undermining national economic performance, some of the imbalances evident by the latter half of the decade grew out of policies to subsidise certain lines of consumption and attempts to carry out an ambitious public investment programme that overshot the saving effort and ran up the country’s external longterm and short-term debts. Poor performance in the agricultural sector aggravated the picture. Also germane to the economic deterioration were, as an I.M.F. report delicately remarked, “organisational problems in the operations of the state production and marketing apparatus”.14 From 1970 to 1975 overall deficit in the public sector (including state enterprises) rose from 1.4 per cent of G.D.P. to 11. 6 per cent. From 1975 onwards, the proliferation of public enterprises dropped, but problems inherited from the period of uncoordinated and unplanned expansion of the parastatal sector loomed larger. It proved exceedingly difficult, for example, for central authorities to impose fiscal and administrative discipline on the multitude of public entities under their formal jurisdiction, while political considerations made it hard to deal with the problems of overstating or even with the continuous pressure for upward wage and salary adjustments that to some

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extent were inspired by the régime’s redistributive goals. There seems to be some evidence, in fact, that individual public enterprises even worked at cross purposes with the government’s stabilisation efforts, defeating any coherence in this policy area. Criticism swelled, along with social unrest, as the government’s popularity declined, and as the anticipated return to government by election neared, the deterioration of the economy led political groups to cast about for a means of alleviating the situation. By the time that constitutional government was restored in 1980, it was a foregone conclusion that at least some moves toward privatisation and denationalisation would enjoy support from an important segment of the political spectrum. Though by no means was there widespread agreement on this course of action, discussion of the issue was, for the most part, less charged with emotion and political passion than was the case in Argentina, Chile, and Uruguay—may be even less tense than the brief controversy over the state’s economic role that erupted in Mexico before Echeverría left office or than the more recent electoral contest in Jamaica. In short, in the relatively brief compass of two decades, from 1960 to 1980, Peru exhibited in a particularly clear, if compressed, manner both the march into interventionist developmentalism and the subsequent reaction to a statist pattern of economic management that have characterised much of the broader Latin American scene in the past fifty years. 4. Global Factors in Privatisation In assessing the wider relevance of Peruvian experience with privatisation, it is useful to set this against certain features of the global context which operate in Peru as well as elsewhere to influence the onset and unfolding of denationalisation programmes. It is necessary, too, to identify circumstances which may be significant in other cases but which seem not to have been important in Peru. The ultimate aim is to highlight those aspects of denationalisation in Peru which are shared with a good many other countries, especially the developing nations, even if they are not universally present. At the most general or global level, then, are at least four factors that apppear to support the adoption of privatisation policies. In the first place, the stabilisation programmes of the I.M.F. have undoubtedly played some role in the genealogy of privatisation efforts inasmuch as the rationale of the international adjustment process led the I.M.F. early on to adopt conditionality as a means of ensuring the efficiency of this process.15 The body of policies and procedures that has been developed to accompany the use of Fund resources is both pragmatic and flexible, and the particular policy instruments used to ease the balance-of-payments difficulties of member countries have

14. I.M.F., Peru, Recent Economic Developments, 19 Feb. 1976.

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varied in the light of the institutional setting and organisation of an economy. In general, however, the preferred strategies of adjustment have sought to restore a suitable balance between the aggregate demand for and aggregate supply of resources in a national economy by resting the required adjustment process of fiscal restraint and restrictive monetary policies, along with removal of what are considered to be “distortions” in the structure of relative prices (i.e., disparities between domestic and foreign prices). Distortions in the structure of relative prices have in the Peruvian case, for example, derived from such sources as exchange rate policy, policies holding food prices artificially low for the benefit of urban consumers, and energy-related prices that fail to provide needed incentives for production and conservation and which do not match the real replacement cost of the fuel. As mentioned earlier, the growing burden of deficit financing which partly came from parastatal operations, in turn, compounded the difficulty Peruvian authorities faced in bringing aggregate demand and aggregate supply into equilibrium. To improve the allocation of resources, strengthen exports, and increase aggregate supply, I.M.F. stabilisation efforts have therefore tended to focus on such matters as undue expansion of domestic credit by the banking system (typically the product of government budget deficits), reliance on foreign borrowing in amounts and on terms unsustainable over the medium to long term (the result of both public sector and private sector actions), and on the fiscal and public sector imbalances believed to lie at the roots of these developments. Inappropriate policies in respect of the product prices under public sector control, excessively generous public sector wages and salaries,16 exchange rates and other deterrents to export expansion, rigid price controls on the private sector, and so on have been among the most common targets for corrective actions such as the liberalisation of price controls, cuts in subsidies, rationalisation of the prices charged by public enterprises, reductions in the real wages and salaries of public sector employees, postponement of public sector investment programmes, and curtailment of public sector foreign borrowing. I.M.F.-induced policies have tended, in most cases, to favour the export sector, as the structural changes in the economy required to effect balance of payments adjustment have usually involved the reorganisation of production toward exports and “efficient” import substitutes and away from purely domestic goods. Although in this connection Peru is exceptional, the export bias in I.M.F. stabilisation programmes would thus ordinarily push resources in a private sector direction rather than into the public and parastatal sector. Of probably greater bearing on the Peruvian case is the fact that the I.M.F.-sponsored policy package has also tended to reduce the salience of the non-market, and distinctively

15. Conditionality has meant prescribing policies which assist in overcoming balance-ofpayments problems and which serve as safeguards to ensure that a country’s use of Fund resources is temporary.

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“public”, operating characteristics of state enterprises, while reining in the overall expansion of the parastatal sector. Although it would be going too far to say that the I.M.F. has directly called for privatisation, the net effect of conditionality, particularly since the monetary, fiscal, and trade problems of the 1970s, has been to encourage in mixed economies a policy tilt in that direction, in Peru as well as elsewhere. To some extent, this hypothesised relation between I.M.F.-type adjustment policies and privatisation may be viewed as a function of scale, of the growing size of the state sector in mixed economies one consequence of which is that fiscal structure and the policies of parastatal enterprises how have a much greater impact than formerly on all macroeconomic variables. In a number of countries, Peru included, the expansion of intervention has in effect transferred to the state a greater responsibility for accumulation than its fiscal system and the prevailing practices of public enterprises have been able to sustain. Moreover, thanks to the wave of nationalisations that followed 1968, the Peruvian public sector also assumed a major macroeconomic responsibility for the provision of foreign exchange, by virtue of which the Peruvian state enterprises might be said to be doubly exposed to the constraints of I.M.F.-type policies designed to deal with external disequilibria. Somewhat more explicitly oriented toward private sector promotion has been the World Bank’s stance of late, the second factor of global relevance. Long centrally involved in financing the expansion and improvement of transport networks, irrigation schemes, communication facilities, and power supplies all of which have occupied a prominent place in national development efforts, the Bank has come to the view that today the elaboration of public infra-structure in these fields is more threatened by a shortage of financial resources than was the case several years earlier. A slowdown in the growth of foreign aid, a reduced rate of international economic growth, and a lagging expansion of world trade have contributed to this restriction of resources. The world oil crisis17 aggravated the problem even worse by creating a need for capital-intensive outlays in new hydroelectric plants, domestic petroleum exploration and refining, railway electrification, and such like. Meanwhile, the internal evolution of developing economies has accentuated such competing claims on public resources as

16. In Peru it appears that, at least between 1968 (if not a bit earlier) and 1978, the hiring and wage-and-salary policies of the parastatal sector were shaped in part by redistributional objectives. Yet, such policies, perhaps unwittingly, carried with them a risk of condensing groups of public workers into a social class or interest group and of “privatising” public policy to further the interests of a Djilas-like “new class” or state bourgeoisie. In effect, policy integrity in the redistributional field was eroded in both concept and practice, as the experience of Peru (or in such other cases as the Argentine railways) suggests that the inordinate growth of deficitary public enterprises subsidised favoured workers over lower socio-economic groups and undermined the design and implementation of social programmes having a more comprehensive reach.

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educational expansion, the extension of health systems, urban housing, water and wastewater systems and other forms of social overhead capital. To these circumstances must be added the rising costs of international borrowing (a decisional factor of moment in capital-intensive projects) and the growing recognition by development authorities that subsidised prices for infrastructure output may simply encourage excessive consumption without being really essential for sound industrial development. These considerations, in tandem with the fact that some three decades of intensive emphasis on the build-up of infrastructure have met the most pressing initial development needs in many instances, have led to a greater reliance on market prices to generate and attract the resources required for financing further investment, to experimentation with self-help measures, and to a search for means of inducing private enterprise to come up with new technical solutions. Argentina, Brazil, and Colombia, for example, are reported to have realised significant economies by turning over infrastructure repair and maintenance to private contractors on a competitive bidding basis, while some countries, such as the Ivory Coast, Zaire, the Congo, or Guinea, have actually let contracts for private companies to operate public infrastructure on a paying basis or have left (or returned) transport and/or other infrastructure to private hands. It was in this spirit that the constitutional government of Peru set about after 1980 to convert AEROPERU, ELECTROPERU, and ENTELPERU into mixed enterprises. Although most public utility companies in developing areas are now run as government or municipal enterprises, not always conducted according to sound standards of financial performance, there seems to be a growing inclination to experiment with either partial privatisation (via management contracts and operating concessions) or a transfer of the activities of government-owned companies to regulated private companies—with some observable tendency to moderate the extent of regulation in the case of road transport.18 Indeed, the fullest possibilities along this line in mixed economies may yet lie ahead when, after indexation has been introduced to keep rates at realistic levels, the special usefulness of public utility securities in building a capital market and in shaping the portfolios of larger institutional investors such as banks, insurance companies, and pension funds comes to be more clearly perceived.19 The World Bank has, of course, by no means abandoned its customary role of responding to bankable requests for loans from member governments, nor is it likely to so do, this being its principal raison d’être. Its affiliate, the International Finance Corporation, remains the principal operating arm of the Bank in respect

17. For many oil-importing developing countries, the oil crisis of the early 1970s seems in retrospect to have been a particularly important triggering factor in the shift to denationalisation, for in running up external debts at high interest rates and by depressing the growth rate in major economies (and hence the export markets for LDC exports) it became a major reason for instituting the decompression and austerity programmes that required cutbacks in government spending.

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of private sector financing, presiding over a rapidly growing volume of term and equity investments. Yet, it is likely that the design of World Bank operation in various countries will be increasingly sensitive to complementarities of function between the public and private sectors and that it will give more and more consideration to keying the development programmes it finances to institutions and policíes that foster a vigorous private sector. The same orientation, for that matter, is now discernible in the policy preferences of another significant source of external economic and technical assistance for a number of countries, Peru included: the U.S. Agency for International Development.20 In tandem, then, the World Bank and U.S.A.I.D. have lent weight to the domestic forces in Peru that have worked to reshape policy in a less statist pattern. In part this shift of emphasis in World Bank and A.I.D. strategies derives from a third global factor: namely, a changing view of the sectors deemed pivotal in the contemporary development process. The past twenty years have witnessed a gradual moderation of the inward looking development policies that prevailed in much of the world from the thirties to the mid-sixties. Instead of centering industrial policy on the conservation of foreign exchange by protecting industries from foreign competition, developing nations, among them Peru, have begun to adopt policies designed to earn increased foreign exchange through export diversification and growth, a process which has entailed taking steps to make domestic enterprises competitive internationally.21 This objective, together with a critical rethinking of industrial promotion policies that biased factor choice in a capital-intensive direction in labour-surplus economies, gives increasingly greater emphasis today to an orchestration of redesigned fiscal incentives, investment codes, monetary policies, and regulatory relaxation that is outward-looking. The intention is to enable national economies to cope more effectively with adversity than protected ones and make better use of their resources in the intervals of prosperity. The importance of this “new” policy orientation (i.e., an export substitution strategy in place of an import substitution one) has been, for instance, underscored by empirical research presented in the previously cited World Development Report, 1981. Thus, both the I.M.F. “factor” (balance-ofpayments adjustment) and this long-term growth factor (internal resource

18. Chile, Sri Lanka, India, and Sierra Leone are countries in which there has been a notable transfer of trucking services to the private sector, with some deregulation as well in several cases. 19. The relatively routine nature of management operations and the demand characteristics of public utilities might make them especially well suited to function as seed beds for the cultivation of private-sector entrepreneurs, managers, and skilled workers. 20. See, for instance, “Role of the Private Sector in Developing Countries.” (Current Policy # 329) and “The African Private Sector and U.S. Policy” (Current Policy # 348), Washington, D.C.: U.S. Department of State, Bureau of Public Affairs, 19 Oct. 1981 and 19 Nov. 1981 respectively.

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efficiency and expanding the supply of non-borrowed external resources available for national growth) have led to a renewed emphasis on the export sector. It is in this context that one must view the decision taken by the Acción Popular party to call for converting to mixed (i.e., public/private) enterprises such state-owned companies as HIERROPERU, MINEROPERU, Paramonga, PESCAPERU, and MINPECO. Side by side with the priority on export expansion and diversification has come a more acute awareness of the need for increased agricultural production and productivity to bring about an alleviation of rural poverty. Today, country after country has discarded the industrialisation-first policies of earlier decades and elevated agricultural development to a top priority, a reorientation that has involved examining the whole set of taxes, price controls, subsidies, exchange rate controls, and rural credit deficiencies that have tended to stifle the growth of a dynamic and versatile agricultural sector. Even in Peru, where important structural reforms were carried through in the late sixties and early seventies, there was an altogether inadequate follow-through with policies to re-equip the agricultural sector and place it on a sounder footing. Production, not surprisingly, suffered, and with it attainment of the regime’s redistributional objectives. For Peru, this new policy inflection has called attention to the ambivalent agricultural role of the state. This has mainly been expressed in a reform that produced far-reaching land tenure changes and indirect intervention (mainly a cheap staples policy through price regulation and the marketing operations of ENCI) together with some road building, irrigation, and rural electrification programmes and a very modest credit provision programme. Virtually without exception these latter areas of social investment have been, like the critically needed agricultural extension system, drastically underfunded. At the same time, much of the indirect intervention of the state through price regulations and the state trading organisations, while furthering a cheap staples policy for the primary benefit of urban and industrial consumers, had the effect of generating disincentives for farmers. One of the public enterprises operating in the agricultural products field, the National Tobacco Company (ENATA) suffered from poor management and marketing practices, deteriorating (as well as outmoded) machinery and seemed, when the Belaúnde government reviewed its operations, to be serving no public policy objectives very well. Another, a food dehydrating (freeze drying) plant (DAASA) in Arequipa, had been set up in the mid-1960s to expand the market for local producers of garlic and to encourage agricultural exports. Like the tobacco company, a variety of technical and

21. Before the 1960s, Peruvian policy was decidedly export-oriented but this dimension of policy was gradually eclipsed in the sixties and early seventies, leading eventually to sharp foreign exchange constraints on domestic policy options, as an earlier section of this essay indicated.

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managerial problems stood in the way of its performing a useful function. Both enterprises, in fact, incurred substantial operating deficits and thereby were part of the larger picture of a general diversion of resources away from an economical use in agriculture. Not surprisingly, then, both were slated for privatisation when the production and income consequences of years of rural neglect could no longer be ignored. A third contemporary modification in development programme priorities has encouraged third world countries to give more explicit attention, in the interest of employment promotion and income redistribution, to assisting the growth of small-scale enterprises. Often employing a substantial portion of the manufacturing labour force, small enterprises have, it is currently believed, a significant role to play in cultivating entrepreneur ship, giving jobs for workers with limited formal training, mobilising the savings of individual proprietors and their families who have traditionally been disinclined to participate in the organised capital and money markets. There is evidence, moreover, that such firms exhibit a high propensity to reinvest and to rely more heavily on local than imported inputs. As Japanese experience has demonstrated, such firms can display a versatility in production that enables them, when linked with larger scaled enterprises through subcontracting arrangements, to lend a flexibility to the industrial structure itself. In Peru as elsewhere, the smaller and medium scaled enterprises lie outside the government’s ownership sphere so that when programmes are eventually mounted in this field, the net effect will be to strengthen the role of the private sector. While this is not the place to dwell at any greater length on the sources and implications of the development policy modifications just enumerated, it is pertinent to observe that their overall thrust is to put much greater reliance on the private sector than was usual in the previous quarter century or so. A fourth global factor abetting the partial denationalisation of economic structures has derived from a growing perception that the vast and intricately patterned organisational networks known as multinational corporations or transnational enterprises do much more than merely transfer investment capital (and asset control) from one location to another. The traditional role of the transnational firm and foreign banks as suppliers of capital nevertheless remains important, for it appears that the very growth of developing countries has led to a scale of external financing requirements that has outstripped the supply of capital available through the international public sector (government-to-government loans and grants, loans and equity transfers from multilateral financial intermediaries). Thus, an increased responsibility for the supply of investible funds has been shifted to private sector institutions. As mechanisms for information gathering, processing, and transformation, as transmission channels to facilitate (or constrict) the flow of technolgical innovation, and as agents of accumulation, the multinationals first aroused fears of external domination and dependency and then gave rise to a variety of institutional responses. These latter—codes of regulation, newly established

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supervisory authorities and negotiating channels, countervailing public enterprises, joint public/private ventures, and so on—have all been aimed at bringing about some measure of “domestication” and conforming the optimising framework of multinational decision centres to nationally ordered priorities. At the very least, what has been sought is a socially tolerable degree of accommodation between the two sets of objective functions, those of the multinational corporations and those of national development planners. At the same time, with the development experience of some thirty to forty years behind them, the newly industrialising countries, appear during the seventies, to have come to a keener appreciation that the contribution to economic growth that large industrial projects—of the kind seen as vital to a country’s development—can make, is best assured if the signals of the market, corrected when necessary for distortions, are followed in each stage of the project cycle. A further precondition for success is that in addition to being subject to market discipline these projects should enjoy access both to the stream of ongoing technological innovation and to effective marketing networks of national, regional, and even global compass. Among other things, this newer understanding of the performance criteria appropriate to large industrial projects —in steel, chemicals, fertilizers, and cement for example—implies vigorous evaluation in project planning, careful attention to project execution, the maximum feasible autonomy and financial discipline in project management, the avoidance of cross-subsidies except in special circumstances, and pricing policies to cover real costs. Inasmuch as considerations of this sort have led even centrally planned economies to devise ways of enlisting the collaboration of multinational corporations in their respective national projects, it is hardly to be wondered that the intermediate regimes of peripheral or state capitalism should also turn to this quarter in a guarded yet willing-to-negotiate attitude. In this connection, it is worth noting that even in the era of most intensive institutional reform the Peruvian government tendered many more offers for joint ventures with multinational cor porations than the four (Sheraton, Tractores Andinos, Motores Diesel, and Bayer Industrial) that were taken up, not to mention the special petroleum development arrangements negotiated with foreign oil companies. With the inauguration of the Belaúnde administration, the government announced its intention to move ahead still more concertedly in this direction. What is more, in part to save on public capital but in part in an effort to ensure efficiency, the new administration also declared that a number of state projects in mining (e.g., Tintaya, Cerro Verde II, Antamina, and Toromocho) would move forward as mixed enterprises with the state taking a minority position, that the largest public enterprises in the minerals field (and in steel making) would be accorded greater managerial autonomy to make them more flexible and efficient, and that a number of the state’s industrial holdings—e.g., the Paramonga paper and chemicals works, the Química del Pacífico caustic soda and chlorine plant, the Emdepalma palm oil project, the ANFA pharmaceutical company, the Iquitos plywood plant—were scheduled to be partially or wholly

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privatised. Even in the case of the rather more complicated circumstances of the cement industry, where legal and business confidence considerations played a role in the semi-reprivatisation, one may reasonably posit that the policy criterion of heightened managerial efficiency figured in the decisional framework to some extent. In short, the very success of industrialisation drives in peripheral capitalism has begun to press against the technological frontier, giving rise to a greater need for technological borrowing not simply “off the shelf” of the common pantry but from the proprietary cupboards of the multinational corporations.22 5. General Domestic Factors in Privatisation The Peruvian privatisation process unquestionably reflects, on the national level, the global factors reviewed above. But in addition it may also be ascribed to the interplay of domestic social forces and considerations which have parallels, though not always exact ones, in a fair number of other countries. Part of the process, for example, is a “normal” instance of what may be called a rolling privatisation policy. Since the Peruvian government never sought to effect a complete socialisation of the national economy and there was from the start an interest in maintaining a mixed economy, some public enterprises were initiated by government as catalysts for the industrialisation programme but in the expectation that they could, as industrialisation advanced to a more mature phase, be transferred to the private sector. From the sales, proceeds, and/or repayment of publicly supplied loan capital, development authorities could then move on to promoting still newer fields of activity. Used as a policy expedient for industrial development as long ago as the early period of Japanese economic modernisation,23 this strategy has been widely employed from around the 1940s on in Latin America. Throughout much of the third world, in fact, development banking has been thus predicated on a temporary need for public entrepreneurship so that in a good many instances the eventual devolution of companies to the private sector is anticipated from the outset.24 The underlying supposition for this use of public enterprise as an instrument of industrial policy has been that owing to inelasticities in the domestic private supply of capital, entrepreneurship, and various other inputs (such as skilled labour), the start-up costs and initial operating costs for new industry are likely to be substantially higher than either will be later on. As the business environment of such an economy matures and 22. See, for example, the common effort of state petroleum companies in Argentina, Mexico, Brazil, Venezuela, Colombia, Ecuador, Peru, and elsewhere to enter into cooperation with the major private sector companies in order to gain access to advanced technology such as secondary recovery methods, offshore and deep drilling techniques, logging technology, sophisticated refining procedures, and so on.

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becomes richer in externalities, capital, entrepreneurship, managerial talent, skilled labour, and information are more readily mobilised and the private sector’s growth and relative importance can pick up. In the process, the rolling turn over of public enterprises to private investors is of course facilitated, so that this type of privatisation might well be viewed as a direct function of the success of the government’s industrial policy. In the case of Peru, the relevance of this strategy of rolling privatisation was clear in the era before the Velasco government, for the concept was embodied in the work of the government-owned Banco Industrial and the Industrial Promotion Institute though the functions of these entities seem also to have included that of facilitating projects organised primarily by private entrepreneurs. After the 1968 revolution, the role of rolling privatisation was obscured by the importance attached to establishing state control over the “com manding heights” of the economy, but with the return to power of constitutional government orderly divestiture again became the rationale asserted by the government, this time as a policy framework for COFIDE. For that matter, even the Velasco period was not necessarily inconsistent with the rolling privatisation process over the longer run. Besides creating industrial enterprises owned and operated by government as part of a programme to launch large capital-intensive plants which might not have been undertaken by the private sector (or which would have required regulation of monopoly profits if they were) or as catalysts for private investment in the development of industrial linkages, state power has also been deployed in many countries (e.g., India, France, the U.K.) to balance that of domestic economic interests and foreign or transnational firms. Such was clearly a motive of the Peruvian government from 1968 to 1976. Once this underlying objective has been fulfilled and the main levers of the economy are in the hands of public authority, however, decreasing returns in political and macroeconomic managerial terms would be realised from further extensions of national control. This aspect of the Peruvian nationalisation process was, therefore, ultimately self-limiting, especially as it became evident that the volume and quality of central planning and detailed state intervention required for this strategy had outstripped the capacity of the planning and implementation apparatus. When this point was reached, it was logical to resume the strategy of a rolling privatisation.

23. See T.C.Smith, Political Change and Industrial Development in Japan, Government Enterprise, 1868–1880, Stanford: Stanford University Press, 1955, for one of the earliest manifestations of this promotional function. 24. The Korean Development Bank and Singapore have been notably successful in the strategy of selling public enterprises to the private sector once the pioneering role of the government has been discharged, but favourable results have also been realised in a good many other instances—even, for example, in a U.S. economic jurisdiction (the Government Development Bank in Puerto Rico).

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A second domestic factor, albeit one of undeterminate significance in Peru at this time, can be distinguished as an aspect of privatisation conceptually different from that called rolling or anticipatory privatisation. In this instance, an appropriate designation might be that of claimant-induced privatisation. Yet, conceptually distinct though it may be from the first process, it is nevertheless also a function of the success of a government’s general industrial promotion policy. What is involved could be construed as an internal contradiction latent in the dynamics of state capitalism, a contradiction that began, for instance, to surface in Brazil and Mexico as well as in the southern cone states during the 1970s. In essence, as the field of economic opportunity in less developed countries has been enlarged through state action and the ordinary course of economic evolution, more actors interested in claiming or appropriating a share of that field have sprung up in the private sector, claimants who possess, moreover, an enhanced capacity to appropriate investment and marketing opportunities and turn them to account. Nurtured under the umbrella of protectionist policies and by direct subsidies and other inducements, such private business groups may also have emerged in part from the supply of trained managers and technical staffs generated by the parastatal sector itself. Increasingly, the state’s role is seen as competitive rather than complementary (though not, of course, in all sectors), and pressure builds on government to dispose of some public sector earning assets, for it to withdraw from or cease to preempt certain promising lines of investment. (Recent history suggests that this can take place even in the same context in which state intervention is being accepted to forestall bankruptcies and lay-offs in private enterprises of marginal profitability.) More than in other privatisation processes, the claimant-induced version tends to go hand in hand with an explicit ideological viewpoint in which state shrinking is seen as an admission that governments have found (or should find) statist policies to be unproductive and learned (or should learn) that a hostile, restricftive posture toward the private sector is detrimental to the inflow and local accumulation of capital and the transfer of technology. While there are those within the Peruvian government, and certainly within the Peruvian business community, who share the neo-classical economists’ abiding skepticism that positive government action can yield over the long run a net gain for society, the influence of doctrinal commitment to the free-market ideology of economists such as Friedman, Feldstein, Bauer, Sowell and others seems rather less pronounced (not to mention less fervently preached) than it has been in the southern cone countries.25 Additionally, the anti-corporatist strand of policy which became prominent in post-1973 Chile and post-1976 Argentina is largely absent in Peru. While some have purported to see the hand of national business interests in the supposedly neo-liberal policies of the second Belaúnde administration and while there can be no doubting that the commercial and industrial community supported both the Action Popular and the Partido Popular Cristiano positions on

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the proper functional repertoire of the state, it is arguable that one can attribute a great deal of what has actually happened in Peru to claimant-induced privatisation. In some instances, to be sure, this seems to have occurred: e.g., the reprivatisation of cement, newspapers, radio and television broadcasting. In these, restitution even involved the previous private owners of the firms. Beyond such cases, the weight of private sector preferences as compared with other policy constraints is problematic, perhaps on account of the lingering weakness of private capital after the dislocations of the 1968–80 era and the intensity with which other circumstances have impinged on the policy process. Furthermore, although one counter-privatisation feature of, say, the oversized state sector of the Argentine—the existence of substantial and long-standing military involvement in manufacturing companies—is absent in the Peruvian case, there does appear to have been some bureaucratic resistance to privatisation in ministries which viewed the public firms of their respective jurisdictions as important sources of political power, along with oppositions stemming from the workers in some of the public enterprises. If claimant-induced privatisation has, as yet at least, played a limited role in Peru, the same cannot be said for a third form of the process: distressed privatisation, the term we shall apply to cases to which a constellation of problems impells the state to move toward divestment.26 Vividly illustrated in Peruvian experience of the 1970s, the sources of distressed privatisation are multiple. In some instances, the private firms acquired by the state were discovered to be partially decapitalised at the time of expropriation and required substantial long-term investments to upgrade and expand their operations— thereby contributing to a major rise in the long-term and short-term debt of the parastatal sector. Owing to the rapidity with which the state nationalised industry, the responsibilities of its role outran its capacity to administer the enterprises, and major delays occurred in expanding minerals production (and hence foreign exchange earnings) as public-sector managers negotiated for technical and other expertise and sought external financing for both operating and programmed expansion. In other instances, inadequate provision was made for the working capital of new public enterprises (which were limited by law in their local borrowing), while the pricing policies permitted them by the government did not generate internal resources for this purpose out of revenues, let alone savings for fixed capital formation. Cross-subsidies to other state firms (or other public sector entities) and the subsidisation of certain areas of other industrial and household consumption figured in the pricing problems.

25. Frits Wils, Industrialists, Industrialisation and the Nation State in Peru, The Hague: Institute of Social Studies, 1975, notes the ambivalence of Peruvian industrialists in respect of public policy preferences in a study made at the end of the 1960s, and there is little evidence that the Peruvian business community has reached a consensus on many elements of industrial policy since that time except on a general need for retrenchment in the state sector.

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Project design and inter-project co-ordination were often faulty, cost over-runs were frequent, and plans were too rigidly adhered to in the face of unforeseen events. Where explicit subsidies were involved the public treasury was often slow in paying them to the enterprises, forcing unprogrammed loans to be assumed unpaid interest charges to accrue, thereby worsening an already precarious financial situation for the firms. The capacity for decentralised decision taking was suppressed by cumbersome administrative procedures. Public enterprise managers, for example, were often granted little or no direction regarding pricing, sourcing, product mix, investment decisions and wages and hiring practices. Not uncommonly, central government authorities charged with supervisory responsibilities actually intervened in day-to-day managerial decisions. Insulated from the discipline of the market and subjected to detailed oversight and dilatory scrutiny by central government agencies, not a few Peruvian public enterprises suffered from overmanning and political patronage in staffing. Low profitability was perhaps less a problem than negative profitability. As noted earlier, such operational inefficiencies in time imposed an unsupportable burden on the national treasury and preempted credit which might otherwise have gone to more productive borrowers—all in a context in which the tax system could not readily be adjusted upwards nor wages cut to squeeze out a surplus for public sector accumulation. Thus, ideology aside, there was compelling need to free the public treasury of the growing deficits run up by the unprofitable companies. In this sense, the turn towards denationalisation has been largely structural and, again, a function of the scale of the public sector as a whole, including public and social administration and the military as well as the parastatals. As all of these categories of expenditure are related to the same central fiscal system, the size of the social welfare and other noneconomic activities of government is germane. On the one hand, other things being equal, a small state enterprise sector, even if deficitary, may be accommodated by the national treasury relatively easily whereas a growing volume of losses from a larger number of such firms and/or larger-scale public enterprises will tend to force a rethinking of policy, including the use of privatisation as a means of reducing claims against the fiscal system. On the other hand, a growth in the noneconomic activities of government (such as the Peruvian military spending of the 1970s) tends to reduce the absorptive capacity of the fiscal system for losses originating in the parastatal sector, while transferring funds from both private consumption and investment and public investment into public consumption,

26. Much helpful insight into these difficulties was derived from discussions with Dr. Alfred Saulniers, who has studied at first hand the problems of the Peruvian parastatal sector and from Mr. Brian Branch, whose field research was presented in his M.A. thesis at the University of Texas, “Change and Continuity in the Peruvian Public Sector,” Austin: 1981.

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Contributing to the fiscal crisis—though perhaps less so in Peru than in, say, Argentina, Uruguay, or Costa Rica—were certain structural rigidities which, among other things, also hampered adjustment to fluctuations in the balance of payments. For one thing, the large parastatal sector served there, as it usually does, as a disguised form of protectionism and a means of channelling subsidies towards ailing industries. For another, since both prices and wage levels in the parastatal sector tended to be protected from the impact of market forces, a more realistic alignment of these variables with the prospective growth of real output and employment was hindered. With nominal wages thus divorced from productivity and prices disconnected from demand, profit margins as a source of investible funds and international competitiveness both suffered, aggravating inflation, unemployment and underemployment, the budget deficit, and the balance of payments.27 Further, in Peru as in most other countries government has been notably more responsive, particularly during the Velasco period, to pressures by those who wanted improved benefits than to the need for taxes to support those benefits. Indeed, a tendency in this direction was already observable in the proto-populism of the first Belaúnde administration. Since the political and social pressures behind the expansion or preservation of welfare benefits were not matched by public support for commensurate increases in taxes or by increases in the efficiency of tax administration, it is not surprising that the welfare components of the Peruvian regime, including the support of military personnel, contributed to larger government deficits even while substantial segments of the population remained beyond the reach of such systems.28 So structured, the Peruvian economy, like a good many others, became even more vulnerable to declines in export earnings, for inasmuch as a large portion of spending flows through the state sector, a fall in external economic conditions does not readily translate into a contraction of this sector.29 On the contrary, aggregate spending tended to continue unabated, with the volume of imports resisting downward adjustment and reserves being depleted even more rapidly than would otherwise have been the case. When monetary policy was applied to deal with inflation and the balance of payments situation, this, combined with the heavy public sector borrowing requirements mainly generated pressure on

27. Where income streams are subject to market discipline, a decline in the external demand for final output automatically leads to curtailment of domestic spending, but the interposition of a public sector often blunts the automaticity of this adjustment process and tends therefore to generate greater balance-of-payments disequilibria. 28. As Robert Skidelsky has put it in his masterful essay, The Decline of Keynesian Politics, “political bargaining in the absence of sufficient authority to ration demands is an increasingly expensive technique of government.” See Colin Crouch, ed., State and Economy in Contemporary Capitalism, London: Croom Helm, 1979, p. 80. 29. These conditions have grosso modo counterparts in the declining productivity trends discernible in some advanced welfare states which are a

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financial markets, drove interest rates upward (where they were free to rise), stifled domestic private investment, and encouraged excessive reliance on external financing—to the further detriment of reserves while adding to the pressure on exchange rates. Privatisation, then, becomes one means, though not the only alternative, for dealing with the fiscal crisis that draws together a variety of contributing factors and undermines the central process of capital formation. Its success, therefore, depends on the likelihood that private management can turn around enterprise operating efficiency sooner, or more completely, than can public management with its rather different set of constraints. Privatisation may also be viewed as a means of transferring to the private sector the onus for unpopular decisions— price increases, the sacking of employees —and hence may be resorted to on ground of political palatability or expediency. Around 1976, for example, the Peruvian government moved to modify its earlier expropriation of the fishing industry. While retaining the processing and marketing stages under public enterprise control, it returned the seasonably fluctuating operations of the fishing fleet to private and co-operative management. This relieved the state firm of the unattractive options of (a) periodically laying off fishermen or (b) having to support seasonably idle workers on the company’s payroll, especially at a time when the financial status of the enterprise was already imperilled by both market and supply problems.30 The prospects for distressed privatisation, however, are by no means bright. While some cases have worked out more or less smoothly, there are obvious difficulties connected with the process even disregarding the risk of offending national sensibilities in some cases when the purchaser is a foreign company or multinational. The basic reason has to do with timing: the interest in disposing of public enterprises ordinarily coincides with when they are most burdensome, which is when the economy is not faring well. Yet, it is precisely at such times that the domestic market for companies of any nature is weak, let alone for companies that are money-losing. Moreover, it is just at such times that it may be

function of such variables as the subsidisation of labour and capital in low productivity uses in an effort to moderate intersectorial and interregional differences. The resulting suboptimal (from the standpoint of productivity) allocations of resources made in an effort to redress market-generated disparities often lead in turn to restrictions on the free flow of international trade. Meanwhile, there are, or so it is claimed, disincentive effects at both ends of the social structure in the form of high taxation, at one, and the design of welfare schemes, at the other. The depressive effects on capital formation and productivity of the growing public employment have also been singled out for criticism. 30. The declared intention of the Argentine government to sell some of the governmentowned public utilities to private investors shows, however, how one constraint has shifted. Earlier in the century many Latin American public utilities passed into government ownership when political resistance to upward adjustments in rates, in a context of chronic inflation, reduced real earnings to low and even negative levels. Under

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hardest to put deficitary firms on a profitable footing in order to enhance their saleability and attract the interest of private investors.31 Official desire to shrink the public sector may be frustrated, or carried out only at substantial cost to the treasury because of a need to sell such firms at sizable discount when market conditions are not generally propitious. Since, for that matter, the effects of economic contractions and stabilisation policies fall with special severity on the private sector, in the short run the relative weight of the public sector may inadvertently even turn out to be heightened through the collapse and shrinkage of private firms, notwithstanding the aim of governmental authorities to shift the relative importance of the two sections in quite the opposite direction. 6. Conclusion While we cannot treat the experience and contemporary situation of Latin America, much less of Peru, as somehow normative or defining, it nevertheless helps us to assess the contemporary trend toward privatisation and identify the underlying factors supporting it. Even so, it is difficult, on the basis of presently available research, to specify the processes and relations involved in it with sufficient detail to judge its likely prevalence and duration. This is so even in the Latin American cases whence relatively more information is available; for such other instances as Malaysia, Mauritius, the Ivory Coast, and so on, the evidentiary bases for generalisation are more fragmentary still. Sketchy though the evidence is, it may nonetheless be reasonable to suggest, albeit very provisionally, that except where ideological preference proves overriding, the next decade or so is likely to see a policy of privatisation applied to a limited number of third world industrial sectors, particularly in manufacturing but to some extent also in public utility companies and extractive enterprises. Doubtless, in some instances the assets of the erstwhile parastatal firms will be sold in their entirety to private capital, but a number of factors the circumstances, public ownership and subsidy were essential to maintain and expand service. With the introduction and spread of indexation, however, the public has evidently become more accustomed to and tolerant of frequent rate changes that tend, in the event, to get lost in the midst of comprehensive price rises. Thus, a reinstatement of regulated private ownership may well have become more feasible. 31. A related difficulty, also illustrated by recent Peruvian experience, has to do with the quality of management. When state shrinking moves were announced and the continuation of employment and career progress became problematic for those working in the parastatal sector, it is said that many of the most highly qualified technocrats were among the first to collect the preferred bonuses for resignation. Their exit, timed to locate and take up the most promising available opportunities in the private sector before labour markets should become clogged, left some public enterprises bereft of their most competent personnel and depressed further their attractiveness for private takeover.

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point to the possibility that joint ventures become much more prevalent than they have been hitherto. In some fields, joint ventures will be seen as an expedient through which public enterprises can gain access to advanced material and organisational technology and even, on occasion, overseas marketing networks. In other instances, governments may end up retaining a residual equity in firms scheduled for privatisation, either to avoid having the control of assets pass entirely over to multinational enterprises (i.e., to avert denationalisation in its fullest sense) or because especially where distressed privatisation is involved, private investors (mainly of local origin) cannot be induced to assume full responsibility for a firm’s operation. In the event, the process of collaboration between public and private sectors seems destined to be facilitated by the growing professionalisation of parastatal sector management in a structural context that is increasingly constraining public enterprises to adopt operating norms more akin to those governing the conduct of large management-controlled firms in the private sector. It is important, in this connection, to be mindful that a learning process is observable in the field of parastatal management just as it is in the private sector. While the management of government-owned companies in developing countries has yet, in most instances, to attain the level of professionalisation and technical competence of, say, that characteristic of state firms in West Germany, Austria, France, or Canada, a great deal of headway has nevertheless been made in upgrading managerial quality in a number of the Brazilian public enterprises, the Venezuelan petroleum companies, Mexico’s government-owned banks, the national Chilean copper company, and so on. Paralleling, as it were, the evident progress that structures of public administration have also exhibited in a growing number of developing countries over the past two decades, this changing complexion of parastatal management will also, in all likelihood, work eventually to diminish the impetus towards full privatisation. Even where privatisation does not enter the picture, it seems almost certain that, with the growing professionalisation of their management, and in response to the circumstances discussed above, parastatal companies will generally move in the direction of rather than away from market-guided investment and operating decisions. Increasingly, public authorities will be devising more effective and sophisticated control systems for the monitoring and concentration of their industrial, commercial, and financial concerns. Indeed, there is in principle no little similarity between the functional task confronting the corporate centre of a large conglomerate and that in which a governmental entity overseeing a complex of public enterprises must engage. Their optimising frameworks are different and the latter may have to incorporate somewhat more complicated performance criteria into their objective functions, but the logic, and even the design, of the managerial process is essentially the same in either instance. Over the past two decades, country after country has experimented with new organisational mechanisms for improving the control and co-ordination of

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parastatal corporations and government agencies, and during the last ten years or so the record of experience in this field has become both more subject to closer analysis and more widely shared. This too, in time, should relieve the pressure for privatisation of both the distressed and claimant-induced varieties. At the same time, the broad trends reviewed at the outset of this essay appear to promise that the responsibility of the state for regulation, accumulation and the provision of manifold goods and services will continue to be a heavy one. In fact, the relative weight of the public sector in the overall economic balance may well continue to grow even while privatisation is marginally reshaping the sectorial distribution of production. In this sense, then, privatisation becomes a means for consolidating and concentrating the state sector and enabling national economies to press ahead even more vigorously, with public enterprises clearly on the ascent in their respective learning curves.

5 The Efficiency of Public Enterprise in Less Developed Countries LEROY P.JONES and GUSTAV F.PAPANEK

There is little in the developing countries that has been developing, as rapidly as the hybrid form of productive organisation termed public enterprise: that is, production for private consumption by firms which are owned by the government. The ubiquity of this phenomenon is one of the few constants where diversity of circumstance and inclination have led to substantial variety in the development strategies adopted. The trend is by no means confined to one end of the ideological spectrum. Even in presumably private enterprise oriented countries such as Brazil and South Korea, a third or more of new investment has typically gone to the public enterprise sector. The rise in the contribution of the public enterprise sector to output has been all too often matched by a rise in its contribution to the government deficit. Critics of government involvement interpret this as an inevitable consequence of the inefficiency of public operation. As public ownership has expanded, so also have the deficits of the sector, and critics have attributed much of some countries’ economic malaise to this single cause. Enterprise losses are said to contribute to fiscal and balance-of-payments deficits, divert resources from investment, social services and more productive private uses, and ultimately lead to political unrest. All of this is said to represent the consequences of socialist policies. Defenders of the process may admit to certain “technical difficulties”, but argue that these are subordinate to the overwhelming importance of achieving egalitarian consumption patterns. If public production were the only effective means for obtaining control over the resources necessary to make socialist consumption possible, this would be a legitimate response. However, the tax system and other governmental control mechanisms can also be used to achieve socialist consumption objectives. Witness the case of Sweden, which couples one of Western Europe’s higher levels of socialist consumption with one of its lower levels of public ownership. Public direction of consumption does not require public ownership of production. A confusion between means and ends has thus arisen. Over the decades, public ownership of productive facilities has taken on the attributes of a goal, when it is in fact only a means. This meansends confusion is not limited to socialist advocates. Public ownership can, after all, be directed to ends other than

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collective consumption by removing growth bottlenecks and supporting and subsidising inputs necessary for private production—witness the large reliance on public enterprise in South Korea, Taiwan and Singapore. Failure to recognise such possibilities reduces the options available to advocates of capitalist patterns of development. Ideological myopia is thus symmetrical. We therefore believe that public enterprise must be viewed from a nonideological perspective. It is nothing more nor less than an instrument of government policy which can be used to reach a wide variety of ends. Like any tool, it may be wielded with more or less dexterity and efficacy. One of the reasons that it has so often proven cumbersome and inefficient in practice is that its use is so often viewed as the outcome of political rather than economic decision processes. It should be evaluated in the same way as taxation or any other instrument of government intervention. In this spirit, we first identify the multiple causes of the impressive growth of public enterprise in less developed countries (L.D.C.s). We then analyse the consequences of the trend in terms of efficiency and suggest the elements of a strategy to improve performance and achieve the objectives for which public enterprises: have been created.1 1. Causes: Circumstantial Historical circumstances and market failures explain much of the trend towards increasing public ownership and control in the mixed economy of L.D.C.s. The antecedent historical circumstances are as diverse as the nations themselves, but can be suggested in terms of a limited number of admittedly overlapping prototypes. Over the last decades, the single most visible source of growth of public enterprises has been resource nationalisation. As the petroleum extraction industry has passed from foreign to domestic hands, the new owners have been overwhelmingly public rather than private investors. Nationalisation was justified largely in terms of returning the national patrimony to national hands. It

1.This paper is a non-technical overview of issues which have been treated elsewhere in greater detail. On “Why Public Enterprise”, see Leroy P. Jones and Edward S.Mason, “The Role of Economic Factors in Determining the Size and Structure of the Public Enterprise Sector in Mixed Economy LDC’s”, in Public Enterprise and Economic Development, edited by Leroy Jones with Richard Mallon, Edward Mason, Paul Rosenstein-Rodan and Raymond Vernon. (New York: Cambridge University Press,. 1982.) On performance evaluation, see: Leroy P.Jones “Towards a Performance Evaluation Methodology for Public Enterprise (paper presented at United Nations Symposium, Islamabad, Pakistan, November, 1981). On income distribution, see: Leroy P.Jones, “Public Enterprise for whom?: Perverse Distributional Consequences of Public Operational Decisions” (paper presented at OECN conference on Problems and Policies of Industrialisation in an Open Economy, Istanbul, Turkey, August, 1981).

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would have been difficult to rationalise taking these enterprises from foreign “exploiters” only to turn them over to one of a handful of rich indigenous families who could afford to handle such large enterprises. Moreover, government clearly had to play a decisive role in price setting, taxation and international negotiations, so the introduction of yet another interest, that of the domestic private owner, seemed needless complication. Finally, there often were few, if any, private domestic firms able to raise the capital and talent to take on the large firms involved. As profits from these enterprises have entered government coffers, there has been a derivative expansion in official investment, generating new enterprises, often in downstream petrochemicals. Parallel events in non-hydrocarbons, (particularly tin, bauxite and copper) have further expanded the public sector, most notably in Andean Latin America. Ideological commitment is a traditional category. The model here is India, where “a socialistic pattern of society” has been a national objective at least since the Industrial Policy Resolution of 1948. In pursuit of this goal, the public enterprise sector in the 1960’s absorbed perhaps one-third of national investment, and grew at a rate roughly triple that of the economy as a whole. Other examples of long-term official commitments to public production in the name of socialism include Tanzania (after the 1967 Arusha declaration), Algeria, Sri Lanka and Burma. Ideology and politics have also played a role in countries such as Bangladesh and Ethiopia. Here, however, wholesale nationalisation occurred as a revolutionary by-product, rather than as a planned strategy of national development. These instances are closely related to the development of public enterprise in countries where no acceptable indigenous private entrepreneurs appear to exist. Bangladesh and Uganda are extreme examples of countries where the departure of the minority ethnic groups which controlled the modern sector left much of manufacturing and other non-traditional enterprises in government hands. It would have taken a deliberate, and politically risky, decision to denationalise enterprises and return them to the private sector. Malaysia is a less extreme example of the same motive. In an economy where domestic private firms were largely in Chinese hands, government enterprise was used to increase the economic role of the ethnic Malays. In addition there are a large number of countries in a mixed category with public enterprise alternately expanding and stabilising (rarely contracting) as a result of political compromise or alternating ascendency of domestic power groups with conflicting ideological orientation. Examples include Argentina and Indonesia. Requiring a different set of explanations and less well known is the significant, non-ideological expansion of public enterprises in a group of nations which may be characterised as having a pragmatic growth orientation and a stated preference for private enterprise. The historical model is Meji Japan, where government factories dominated the industrialisation of the early Restoration. In recent times South Korea has doubled the size of its public

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enterprise sector while growing at a real annual rate of 10%, despite an official dedication to laissez-faire market mechanisms and private capitalism. Similar stories may be told for Brazil, Taiwan, and Singapore. 2. Causes: Ideology or Economies? The foregoing survey suggests that as a determinant of public ownership, ideology may be somewhat overrated. Consider the cases of India and South Korea, which represent opposite poles of the rhetorical scale. In India, public enterprise is enshrined as a goal in and of itself, with private enterprise tolerated as a “necessary evil”. In South Korea, on the other hand, it is public enterprise which is viewed as tolerable only as an interim solution, with private enterprise lauded as the natural end. What difference does it make in practice? Surprisingly little. In the early 1970’s, some 9–10% of GDP originated in the public enterprise sector in both India and South Korea. Allowing for India’s larger agricultural sector, the shares of non-agricultural GDP were roughly 15% in India and 13% in Korea. Growth relative to the rest of the economy was substantial in both cases—public enterprise in India grew from a ’61/’62 base in the vicinity of 5% and in South Korea from perhaps 6%. In terms of industrial composition as shown in the Table, the similarities are far more impressive than the differences. Only in transportation are the shares markedly different and this is due to the greater role of railroads in the transportation sector of a geographically much larger country. In sum, it is difficult to discern the impact of differing ideology on the actual use of public enterprise in the two countries. This striking divergence between rhetoric and reality suggests that the scope of public enterprise activity is heavily conditioned by objective economic factors. Faced with common problems in the course of development, both countries have responded with similar solutions. This is not to espouse a simple economic determinism, and the pure symmetry of our example is in no sense to be taken as typical. Nonetheless, observations on other less well documented L.D.C.s suggest for greater similarities than are explicable in terms of social philosophy. Ideology is not impotent, particularly in a revolutionary setting, but economic reality heavily conditions the outcome. This argument is structurally similar to the various theories on the “convergence” of Soviet and Western style economies. While movement towards one another is predictable on economic grounds, there will always be a substantial band of indeterminacy separating those who approach from opposite directions. The point is that the choice of economic systems in general, and public enterprise in particular, is not simply a given goal of the political system but is conditioned by environmental factors in a fashion amenable to economic analysis.

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PUBLIC ENTERPRISE SHARES IN INDUSTRIAL SECTORS (PERCENTAGES) Korea and India: 1971–72 Agriculture Mining Manufacturing Electricity, etc. Construction Trade Transport, Communication Finance Other Total

Korea* 0.2 32.6 16.4 71.7 4.9 1.2 30.8 83.5 0.5 9.7

India** 1.6 36.3 13.3 83.8 4.8 3.2 61.4 84.0 1.6 9.4

3. Causes: Market Failure It is possible to state rigorously the conditions under which Adam Smith’s unrestrained “invisible hand” of laissez-faire leads to a socially desirable outcome. Deviations from these assumptions may be broadly termed “market failures” and present a prima facie case for corrective intervention by the visible hand of government. In the real world, of course, market failures are ubiquitous. We do not intend to present a detailed morphology of these failures, but only suggest their scope as applied to marketed goods (i.e., excluding public services). “Basic” motives for intervention which apply to all economies are well described in the literature and include: (a) technical factors which lead towards monopoly or oligopoly in certain industries; (b) consumption and production externalities; and (c) government monopsonistic purchases of the output of various collective intermediaries. In L.D.C.s, the list of critical market failures is far larger, including a group of “developmental motives” for intervention focusing on barriers to entrepreneurship such as inadequate information on markets and technology, risk and uncertainty, scale economies and the absence of financial * Leroy Jones, Public Enterprise and Economic Development. (Seoul: K.D.I. Press, 1975), p. 78. ** N.S.Ramaswamy, V.G.Kesary, P.V.George, G.K.Nayar, V.G.Kamath, and P.D.Deenadayalu, Performance of Indian Public Enterprises (New Delhi: Standing Conference of Public Enterprises, 1978), p. 96. Source adjusted to treat “ownership of dwellings” with “other” rather than with “finance”,

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intermediaries. There are also widespread divergences between private and social costs, arising from distortions in the markets for foreign exchange, credit and labour. Since such failures constitute the very definition of underdevelopment, the scope for government intervention is far larger in L.D.C.s. Given a case for intervention, it is clear that a wide variety of mechanisms are available, including: taxes and subsidies; informal “guidance”, “discussion”, or “jawboning”; formal regulation and antitrust measures; and public enterprise. Taxes and subsidies, impersonally administered, are the economists’ preferred tool, but are inadequate for a number of tasks. The U.S. has approached the “basic” failures using antitrust and other regulations, but has been notably unsuccessful in exporting this technology. Elsewhere in mixed economies, the same problems are typically dealt with via public enterprise. The menu of intervention tools should always include the possibility of “hands-off”, since any form of intervention also entails costs. There are administrative costs and, more importantly, the problem that any form of intervention generates its own set of distortions in the system. Thus, profit regulation of an electric utility in the U.S. may, depending on its structure, eliminate monopoly profits but can also lead to over-capitalisation, excess costs, and insufficient output. Such costly unintended deviations are inescapably associated with any form of intervention. The problem of the visible hand, then, involves: (a) identification of various intervention mechanisms which achieve the primary intended deviation from private behaviour; (b) assessment of the probable costs of associated unintended deviations; and (c) selection of the mechanism with minimum costs, so long as these do not exceed the costs of the distortion which is to be overcome. In practice, of course, the flexibility of decision makers is inadequate for such a proposal, but much the same thing can be accomplished with a more restricted range of options. That is, given a decision that public enterprise will be the intervention mechanism, a wide range of options are available in the administration thereof. Choosing between these alternatives involves essentially the same choices as outlined above. Public enterprise and its varients, then, constitute one set of policy tools available to the government in correcting imperfect private market activity. Some of the consequences of choosing this particular set are now considered.

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4. Consequences of Public Operation: Inefficiency While L.D.C.s have revealed increasing preference for public enterprise, there has been at the same time rising concern with the undesirable side-effects of this choice; that is, the unintended deviations from private behaviour. Allusions to inefficiency abound, and these are in no sense confined to opponents of the concept. A major stimulus for this concern is the profit position of public undertakings. As conventionally measured, the profits of public enterprises are typically low and often negative, even in monopolised sectors. As we will argue in detail below, accounting losses are a highly superficial and misleading indicator of public enterprise efficiency. Nonetheless, given the high opportunity cost of public funds in L.D.C.s, they are not to be taken lightly. Further, a portion of the losses are directly attributable to what we perceive to be the major undesirable consequence of public operation. To specify this consequence, a brief semantic digression is necessary on the ambiguous notion of “efficiency”. Economics is concerned with allocation of societies’ scarce resources so as to achieve a non-improvable level of social welfare. This requires, among other things: (a) that whatever is produced is produced at minimum cost; and (b) the selection of the optimal quantity (price) of each competing output (input). The overwhelming bulk of microeconomic work assumes that cost of minimisation is taken care of by engineers and managers and devotes itself to solving the second problem which may be termed “allocative efficiency”. A distinct minority has concerned itself with the cost-minimisation problem which is part of what Leibenstein calls “X-efficiency”.2 Is the perceived inefficiency of public enterprises of the “allocative” or ‘X’ variety? That is, did the voters of Massachusetts recently reject a public power authority because they feared overexpansion and underpricing or because they thought that public operation would result in higher costs? There can be no question but that the overwhelming popular concern with public enterprise efficiency refers to the ‘X’ variant. Further, we believe that this concern is well placed and that the gravest consequence of public operation is not the failure to produce the correct output at the correct price, but the failure to minimise costs. This is not to say that allocative efficiency is to be ignored. Much is to be gained by improved application of the well-developed literature on cost-benefit analysis and marginal cost pricing. We believe, however, that top priority should be given to X-efficiency because the literature is less well developed and because the potential welfare gains are far larger.

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This belief is demonstrable empirically, but may also be supported by a bit of a priori theorising on the way in which public enterprises are operated. Performance standards, management incentive systems and the realms of managerial discretion are typically such that X-efficiency is not only unlikely but virtually impossible. 5. Performance Evaluation The first problem in achieving public enterprise X-efficiency is the absence of acceptable performance standards. Accounting profitability is the obvious candidate for a performance criterion. Granted that no single-period indicator can reflect multi-period effects, this measure is nonetheless exceedingly useful in evaluating the performance of private enterprises and managers. Why not for public firms? Part of the answer, of course, is that accountants’ prices do not correspond to scarcity values and hence do not measure social benefits and costs. If the government holds the price of fertiliser down as a subsidy to agricultural production, the fertiliser manufacturer should not be penalised. Similarly, though less widely recognised, if the enterprise is given privileged access to low priced inputs (e.g., credit or foreign exchange), then its profits are overstated. Finally, many of the outputs of a public enterprise are not sold at a price and do not enter the profit calculation at all. To private enterprise the reasons for profit or loss are not irrelevant, since profit and related indices of success are their principal objective. But public enterprises, after all, have multiple objectives such as income redistribution, employment creation, regional development, national security, price stabilisation, capturing “commanding heights”, prevention of business failure, manpower development, creating production externalities, enhancing national prestige, and so forth, for as long as one wishes to continue. For them, price distortions and externalities negate the accountant’s profit comparison of costs and benefits of operation. Managers and controllers of public enterprises are not unaware of these considerations. The controller observes that X’s profit picture is rather bleak and the manager responds, “Yes, but remember the social objectives set for the enterprise”. This may well be perfectly legitimately, since the pursuit of many intended deviations requires explicit or implicit government subsidy. The rub, however, is that excess costs also decrease profits and these are also typically explained away with reference to prices, social goals and externalities. 2. Harvey Leibenstein, General X-Efficiency Theory and Economic Development, (London: Oxford University Press, 1978). Harvey Leibenstein, “X-Efficiency Theory and the Analysis of State Enterprises” (paper presented at Second Boston Area Public Enterprise Group Conference on Public Enterprise in Mixed Economy LDC’s, April, 1980).

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Since “Yes, but” responses are always qualitative and never quantitative, they are equally useful in explaining legitimate intended deviations and in excusing costly unintended deviations. The result is nihilism: anything can be explained by a wave of the magic externality wand, so virtually any level of profit is defensible and the indicator is worthless. Carried to its extreme, as it frequently has been, the result has often been untenable budget deficits. A common temporising response is the instruction to “break even” or “cover costs, taking one year with another”. While this may have some effect on X-efficiency, it is equally likely to fuel pressure on controllers for price increases. Further, there is no pressure at all put on highprofit enterprises. Extractive industries (e.g., oil), or unnatural monopolies (cigarettes, liquor) may in fact be among the most X-ineffi cient of the public sector enterprises because of the profit cushion provided by their market position. In any event, the break-even criterion, while in practice probably superior to nihilism, remains tied to an inappropriate scale of social welfare. Accounting profits do not reflect social costs and benefits. Three sorts of solutions are possible: development of superior quantitative criteria, reliance on “great men”, or “muddling through”. The last suggestion is not meant to be facetious. As Lindbloom has argued, the British style of muddling through has distinct advantages given the costs and inflexibilities generated by rigid pseudo-objective standards in an uncertain world.3 This solution is obviously improved if the “muddling” is done by “great men”. A.K.Sen, despairing of profit as an indicator, sees no alternative but the assignment of exceedingly competent, public spirited managers and controllers.4 While there are clear examples of superior public enterprise performance attributable to the vision and forcefulness of individuals, such persons are in short supply. What is needed is an environment which will allow success by managers who are merely competent. To ask one individual to both weigh relative social priorities and run an enterprise is to ignore the principle of division of labour. Asking a manager to decide the objectives by which his own performance will be measured requires him to determine a social objective function and to weight (price) different objectives appropriately, tasks for which he has neither the information nor the incentive. In any event, reliance on individuals and muddling through represent the current norm and has produced consequences which are less than salutory. While fully recognising the difficulties involved, we believe that there can be no substitute for a concentrated effort to provide quantitative standards for evaluating the performance of public enterprises. One approach is the use of partial indicators such as capacity utilisation, output quantity or sales. The distortions introduced by managers in the pursuit of such standards are well known. 5 The answer can only be some form of reasonably comprehensive social profitability calculations. Project evaluation has moved increasingly towards the use of social scarcity (shadow) prices in ex-ante cost-benefit analysis of investment decisions. Why

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not apply the same idea to ex-post performance evaluation? Given the basic accounting documents of the firm in market prices, the profit and loss account would be re-arranged to reflect economic, rather than accounting, categories and producing “public profit at market prices”. If all items were then repriced as necessary to reflect social utility, the resulting bottom line would be “public profit at shadow prices”. Dividing by an appropriate measure of capital stock would then give the single-period social rate of return or “public profitability at shadow prices”. Public profitability calculations in principle can use suitable shadow prices to incorporate the various economic objectives usually set for public enterprise and to quantify the various subsidies (taxes) implicit in the firm’s operation. This is not, however, a simple task. For example, where an enterprise borrows at subsidised rates, it is difficult to ascertain the real opportunity rate of interest. Further, even the quantity being subsidised is not certain since there are both income and substitution effects and one cannot be sure of the extent to which excessive use of capital is due to this substitution, as opposed to simple managerial incompetence. Measurement of some externalities and non-economic objectives may in fact defy calculation. Economic calculation of social profitability is thus an heroic task, and theoretical perfection is not to be expected. Instead, the goal is an indicator of performance which would move enterprises in the direction of greater social Xefficiency. The room for improvement being great, even modest success might be expected to reap great benefits. The crucial question is not whether the real opportunity cost of capital is ten, eleven or even fifteen percent, but whether or not we would like managers to behave as though it were well above the zero or negative real rate reflected in market prices. It is not so important to ascertain the exact shadow price for labour but only to ensure managerial awareness that there are real costs to extra hiring. As a practical first step, one might not aim at an indicator which allows comparing one enterprise with another, but only one which allows comparison of this period’s performance with that of the previous period for a single enterprise. After all, once the investment decision is made the operational question is not how well the enterprise is doing relative to others, but how to stimulate it to do better. For this purpose, a trend indicator of performance is all that is necessary and this is a much simpler problem because the shadow valuation of capital

3. C.E.Lindbloom, “The Science of Muddling Through” (Public Administration Review, 1959). 4. Amartya Sen, “Profit Maximisation and the Public Sector” (Lecture delivered at Kerala University, Trivandrum, March 31, 1970). 5. For a classical treatment in the Eastern European context, see: Jones Kornai Overcentralisation in Economic Administration (Oxford: Oxford University Press, 1954), pp. 27–69.

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stocks and externalities is far less critical. The basic problems here are adjusting for inflation and rearranging the accountant’s categories to reflect economic concepts. This is none-theless most useful because simply being able to compare this year with last year for even one enterprise allows appropriate behaviour to be recognised and rewarded. Establishing “which direction is up” is a necessary prelude to finding “how high is up”—a criterion is easier to find than an optimal criterion value. The public profitability calculation is not feasible for all enterprises; for those whose output is heavily non-marketed (e.g., regional development banks) the calculation might not be worth the effort. Here one might have to ignore benefits and resort to some sort of cost-effectiveness calculation in a governmental, rather than a business, evaluation procedure. For the bulk of public enterprises, however, a public profitability calculation might be expected to yield substantial benefits in X-efficiency. Further, an imported calculation of social costs and benefits would allow a superior basis for an appropriate marginal cost pricing calculation and derivative allocative efficiency. In sum, the first condition for improving the performance of public enterprise is the articulation of objectives and a specification of trade-offs among them. The problem of “multiple objectives” must be attacked directly rather than allowed to continue to rule as an excuse for any outcome whatever. Establishment of improved evaluation standards is thus a necessary condition for performance improvement. It is in no sense sufficient. 6. Control System Given a clear performance standard, are there any reasons why a public enterprise could not perform as well as a private enterprise? In theory, the answer is “no”, at least for large enterprises where management will in any event be divorced from control. A professional manager ought to be able to organise production so as to achieve government’s goals as effectively as those of any other stock-holder. Regrettably, it does not work out this way in practice. In the first place, the incentive system of public managers is too often unrelated to performance. To cite but one example, a semiretired general or senior civil servant may not be overly concerned with mundane bottom-line considerations. In one environment, he may be primarily concerned with keeping out of trouble until some new political opportunity arises. In the meantime, he will “satisfice”, maintaining some minimally acceptable level of profit (however defined) but avoiding any of the conflict or risk implied by maximisation. In a different setting, a manager may wish to generate immediate public or official attention by making a single-valued, short-run splash, regardless of long-run or net effects. In both cases, appropriate behaviour is likely only if effective pecuniary

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and non-pecuniary incentives are linked to an appropriate success indicator. This is the second requirement for improving public enterprise efficiency. Incentives ought to be applied to the enterprise as a whole, as well as to managers. For this purpose the ultimate threat of “capital” punishment should be reimposed. Public enterprises must be allowed to die occasionally, both to avoid resource wastage and to stimulate survivors. In the history of economic organisation, the move from the unlimited liability of the partnership to the limitedliability status of the joint-stock company was a salutary step. The further shift to the no-liability status of the public corporation has-taken things a bit too far. Given an incentive system linked to a meaningful performance criterion, will all be well? Again the answer is no. The reason is that even an appropriately motivated manager can only affect those factors within his control. All too often the actions of public managers are so circumscribed by bureaucratic impedimentia that they cannot hope to reach achievable objectives. Exhaustive reports through multiple channels generate unnecessary costs. Much more important, requirements for multiple ministerial validation of even minor decisions consume time, delaying the introduction of new ideas and retard adjustment to changing market conditions. Administrative interference in the appointment of subordinates subverts the top manager’s ability to control outcomes and precludes his responsibility for performance. Appropriate demarcation of the realm of managerial discretion is thus the third requirement for improving public enterprise X-efficiency. The problem of “autonomy versus accountability” cuts both ways. Witness the case of Indonesia’s Pertamina oil monopoly where excessive independence from government scrutiny nearly led to national bankruptcy. There are indeed whole countries where the creation of undercontrolled public enterprises has led to the development of a new bourgeoisie with all the perquisites of power but none of the responsibility. Here, public funds are all too often used for individual gain without noticeable contributions to growth. The problem then is to renationalise from the managers that which had previously been nationalised from the capitalists. Elsewhere, historical circumstance has produced bureaucracies of such strength that the manager cannot but acquiesce in their intervention, however inappropriate. The fundamental problem is thus to provide sufficient governmental control to insure achievement of intended deviations from private behaviour, while insuring sufficient managerial discretion to minimise unintended deviations. A performance standard coupled with an ex-post performance audit is the first step. Faced with control problems in a public enterprise, the preferred bureaucratic solution is often to “reorganise”: i.e., convert a departmental enterprise into a government corporation or joint-stock company or vice versa. This commonly fails because there is no necessary link between legal status and managerial autonomy. Reorganisation can work—particularly the imposition of a holding

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company between the bureaucracy and the manager—but only insofar as it affects the three basic determinants of efficiency already defined. In sum, we perceive the first step of improving the management of public enterprises as not being primarily that of improving managers. Given the typical existing environment even good managers cannot manage very effectively. Priority in improving X-efficiency must be given to establishing performance criteria, linking these to managerial incentives, and allowing appropriate scope for managerial discretion. Training and selection of qualified managers may then be expected to produce more efficient operation rather than frustration. 7. Political Constraints Appropriate performance criteria, incentives and realms of managerial discretion are necessary for the economically efficient operation of public enterprises. That these conditions are conspicuous by their absence is only partly due to technical difficulties in defining appropriate measures. Much more important is the unwillingness of national leadership to subordinate political ends to economic efficiency considerations. The literature on taxation is replete with examples of taxes and subsidies being used to gain political support by providing subsidies to particular individuals, groups and institutions. From the politicians’ point of view, this may be an inconvenient and embarrassing tool for such redistribution, since the transfer elements are explicit. Alternative mechanisms—in the form of tariffs, preferential credit allocation, licensing procedures, and the like—are less conspicuous, since the subsidy element is harder to identify and quantify. Public enterprise is in practice perhaps the ultimate tool for providing such hidden subsidies. Political reluctance to forego discretionary use of this powerful lever explains much of the difficulty in effective reform of the public enterprise sector. It must be stressed that the problem is not the subsidies themselves, but the fact that they are hidden. In any society there are legitimate reasons for transferring income from one group to another, and this is particularly true of L.D.Cs. In theory, given the infeasibility of lump-sum transfers, there is little to choose between effecting such redistribution through the fiscal pocket as opposed to the public enterprise pocket. In practice, the fact that public enterprise subsidies are hidden creates two problems. First, illegitimate transfers to political favourites is as likely as legitimate transfers to the under-privileged. Second, where any accounting loss can be attributed to unquantified subsidies, there is no way to control real resource wastage. The solution suggested above is to establish performance criteria which specify the legitimate subsidies, leaving illegitimate ones to appear as implicit costs for which management is penalised through the incentive system. It would therefore be naive to expect our proposals to have universal appeal. Governments using public enterprises to covertly subsidise particular activities

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or groups are likely to be reluctant, at best, to see calculations made which bring into the open the costs of the hidden subsidy.

6 Management Information Systems in Public Enterprise MARTIN J.BOODHOO

The inter-face between the government and public enterprises is not only a sensitive but perhaps a highly critical aspect of the decisional process in public enterprise.1 This has been complicated by the lack of mutual understanding and trust between the political and administrative authorities on one side and the boards and managements of public enterprises on the other. To some extent this has been caused by difficulties in defining, or by political preference for flexibility in delineating, the respective roles of the two sides. The lack of mutual trust seems to have been worsened by inadequacies in the availability of information as well as those in the proper flow of whatever information is available. This paper aims at reviewing some of the strengths and weaknesses in the relationships between the government and public enterprises and indicating how an improved Management Information and Control System (MICS) could ameliorate relationships and enhance the performance capacity of public enterprises (PEs). The institutional framework of public enterprises in developing countries still bears the marks of colonial traditions even though these countries have attained political independence over two to three decades ago. As creatures of the state, public enterprises are subject to political supervision and control but the methods may vary; for example, public corporations operating under a specific law may be subject to different institutional modalities from government companies in respect of decision-making and accountability. Generally speaking, however, the political-administrative hierarchy is built on the Westminster-Whitehall principle (or Presidential model) of allocating managerial responsibility for a public enterprise to a board of directors which is accountable to a Minister who in turn is responsible to the Cabinet (or President) and, finally, to a National Assembly.

1. For an elaborate discussion, see (a) Select Committee on Nationalised Industries, U.K. Ministerial Control of Nationalised Industries, H.M.S.O. (1969); and (b) V.V.Ramanadham, Organisation, Management and Supervision of Public Enterprises in Developing Countries, U.N. Sales No. E. 74: II. H.4 (1974).

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This is the theory: how far this chain of accountability actually prevails is a function of circumstances— country, enterprise, time and personalities. Public enterprises in developing countries have been created,, in many cases, as instruments of public policy and as such have had to operate—de jure—within the constraints of such policy. It must not be overlooked that, as creatures of the state, in the final analysis they are subject to political direction; and indeed, conventional practice suggests that no public enterprise is completely autonomous and independent. The confusion over policy direction and day-to-day management is partly due to the inheritance of the autocratic colonial system as well as the drift towards the centralisation of authority in the post-independence period. In commenting on the need for a higher degree of decentralised decision-making to cope with the accelerated development efforts in the Caribbean, for example, Courtney Blackman, Governor of the Central Bank of Barbados, observes that: “Throughout the Caribbean there has been an increased tendency towards centralization and dirigism, with a horrendous result for the quality of public and private services. In this respect, Trinidad and Tobago, although acting from a different ideological basis, shares the tendency with Guyana and Jamaica.2 This tendency affects not only government departments but public sector agencies of all types also; and the thin line that divides —or is supposed to divide —autonomy of public enterprises on the one hand and accountability to the political authorities on the other, has indeed been blurred on occasions in many developing countries. Interventionist policies of governments have occurred3 in consequence. These, however, are not always politically motivated. A review of the statutes and conventional practice among public enterprises in Third World countries indicates that ministeriai-administrative supervision could be initiated through one or a combination of the following means:4 (i) policy directions of a general or specific nature; (ii) appointment of the chairman and members of the board of directors; (iii) the making or approval of top-level appointments, e.g. managing director and general manager;

2. Paper presented on “The Ideological Obstacles to Economic Development” by Dr. Courtney H.Blackman, Governor of the Central Bank of Barbados at General Management Course, Administrative Staff College, Jamaica (Mimeo., undated). 3. For some examples of ministerial and other forms of bureaucratic intervention, see (a) G.E.Mills, “Public Administration in Commonwealth Caribbean: Evolution, Conflicts and Challenges”, in Social and Economic

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(iv) granting approval to capital expenditures and loans over a certain defined level; (v) the assignment of mandatory or indicative targets either specifically or through the development planning process; (vi) the issuance of directives on matters of public interest, e.g. wage policies, price control, import restrictions, training and education, and research and development; (vii the requiring of reports, accounts and returns for control and accountability ) purposes and the setting of standards of observance in such areas as financial and performance audits, recruitment, discipline, social security, superannuation, etc. Over and above these formalistic channels, there is an amorphous bundle of informal relationships such as lunch-time discussions, cocktail chats, telephone conversations and casual discussions which take place from time to time. Interviews and discussions conducted by the author over the last ten years with politicians, senior administrators and managers as well as researchers, confirm that there are regular consultations and discussions between the politicaladministrative groups and those concerned with broad policy as well as day-today management. Albeit, in the final analysis, the supervisory authorities reserve the right to give policy directions of a general or specific nature, for which the statute provides, such directives are very seldom resorted to. In practice, there are several forms of “off-the-cuff suggestions” and “subtle arm-twisting” techniques to get decisions through rather than the issuance of formal directives. Such measures naturally blunt the process of accountability as the locus of responsi bility for particular decisions or even the process of such decisionmaking turns out to be elusive. What is evident, moreover, is that under the prevailing conditions many important decisions are not taken within an established institutional framework based on reliable data. This phenomenon appears to be more common in newly independent countries. The urgency and pressures for the implementation of projects to raise living standards and accelerate the pace of socio-economic development influence the political-administrative authorities as well as operational managements to take decisions on the basis of hunches or “inspired guesses” rather than of systematic data-based planning.

Studies, Vol. 19, No. 1, March 1970, pp. 5–25; (b) Keport on Guyana Rice Marketing Board and Rice Development Company, by Urwick Orr and Partners Ltd., 12th August 1966; (c) Commonwealth Secretariat, The Role and Management of Public Enterprises: Report of a Seminar in Jamaica (1976). 4. These powers are invariably retained by the supervisory authorities in the statutory or other instrument setting up the enterprise.

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A Management Information and Control System Under such conditions the case for an improved system of management information becomes an urgent and fundamental necessity. A MICS is an organised method of presenting facts, figures and statements, i.e. data both qualitative and quantitative, on past and current time periods as well as projections of likely outcomes, relating to the internal functions of an organisation and the external environment that may favourably or unfavourably affect the organisation. In operational terms a MICS provides basic information for the various functional processes, i.e. planning, budgeting, staffing, control, auditing, reporting, etc. It can be visualised as a group of people working with a set of methods, procedures, manuals, equipment (manual or electronic) which are concerned with the collection, storage, processing and retrieval of data for managerial purposes at various levels of a given organisation. In the absence of an effective MICS a public enterprise would be like a boat without a rudder floating aimlessly in a turbulent sea. If we assume that one of the major objectives of proper relationships between the government and public enterprises is to ensure that they operate efficiently, and that their programmes of activities should be in consonance with the national development objectives, then it is obvious that an important requirement consists in the setting up of an effective Management Information and Control System for monitoring, evaluation and accountability purposes. There is abundant evidence to indicate that one of the major weaknesses in the planning, management and evaluation of public enterprises in developing countries lies in the absence of upto-date and relevant management information systems. This phenomenon was recently alluded to by Carlton James, an Information Expert in the Caribbean, in a report which stated that: “Library and documentation systems in most Caribbean countries suffer from severe shortages of funds, technical backup and manpower. As a result, informal systems are the rule, and these can go badly wrong. Government or consultant reports, for instance, are usually housed in the public library and in the government office concerned, but little attention is paid to methods of retrieval; too many reports simply drown in the maelstrom of official and not-so-official documents and archival records stashed in corners. Furthermore, few of the Caribbean countries have efficient means to gain access to regional or international information sources.”5 That there are gaps in information at another level may be evidenced from the observation of V.V.Ramanadham in the context of public finance decisions involving public enterprises:

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“Not enough information is systematically presented in the budget context in many developing countries today. No wonder the full impact of their public enterprise finances is neither realised nor allowed for in formulating budget policies.”6 Admittedly, other variables also affect efficiency and good working relationship but the principal thesis of this paper is that the setting up of an EFFECTIVE INTEGRATED MANAGEMENT INFORMATION AND CONTROL SYSTEM within an established framework of mutual respect and understanding between the government and the enterprise managements could lead to less external interference with, and a higher level of performance capability in, public enterprises in third world countries. It is not often recognised that an effective MICS can assist in better problemidentification provided that the system of data collection and retrieval is institutionalised so as to serve the requirements of the various hierarchical levels within the organisation. Many information systems have not progressed beyond the stage of mere historical data collection and storage,7 simply because due attention was not given as to what kind of information is required at various levels of the enterprise, and what the quantum and the frequency flows of such information should be. An ancillary problem is the failure to appreciate the multichannel character of the information requirements, i.e. top-down, bottom-up and lateral flows as opposed to everything moving upwards to the higher echelons through a sluggish monolithic system. Both the providers and the users must work as a team and ensure the relevance of the information system if the relationship between the various segments or agencies is to improve. One may very well ask the fundamental question as to why a system of monitoring and control is necessary if government-public enterprise relationships are to evolve properly. A simple answer is that no organisation can operate efficiently and effectively in the absence of a system of information that guides the management and enables policy-makers at the supervisory levels in evaluating performance and formulating long-term strategic plans. Furthermore, public enterprises in developing countries operate in an environment which is not static but poses certain distinctive challenges and problems. Changes in the economic, social, financial and political environment are a challenge for all managers, administrators and policy-makers; and adaptation to them is a basic condition for the viability and healthy existence for any organisation. One of the

5. Carlton James, “The Search for Information” in Commonwealth Currents, June 1981, Commonwealth Secretariat, London, p. 9. 6. V.V.Ramanadham, Organization, Management and Supervision of Public Enterprises in Developing Countries, p. 212. (United Nations, New York, 1974, E.74. II.H.4). 7. See, for example, Report on “Seminar on Public Utility Enterprise Administration”, Daily Gleaner, Jamaica, 19th Nov. 1976.

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means of coping with such changes is the establishment of a Management Information and Control System, which provides for an improved understanding of the nature of changes, so as to enable managers and policy-makers to take remedial measures on the basis of relevant and reliable data rather than on intuition or “off-the-cuff” impulses. The need for an improved information base was emphasised at a Seminar on Public Utility Enterprise Administration in Jamaica, in the following terms: “…the portfolio ministry which has overall responsibility for the formulation and implementation of sectoral policies and programmes, should get regular data on production, yields, expenditure and revenue, capital expenditure and progress, as well as progress reports on all nonfinancial objectives.”8 Similar suggestions were made in respect of returns to the Ministry of Finance in order to evaluate new projects, and other financial transactions of public sector agencies.9 These suggestions reinforce the case for public enterprises to provide timely, relevant and reliable information in order to assist supervisory agencies to carry out their monitoring and co-ordinating roles. Without such an information system, the political and administrative authorities would be tempted to interfere or take arbitrary action of one kind or another. The rationale for establishing an information rapport between the management of enterprises and the government is admirably summed up in the 1978 White Paper on U.K Nationalised Industries which stated that: “For many years the development plans and investment programmes of the nationalised industries, covering periods of five years ahead have increasingly been formulated within the wider context of both the industries and the Government’s objectives and policies. This process of corporate planning, covering various time periods, involves a continuing dialogue on long-term strategy, medium-term development plans, and annual operating plans and budgets. The industries look to the Government for guidance on industrial policies, or economic prospects and where appropriate on sectoral policies, including the social objectives underlying the payment of grants from public funds. The Government looks to the industries for data on markets, supplies and production. The development

8. Paper presented at “Seminar on Public Utility Enterprise Administration” in Nov. 1976, by the Advisory and Monitoring Unit, Ministry of Public Utilities and Transport, Jamaica (mimeo.). 9. See paper on “Public Enterprises in Jamaica and their Accountability” (undated) prepared by Finance and Accounts College of Training, Ministry of Public Service, Jamaica (mimeo.).

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of this process is more advanced with some of the industries than others. Its benefits are already becoming apparent in the energy sector…”.10 The above observation goes beyond just establishing good working relationships. In fact, it underlines the stark necessity to base operational policies in reliable data, from the point of view of the supervisory authorities as well as the operating agencies in the public sector. To sum up, therefore, the main objective of a MICS is to collect, evaluate, store and retrieve data to assist management to: (i) formulate medium and long-term strategic plans; (ii) facilitate decision-making to optimise the use of scarce resources; (iii) diagnose problematic areas and initiate timely and appropriate remedial measures; (iv) undertake review and evaluation exercises; and (v) assist in the re-formulation of development policies on the basis of established evidence.

It should be recognised that the availability of information would not per se guarantee better relationships between public enterprises and the government, but at least it can provide a clearer perspective of the business environment for both sides. Finally, a MICS is no substitute for mature judgment and responsible management action. Properly used, however, a MICS can enable the administrator and the manager to make better decisions. In fact, for the system to be successful the providers of information at one level must know what the users at another level (or area of activity) want as well as why the information is required. The entire exercise should be undertaken within a corporate structure that facilitates participation and the sharing of ideas at the enterprise as well as national levels. Many information systems never left the drawing board or became “unresponsive” simply because the “providers” and the “users” of information operated on “different wavelengths” or, worse still, communicated in “different languages”. The establishment of links within a participative framework is a basic pre-condition for an effective management information system in any organisation. There are a number of other advantages of setting up a MICS. These may be summarised as follows: (i) to provide basic data for all forms of planning, i.e., strategic, project and operational, so that forecasts and projections can be based on reliable statistics and not guesstimates;

10. CMND. 7131, The Nationalised Industries; HMSO (U.K.), March 1978, pp. 17–18.

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(ii) to provide those concerned with management and/or co-ordination with adequate, timely and accurate information in the form of qualitative and quantitative data such as financial statements, budgetary statistics, progress reports, performance analysis, etc., in order that activities can be properly monitored and an early warning system set up to guide policy-makers and managers. (iii) to assist the management of an enterprise to establish whether the enterprise is fulfilling the objectives for which it was created and to identify bottlenecks; (iv) to enable the supervisory agencies—such as the Ministry of Public Enterprises in Malaysia, the Guyana State Corporation in Guyana, and the Bureau of Public Enterprises in India—concerned with policy formulation and co-ordination to undertake evaluation exercises of a socio-economic and financial nature and, furthermore, to provide basic data for new policy measures with respect to future development programmes; (v) to monitor and facilitate the assessment of cost-effectiveness of development projects and on-going activities so that forward planning and operational management could be enhanced through an integrated feedback system; (vi) to assist public enterprise managements in meeting the requirements of accountability in respect of supervisory authorities as well as parliamentary bodies; and (vii to facilitate the establishment of a data bank for the public enterprise sector ) and thus foster a better exchange of planning and operational strategies and statistics among public enterprises in the country. Further an effective MICS can go a long way in eliminating or at least containing mistrust between public enterprises and supervisory authorities. Neither the supervisory authorities nor the managements of public enterprises are islands unto themselves. The working modality has to be underlined by a ‘gentleman’s agreement’ built on mutual respect, trust and understanding and on the principle of ‘give and take’. In this regard it may not be amiss to refer to two cases where attempts have been made to set out a framework for better understanding between the supervisory agencies and public enterprises. The case of the National Enterprise Board and Rolls Royce in the U.K. is an example of an industrialised country where a “Memorandum of Understanding” was drawn up to indicate the broad parameters of relationships.11 The full text of this Memorandum is given in an Appendix in view of the relevance, in the present context, of the matters covered by it—e.g., the general principles underlying the understanding, the composition of the board of directors, the monitoring of the enterprise performance, capital investment and borrowings, wider economic and social responsibilities of the enterprise, contacts with the government and channels of communication between the enterprise and the NEB —and in view of the light it throws on the nature of MICS implicit in the effective working of such a document on mutual relationships between the operating and higher levels.

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The other case is that of a developing country, Pakistan, where a comprehensive set of “Guidelines on Corporations and Enterprises under them”, was drawn up to assist in the establishment of better relationships.12 In brief, mutual trust, a document of understanding, and MICS may be described as three inter-related basics in the good perform ance of public enterprises. MICS provides an organised flow of information that is essential for an efficient direction of the enterprise by its management and for an intelligent control and appraisal of enterprise performance. The information has naturally to be related to the respective responsibilities of management and government, which documents like the memorandum of understanding or the French contract of programme help in defining. Thus MICS helps in keeping governmententerprise relationships from being impaired by lack of information. APPENDIX MEMORANDUM OF UNDERSTANDING BETWEEN NATIONAL ENTERPRISE BOARD AND ROLLS-ROYCE (1971) The full text of the memorandum of understanding about the relationship between the National Enterprise Board and Rolls-Royce (1971) is as follows: General Principles

1. This memorandum of understanding about the relationship between the National Enterprise Board (NEB) and Rolls-Royce (1971) Limited (RR71) is based on certain general principles: (i) Except as provided in this memorandum, RR71 is expected to continue to operate as far as possible on a normal commercial basis like a company in the private sector. (ii) The NEB has no intention of usurping the responsibilities of the Board of RR71 or to intervene in the day-to-day management of RR71. (iii) The NEB has, however, certain responsibilities in respect of RR71 as: (a) the sole shareholder; (b) a major potential provider of finance in the future; (c) a public corporation with certain duties under the Industry Act, 1975 and guidelines issued under the Act.

11. Times of London, 27th Feb. 1976. 12. Cabinet Secretariat, Cabinet Division, Pakistan, “Guidelines on the Relationship between Government and Autonomous Bodies/Corporations and the Autonomous Bodies/ Corporations and Enterprises under them”, (May 15, 1976).

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(iv) In exercising these responsibilities the NEB’s prime concern will be to see that the Board of RR71 runs the company efficiently and successfully, since the performance of RR71 will have a major effect on the NEB’s total performance. The following provisions are designed to enable the NEB to carry out its responsibilities with the minimum disturbance to the normal operation of RR71 as a major industrial company. Composition of board

2. Recommendations for changes in the composition of the Board of RR71 and for changes in remuneration will be put forward by the RR71 Board for approval by the NEB. It is accepted that, as sole shareholders, the NEB has ultimate responsibility for determining the composition of the Board of RR71 and approving its remuneration, subject to such arrangements for consultation with the Government as the NEB and the Government may agree from time to time. Plans

3. RR71’s long-range plan and annual plans will be subject to agreement by the NEB. Monitoring

4. RR71 will be expected to supply to the NEB such information, in a nature and in a form to be agreed by RR71 and the NEB from time to time, -as will enable the NEB to monitor the performance and financial prospects of the company. Capital investment

5. RR71 will seek approval from the NEB for: (i) major investment programmes; (ii) projects involving capital expenditure of £5m or more. Acquisitions and disposals 6. RR71 will seek prior approval from the NEB for any proposal to acquire any of the share capital of a company: (i) if its acquisition would entitle RR71 to exercise or control the exercise of 30 per cent or more of the votes; or (ii) if the value of the consideration for its acquisitions, together with the value of any consideration paid for share capital of that company previously acquired, would exceed £10m; or

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(iii) if the cost of the acquisition would be £5m or more. 7. RR71 will comply with the restrictions imposed by Section 9 of the Industry Act, 1975 which relate to acquisitions of businesses concerned with the media. 8. RR71 will seek prior approval from the NEB for the sale of any voting share held by RR71 or its subsidiaries. Borrowing

9. In order to enable NEB to comply with Section 8 and Schedule 2(3) of the Industry Act, 1975, RR71 will not borrow from sources other than the NEB without the NEB’s approval. Wider economic and social responsibilities of the NEB

10. RR71 has agreed that, in drawing up its long-range and annual plans, it will: (i) examine the case for locating any expansion or new undertakings in an area of high unemployment; (ii) take adequate steps to provide for the full involvement of employees in decision-making at all levels. Counter-inflation policy 11. In negotiating terms and conditions of employment, RR71 will naturally ensure that settlements reached are consistent with the financial situation of the enterprise and with the requirements to be observed for the period up to August 1, 1976, as set out in the White Paper “The Attack on Inflation” (CMND 6151). Early warning of major issues

12. RR71 will be expected to warn the NEB and the Secretary of State for Industry in advance about any decisions which clearly have major Parliamentary implications. Contacts with the Government

13. On all major issues affecting RR71’s strategy, plans and performance and the NEB’s responsibility for securing the efficient management of RR71, RR71 will deal with the NEB. The NEB will, however, be accompanied by representatives of RR71 at major discussions with government of the plans of RR71 and will invite the RR71 representatives to explain the plans to the Government at those discussions. It will also be open to the Chairman of RR71 at any time to seek a meeting with a Minister, provided that the Chairman of the NEB is consulted beforehand and has the opportunity to attend if he wishes.

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14. RR71 will maintain its dealings with government departments on day-today matters including dealings with the Department of Industry in its role as sponsor department of the areo-engine industry, dealings with the Ministry of Defence (Procurement Executive) on all matters for which it is responsible, dealings with the Foreign and Commonwealth Office, and day-to-day contacts with the Department of Employment on pay questions. 15. When RR71 is brought within the Planning Agreements system, arrangements will be worked out by the NEB and RR71 in accordance with the principles set out in this memorandum. Channels of communication

16. The normal channel of communication on major issues will be between the Chairman of the NEB and the Chairman of RR71, supported as appropriate by contacts between senior staff of the NEB and their opposite numbers in RR71, to whatever extent is necessary to carry out the NEB’s responsibilities, without intervention in the day-to-day management of RR71. 17. The supporting staff of the NEB will arrange a programme of discussions through the RR71 Chairman’s office. Their purpose is to ensure that the Chairman of the NEB is properly informed. It is not to take part in the decisionmaking process of RR71 itself, nor is it in any way to act as an inspecting team. Both the NEB and RR71 will do their best to make the relationship a harmonious one and one of trust. The Times, London, 27–2–76

PART II

7 Public Enterprise in Britain Today JOHN B.HEATH

1. Introduction One incidental merit of public enterprises in Britain today is that those who study their control and behaviour are able to maintain a state of full employment. Currently there are three major enquiries being held. First, the Treasury and Civil Service Committee of the House of Commons are holding public hearings about the financing of nationalised industries. This is one of the new Committees established by Parliament when the former Select Committee on the Nationalised Industries (SCNI) was wound-up in 1980, after 28 years of useful service. It consists of Members of Parliament from both Government and Opposition under the Chairmanship of a Government back-bencher, at present the Conservative Edward du Cann. The Committee employs expert advisers. The SCNI used to focus its attention entirely upon the nationalised industries, but the new Committee is charged with enquiring into the activities of the Treasury and Civil Service Departments, and public enterprises are just one of their concerns. Secondly, the Central Policy Review Staff (GPRS) of the Cabinet Office— sometimes called the Government’s “Think Tank” —are currently conducting a more wide ranging study of the control of nationalised industries, going over much of the ground covered by earlier enquiries, hoping no doubt to try to find something new to say. Thirdly, the National Economic Development Office (NEDO) have once again been brought into the scene in order to examine wider aspects of the financing arrangements of nationalised industries. This Committee will take over and continue the studies which have been conducted for the last one and a half years by Messrs. Rowrie and Monck (two senior officials in the Treasury), in association with a committee of Nationalised Industries Chairmen’s Group (NICG).

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2. Background to the Present Enquiries It is not as though the problems of public enterprises in Britain are new, unexplored or unknown. The most professional and analytical study of the wide ranging problems of state enterprise in Britain was conducted in 1975–76 by the NEDO (the final report in October 1976 contained six appendices, nine background papers and the enquiry engaged the services of many firms of consultants, advisers, analysts and others). Their Report was widely accepted for its diagnosis but its main recommendation for a formalised twotier Board structure, with executives, civil servants and trade unionists on the top policy board (or Policy Council as they called it) proved unacceptable to both the majority of Chairmen and to the Government. Earlier there had been another major study into the “Ministerial Control of the Nationalised Industries” undertaken by the SCNI under the Chairmanship of Labour MP Ian Mikardo which reported in July 1968 (in three volumes, 1,232 pages). They concluded that Ministers have largely done the opposite of what Parliament intended in establishing nationalised industries—they had given little guidance on policy but were much concerned with day-to-day management—and recommended that there should be a single Minister of Nationalised Industries with responsibility for ensuring that they were efficient, and with the formulation and application of wider public policies with the various different Ministers. That recommendation was also rejected. Then of course there has been a continuing series of studies and reports by the former SCNI covering particular nationalised industries as well as more wide ranging general problems, and during the period 1967–71 the National Board for Prices and Incomes published the results of its investigations into specific nationalised industries. More recently, under the new Competition Act 1980, the Monopolies and Mergers Commission have begun publishing— on references made by the Government—a series of detailed studies on the efficiency of particular state industries (British Rail Commuter Services in London and the South East, and the Central Electricity Generating Board were the first two). The government has not been unresponsive to all of these enquiries and of the need to state clearly its policies. This it has done in a series of White Papers, in particular the following: “The Financial and Economic Obligations of the Nationalised Industries” (CMND 1337) 1961; “Nationalised Industries: A Review of Economic and Financial Objectives” (CMND 3437) 1967; “The Nationalised Industries” (CMND 1731) 1978. Perhaps it should be added that the formation and development of the Nationalised Industries Chairmen’s Group (NICG), which brings together the

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Chairmen of 22 public sector corporations and boards, has been a response to the continuing unsatisfactory control environment imposed by government within which these corporations, some of them extremely large and all important within the context of the UK economy, have been required to operate. The fact that the Chairmen have grouped together, have set up working parties and subcommittees, and have forced the government to take their views seriously is perhaps the strongest indication that—in spite of all this wealth of study and thought into the range of problems—the present position remains entirely unsatisfactory. Sir Leslie Murphy—a former Chairman of the state owned National Enterprise Board—in a recent speech to the Institute of Administrative Management (16th February 1981) considered that “the situation today (about the problems of managing and financing the nationalised industries) is probably worse than it has ever been”. So what is wrong? 3. Two Periods of Crisis in Government-Industry Relationships Looking back over the last thirty years it is apparent that the two major crises in relationships between government and nationalised industries were both created by insensitive and inappropriate decisions made by the government of the day. They were not inherent in the system of control but that system provided an appropriate environment—without adequate checks and balances —within which such crises could easily arise. The first crisis, which led to the setting-up of the NEDO enquiry in 1975, was brought about by attempts to control inflation through holding down the prices of individual goods and services. The nationalised industries, being owned by the government, naturally were subject to a much harsher regime of price control than was possible in the private sector. As a result the finances of state enterprises were severely undermined, widespread losses were reported, cash flow management became impossible, the running of these huge businesses was in disarray. Eventually the Government gave in and provided subsidies to extinguish the deficits, but not until much damage had been done and embittered relationships developed. The current crisis in relationships which has lead to the enquiries described earlier has been brought about also by insensitive and inappropriate government policies, also in the context of fighting inflation. This time, however, the issue of pricing is not concerned —to a large extent that lesson has been learnt—but instead it is the issue of the availability of funds for investment which has caused such anguish. Briefly, with a few exceptions the only source of external finance for investment by state enterprises in the UK is the government itself, through the National Loans Fund. Each state enterprise is allotted an External Financing Limit (EFL) annually determined, which covers loans, grants, and the issue of Public Dividend Capital (PDC) which is a form of equity stock available to a few

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enterprises. These sums of money are counted as part of the Public Sector Borrowing Requirement (PSBR) which has been a key instrument of the government’s control over the money supply as part of its economic policy to control inflation (previously all investment by nationalised industries was counted against the PSBR, however financed). The financing of investment by state enterprises is seen by government also as being at the expense of the financing of investment in the private sector, the latter investment being seen by many senior Ministers, including the Prime Minister, as in some sense more productive, more worthwhile than the former. So all state enterprises have had great difficulty in obtaining adequate funds for investment, especially in capital intensive industries with market growth opportunities, such as British Telecoms —the new state telephone enterprise which has recently been split from the former Post Office. The former Chairman of the Post Office, Sir William Barlow, resigned on this issue. No matter how high is the prospective rate of return, the amount of external funding for investment is strictly and arbitrarily limited according to macroeconomic considerations. While these major crises have caused deep concern amongst the Chairmen of nationalised industries, there is a continuing ground swell of discontent. It was this deeper and continuing problem which led to the “ministerial control” study by the SCNI over ten years ago. So we need to distinguish the problems of control which have been generated purely by the ineptitude and political prejudices of successive governments from those problems which are more fundamentally inherent in the system, arising directly because of the fact of state ownership. This paper concentrates upon the latter, more fundamental issues which may be expected to arise wherever the state has a major stake in business enterprises. What are these more deep seated problems? 4. The Problem of Conflicting Objectives When the state owns a business enterprise clearly it does so for some purpose. That purpose may range from political ideology through to expediency in the face of democratic pressures. Within that spectrum is the important category of economic activities: deemed desirable but which would not occur in the absence of government ownership. We need not argue about the politics of this: the fact is that every country in the world—even the USA— has some governmentowned enterprises. That is the starting point. Having acquired ownership, governments then have the opportunity and obligation to exercise some degree of control, and they have the responsibility which goes with it. Therefore they have to make policies, which may reflect and be influenced by that wider set of policies which governments believe should be pursued. These may be called broadly “political aims”. On the other hand those businessmen who run state enterprises will have “business aims” which relate to their own personal motivations as well as to

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policies which they see as best for the business itself and its employees. To allow “business aims” to be the sole determinant of corporate policy in state owned enterprises would be to deny that state ownership had any purpose (unless it be simply “survival of the activity” in whatever form the business managers themselves deem appropriate). So—except in the “pure survival” case—there will be a need to reconcile political and business aims in each enterprise. The problem of multiple objectives may become complex. There may be however some feasible solutions to this problem (which may not of course be acceptable either to politicians or to the business managers). First, political and business aims can be brought into line by politicians becoming directly involved in the policy and management decisions of state enterprises, or by the top businessmen being given political status and becoming politicians. Both of these however create other sorts of problems. Secondly, the power of government to exercise its will over the enterprises in its control may be modified by admitting a sufficiently significant element of alternative control, through minority share ownership in the private sector or by other interests (this could also make the problem even more complex). There is however no certain answer and in practice, as British experience illustrates, this clash of policies may lead to crisis and to irreconcilable conflicts. 5. Cultural Differences in the Control Framework Senior managers whose job is to make the day-to-day decisions in a state enterprise most likely will have pursued careers which are fundamentally different from those in government who are part of the external control system. While some people can cross these boundaries easily and can be assimilated into the culture of the other group, probably most people whose careers have been up one or other vertical hierarchies would find the motivations and behaviour patterns of the other group difficult to comprehend. The likely consequences of failure to comprehend or to communicate meaningfully across the divide are almost self-evident, when one side is in a controlling situation over another. At best the result is likely to be frustration, at worst resignation of the subordinate (or rather insubordinate) business manager. Again some actions can be taken to diminish these cultural differences, through combining career paths which embrace both sides for example, or through educational programmes, but the inherent differences in attitude and perspective are likely to remain.

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6. Problems of Simulating Market Disciplines Corporations in the private sector in advanced western countries experience market disciplines which to some degree ensure that they operate to the long-term benefit for the public (normally the disciplines of the market place need to be reenforced by other controls, over competition and monopoly, over potential abuse of the environment, consumer protection and so on). In so far as market disciplines are absent in the public enterprise sector then either the government has to make decisions as if market disciplines existed, or there are no such disciplines. For example, in a capitalist system companies are under pressure to show profits and to distribute dividends to shareholders. In well regulated economies with effective competition, profits come from meeting consumer demand at prices which can be afforded. If dividends were not maintained then these companies would find it more difficult and costly to raise money on the capital market for future expansion and they may lay themselves open to takeover if the prices of their shares were to fall. Clearly in the absence of shares being held by other than the government, this form of discipline is absent. To simulate market pressures of this kind by administrative action may be very difficult. To replace automatic effects by administrative action raises first the complexity of trying to do so, and secondly the difficulty that other policy objectives of government may reduce or remove the desirability of imposing such disciplines. How, for example, can dividends be extracted from state enterprises when there is no automatic penalty for withholding funds? One way would be to provide all state funds for investment in the form of fixed interest loans, but that may be inappropriate where there are risks that economic circumstances may not enable the enterprise to service such loans. Again, there are possible answers to these problems but they are not easily discovered. To issue preference shares is one possible solution, in which there would be a required dividend of a certain percentage—subject to non-payment under specific agreed circumstances. The ultimate discipline in the private sector is bankruptcy—and that threat is so unusual in the public sector that as a discipline it is uneffeetive. 7. The Owners Appear to have a Bottomless Purse Since Governments have large incomes from taxation which could in principle be increased without difficulty, a state enterprise in financial difficulty or a trade union seeking higher wages will perceive that the owners have sources of money beyond those which can be obtained from customers through the sale of its goods or services. This realisation can put great power in the hands of trade union leaders, and may diminish the sense of urgency experienced by management attempting to respond to financial difficulties by putting their own house in order.

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And when the political leanings of the government of the day coincide with those of the trade unions, the effective power of the unions is greatly enhanced. Likewise if the government of the day aligns itself with the interests of business leaders, this may make it easier for state enterprises to persuade the government to provide funds to help when in difficulty than to try to solve their problems by taking firm executive action (to reduce cost, for example). Conclusions This is a pretty formidable list of problems which appear to be inherent in the state owning business enterprises. At the very least they create the conditions in which control failures are likely to occur. If this analysis is correct the implication is that ways have to be found, to overcome the problems identified if state enterprises are to be well managed. Business managers are not super-human and some situations are just too difficult for anyone to expect them to function effectively. But the presence of the four problem areas in themselves define circumstances in which solutions satisfactory to both government and state enterprise may well not be forthcoming. That is perhaps as unduly pessimistic view because awareness of these problems and a recognition of their significance is at least half way towards a solution. The value of studies and reports—even if their recom mendations are not accepted—is educational, contributing towards finding solutions which will be both effective and acceptable to all concerned. The problem in Britain is that governments have consistently failed to find satisfactory workable solutions in any of these four areas. The consequence is that relationships between government and nationalised industries are bound to be precarious and to break down during periods of national stress. These four areas define the priority areas for effective action in Britain—and elsewhere if local solutions have not been found. 8. A Post-script Perhaps now, one year after writing the above words, I might be permitted to add a brief ‘PS’, to update readers in what is a rapidly changing area. Of those initiatives described earlier it turns out that the major event was the CPRS Study. It has however never been published and the full version was kept a closely guarded secret even from those outside of the government who normally would have access to confidential information. A summary version was sent to all Nationalised Industry Chairmen, who reacted so strongly against many of its proposals that a meeting was arranged with the Chancellor of the Exchequer. As a result a modified document was produced as a statement of government policy. The key features on that document are now being implemented with some urgency.

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(a) Objectives The first of these policies states that “the government intends that ministers should agree long-term objectives with Chairmen and the Boards of Nationalised Industries”. This sounds obviously sensible, and indeed raises the question why so many nationalised industries do not have such statements already. The general absence of objectives was noted in the NEDO Report nearly six years ago. One can understand of course the reluctance of government to agree long-term objectives because to do so might reduce their scope for short-term action, tying ministers’ hands when they want to interfere pragmatically in the affairs of a nationalised industry. There is however an unexpected problem with “agreeing objectives”. The power and duties of nationalised industry Boards derive from their statutes, from the legislation which gives each corporation a legal existence. If a Board were to agree objectives with its Secretary of State then it would be fettering its discretion to act in accordance with the relevant statute. Unless the relevant Act of Parliament explicitly provides for the sponsoring minister to agree objectives —and most do not make this provision—he would be acting ultra vires in so doing. So if the government wants the objectives to be in any way binding on the enterprise new legislation would be required. The same applies incidentally to setting a financial target. Most nationalisation Acts make no specific provision for the sponsoring minister to determine a financial target, and accordingly a nationalised industry Board must not fetter its discretion in carrying out its statutory duties if adhering to a financial target would in any way prevent this. Thus a Board might not even be able to agree with its sponsoring minister to adhere to government policies in the conduct of its affairs, because some government policies may be inimical to the discharge of its statutory duties. The document also says that “such a set of objectives would form the basis for a partnership between the Secretary of State on the one hand and the Chairman and the Board on the other”. But a partnership implies equality of position, working together to achieve some purpose: yet it is clear that a Board is accountable to the Secretary of State for its performance. The Annual Report and Statement of Accounts are addressed to the Secretary of State, he appoints the Board, he may give them Directives (within the statutory limits) so the relationship cannot be one of partnership. The government are perhaps trying to woo the nationalised industries by a friendly gesture but it ignores the reality of the relationship, of which the nationalised industries are only too well aware. (b) Monitoring Progress The Civil Service feel that they are not as well informed about the activities of a nationalised industry as they wish to be, and absence of relevant information

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causes them to ask many questions from nationalised industries, which brings much irritation and occupies a great deal of time. Although a vast amount of data flows regularly from industry to government this is not considered sufficient. So, out of this GPRS Report, the government is to conduct a “regular and systematic programme for comprehensive annual assessment of each major industry”, centered on the corporate plan, and focussing on achievements against targets. They would lead into the annual Investment and Financing Review and into the annual setting of the External Financing Limits. It is also to improve procedures for monitoring progress on a regular basis. Here the GPRS itself will undertake a central role and the government is setting up a new Public Enterprise Analytic Unit, collating a vast body of information supplied to it by the spon soring department. The ‘shopping list’ of required information is extremely extensive and in some industries goes far beyond what the Board themselves consider is necessary to monitor performance. Indeed some Boards are saying that if they do not consider all of the details to be necessary for their own monitoring of performance, why should the government require it? In any event it is not clear what the CPRS will do with all this information. It is the sponsoring minister to whom a nationalised industry is accountable, not the CPRS. Three nationalised industries have been chosen to pioneer this new information system. The government will also extend and intensify the programme of investigations by the Monopolies and Mergers Commission. The first batch of such investigations has now been announced and includes the National Coal Board, The Civil Aviation Authority, The Yorkshire Electricity Board, and The South Wales Electricity Board. Future references will be made on a regular programme basis. In addition the government has decided to call in consultants to investigate nationalised industry efficiency, and the British Gas Corporation is to be the first industry subject to this ad hoc kind of investigation. But also the government is under pressure from its Conservative back benchers to provide the Comptroller and Auditor General a much wider remit to investigate the efficiency of nationalised industries, although at present he does not have the staff to do so. This issue is still unresolved. A further policy provision arising out of the CPRS study is that the nonexecutive directors of nationalised industries should “take special interest in the internal efficiency of the industry and ensure that best management practise is maintained”. And Boards will be asked to consider setting up Efficiency Audit Committees consisting of non-executive directors. To help departments in understanding their nationalised industries better, the government is appointing some businessmen to work alongside senior civil servants; the Department of Transport is the first government department to appoint such a person. Presumably the businessmen will advise the civil servants and ministers on how best to conduct a holding company type of relationship

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with the nationalised industries. Indeed the model of regular information supply proposed by the CPRS was said to have been based upon how GEC Ltd manages its subsidiaries, and the holding company model probably exerts an important influence upon current government thinking. It is abundantly clear that the government believes that nationalised industries are inefficient and that all possible measures must be taken to improve the situation. This may be little more than the expression of “private sector good, public sector bad” which permeates the thinking of present Conservative government: of course public enterprises could be better managed (as could private sector companies), although considering the low pay relative to the private sector which the government imposes on the Chairmen and Boards of nationalised industries, the government gets good value for its money. There are several further problems in this approach. First the Monopolies and Mergers Commission cannot call into question the appropriateness of government policies towards the nationalised industries under investigation. Its enquires are confined to the narrow—nevertheless important—question of how well the industry in question executed the policies and actions which it undertook. Although the Monopolies and Mergers Commission have proved to be skilful in obliquely raising these wider questions, the fact that they cannot challenge them directly is a weakness. Secondly, the government envisages an important efficiency auditing role for non-executive directors, but many Boards would regard such a policy as divisive and unacceptable. The Board has collective responsibility and its unity of purpose is particularly important. However the British Gas Corporation has adopted the government proposal (indeed it has set up two committees of nonexecutive directors), and in the British Steel Corporation a non-executive director has headed a performance audit committee for the past two years. Nevertheless some other nationalised industries, including the British Airports Authority, have been very firm in not wishing to split the Board in this way: in such industries the whole Board regards itself as responsible for efficiency monitoring. The CPRS view is also that generally there should be a majority of nonexecutive directors on the boards of nationalised industries, and that “wherever possible” the total number of members should be less than twelve. Both of these are sensible suggestions although few nationalised industries have Boards of this kind at present. The government regards these measures as likely to achieve more efficiency self-regulation of the nationalised industries than exists at present. (c) Financing The NEDO study referred to earlier into the financing arrangement of nationalised industries has been a disappointment. A great many matters were

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left for further consideration, and the resulting guidelines embraced by the Treasury were exceedingly narrow. The most natural form of financing by the private capital market —fixed or variable rate loan stock—is inadmissible in the public sec tor because such borrowing would still have to be included in the PSBR. So the conditions imposed by the Treasury are as follows: “The funds must be provided under conditions of fair competition with other private sector borrowers. Links with the public sector, government guarantees or commitments, or monopoly power should not provide a greater degree of security than that available on private sector projects; and schemes should yield improved efficiency and profit from additional investment taking account of the cost of raising risk capital in financial markets”. Evidently what the Treasury require is risk bearing participation by the private sector, involving a return which would be related in some way to performance. The difficulty with this is that the financial performance of a nationalised industry is bound to be influenced by government policy and so not easily assessable by the private sector financing institutions in risk terms. In the case of British Telecom (BT) the agreement arrived at with the government is that they (the government) would not interfere in the affairs of BT, especially on pricing, providing the industry holds its price increase to 2% below the rate of which the Index of Retail Prices increases. It is thought that this would satisfy private sector financiers. The BT Bond, not yet finalised, has taken an incredible amount of top management and senior civil service time to bring to fruition, for a sum (£150 million) which is extremely small in relation to the annual investment programme of BT, and seems unlikely to be repeated in other nationalised industries. Indeed with the new freedoms granted to AT & T in the United States following the settlement of the anti-trust suit, and in an area of rapid technical change, there is increasing realisation that the constraints imposed on British Telecoms in this country, including financing constraints of the kind shown above, are so inhibiting that de-nationalisation to some degree is probably the only sensible solution. The international markets are huge and no organisation subject to the traditional nationalised industry constraints would be able to exploit them to the full. On the subject of financing the Report of the Hundred Group of Chartered Accounts into “The Financing of State Owned Industries”, (December 1981) highlighted the absurdities of the present system, and in a powerful analysis proposed that individual industries should (1) become a form of statutory corporation more nearly modelled on the debt/equity capital structures typical of private sector company; (2) should obtain more flexible financing arrangements with government, and (3) be less closely linked with the government’s PSBR regime. The report was fully discussed in a forum consisting of the Hundred Group representatives, top Treasury officials, other civil servants, nationalised

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industry chairmen and other people (including the present author). However, the proposals did not find favour with the Treasury who maintained their traditional attitudes. Conclusions In the last year therefore the government has made several initiatives, aimed at improving the efficiency of nationalised industries, at improving the information available about them in government, at providing some possibility of raising private sector finance and concerning the role and structure on their Boards. While it is too early to be assessing fully the effects of these changes, some rationalisation of monitoring procedures would seem now to be required.

8 Efficiency Analysis Through Interrelated Indicators: The Yugoslav Approach IVAN TURK

The main thought underlying this paper is that the most serious problem presented by public enterprises (PEs) is that of efficiency and that the approach towards ensuring it, as a requisite step, towards instituting the indicators reflecting it, is of great significance. Several ideas are perceptible if we can wade through the literature on the subject. It is proposed, in the course of this paper, to delineate the approach adopted by Yugoslavia in respect of the efficiency of its enterprises. The paper is essentially in two parts. First, a brief description of the Yugoslav enterprises is given in order to provide the necessary introduction to the subject of indicators, in the light of the unique characteristics of self-management on which the Yugoslav enterprises are based. This is followed by references to some of the relevant relationships between the enterprises and the rest of the economy. An account is provided of the Social Accountancy Service set up in Yugoslavia with several functions touching the enterprises; then follows a short review of the one special aspect of the efficiency problems in so far as it relates to the emergence of losses in the case of an enterprise. The second part of the paper contains an analysis of the indicators in vogue in Yugoslavia and ends with suggestions towards their improvement, in order that the public may gain a more accurate grasp than at present, of the working of PEs and their efficiency. 1. The Background Yugoslav enterprises with rare exceptions, belong to the social sector. They are independent organisations acting according to the market system, while major questions of planning are settled by negotiations and agreements. But they are not established as associations of capital, or of socially owned resources, but as autonomous and self-managing organisations of workers as employed persons, linked together by their common interest in the fruits of joint labour. Because of such socio economic characteristics of Yugoslav enterprises, they are designated as “work organisations”. In such a work organisation, self-management means that each worker who belongs to it decides, together with the other workers, on

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his own and in the common interest, not only within their own work organisation, but also in the wider spheres of the social community. But self-management does not begin just in the work organisation; all big work organisations are divided into basic organisations of associated labour (BOALs) and into one or more of work communities. Under Article 320 of the Associated Labour Act, workers shall have the right and duty to form a part of a work organisation as a basic organisation, under the following conditions: “(1) that such part makes up a working whole; (2) that the results of the joint labour of workers in the working whole being formed as a basic organisation can independently be expressed in terms of value within the work organisation or on the market; (3) that workers, as a basic self-managing community of workers, can in this working whole realise their socio-economic and other self-management rights”. And under Article 400 of the Associated Labour Act “workers who perform administrative, professional, auxiliary and similar affairs of common concern to basic organisations operating within a work organisation establish one or more work communities for the performance of common affairs”. Very roughly, one may compare the BOALs of Yugoslavia with the profit centres familiar in the context of enterprises outside Yugoslavia. But there are big differences. The process of decision making always begins in BOALs and not in the work organisations. Article 37 of the Constitution of the SFR Yugoslavia explains that “workers in a basic organisation of associated labour shall have the right to have their basic organisation split away from the work organisation of which it is a part; workers may not split their basic organisation of associated labour off from the work organisation of which it is a part, if this should, contrary to the general interest, lead to a major hindrance or prevention of work in other basic organisations making part of the work organisation or in the work organisation as a whole”. Article 70 of the Constitution demands that “working and development plans and programmes of basic organisations of associated labour and of the organisations of associated labour of which they are part shall be adopted and implemented in relations of co-operation and mutual interdependence stemming from the pooling of labour and resources in these organisations in conformity with self-management agreements, provided that the workers in the basic organisations of associated labour are ensured the right to decide on the adoption of these plans and programmes. Basic and other organisations of associated labour intergrated in self-managing communities of interest or other self-managing organisations and communities, shall pass and implement their working and development plans and programmes in conformity with common interest and aims and/or in conformity with the joint plans and programmes laid down by mutual agreement within the framework of these selfmanaging organisations and communities”. Finally, Article 71 of the Constitution says: “Social plans of the socio-political communities shall be adopted on the basis of agreements on the common interests and aims of economic and social development in the Communes, municipal or regional communities,

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Autonomous Provinces, Republics and the Federation, and on the basis of the working and development plans and programmes of organisations of associated labour, self-managing communities of interest and other self-managing organisations and communities, and on the basis of jointly appraised development possibilities and conditions. Social plans of the socio-political communities shall lay down common development policy and guidelines and frameworks for adoption of measures of economic policy and of administrative and organisational measures which ensure conditions for the fulfilment of these plans”. From these excerpts from the law it is possible to recognise not only the socioeconomic position of the BOALs but some general features of the total socioeconomic system in Yugoslavia. It is not intended in this paper to explain it in detail. It is worth mentioning, however, that in the same way as decision making in enterprises begins at the lowest level, i.e., at the level of the BOALs, the external control of enterprises begins at the lowest level of the socio-political communities, i.e., at the level of the communes; the Republics and the Federation do not have, for instance, the role of controlling individual enterprises but have only the role of controlling the general trends of development in the enterprise sector as a whole in a given territory. In order to ensure adequate data on the enterprises a uniform chart of accounts, of the balance sheet scheme and of the scheme of income statement is laid down. And in order to ensure the external recordings and supervision of financial operations of the enterprises, and to distribute information on enterprises and analyse their results to all interested bodies the Social Accountancy Service has been established. This is, by official definition, an independent organisa tion and an autonomous common service of the organisations of associated labour, of the self-managing communities of interest, and of other self-managing organisations and communities as well as of the socio-political communities, performing the operations of a special social character and having public authorisations, provided for under the Constitution and the Act. It deals with a kind of external financial recording of the operations of the enterprises and of the other users of social resources, and it is integrated into the entire system of the social supervision of enterprise operations. Social Accountancy Service is a system unique to Yugoslavia. It employs 24, 000 persons spread over the entire country. As all the financial flows through enterprise operations pass through this Service, there is an automatic control of a sort of the order in payment transactions at the time of their execution. The Service ensures the legality of the payment transactions. The supervisory part played by this Service is performed through controlling the legality of business operations of the enterprises and of other users of social resources, especially concerning the settling end paying of taxes and contributions and upon the granting of compulsory loans. Otherwise, the task of this service is mainly of an informational character. This Service processes the ideas relating to assets and their sources, to the

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formation and allotment of income, to the inflows and outflows of resources at the point of each user of social resources. It prepares information and analyses for: (a) the workers, managing organs and organ of the self-management workers’ control in those organisations from which the data stem, or to which these data relate; (b) the basic organisations of associated labour and other social legal persons that want to know the position or success of other basic organisations or of other social legal persons for guidance in their operations; (c) the socio-political communities, self-management communities of interest and chambers of economy in order for them to be in a position to accomplish the realisation of targets and measures of economic policy, and of social plans of development, as well as of the results and conditions of economic management and other economic and financial movements. A very important part of the information which is prepared by the Social Accountancy Service is a set of prescribed indicators to which the next part of this paper is devoted. The Social Accountancy Service, for one of its functions, has the sending of Inspectors to enterprises to look into cases of irregularity or wrong transaction. A more important and continuing function consists of the preparation of analyses for socio-political community as mentioned in the earlier paragraph. The significance of such analyses; will be clear from the passages that follow. The Service has also the power to sit at the meetings of the Workers’ council, the local community, etc., with a view to explaining correctly the accounting position of individual enterprises. A particular aspect of enterprise performance, to which specific reference may be made at this stage, is in connection with any losses that it may have incurred. In the event of losses, the BOAL has to prepare a project of financial rehabilitation which will be discussed not only in the work organisation to which it belongs but also at the communal level. The situation of losses attracts adequate attention on the part of not only the self-management bodies of basic organisations of associated labour concerned but also the relevant sociopolitical community. The BOAL formulates a diagnosis of the losses and indicates the measures for improving the financial results in the years to follow. The measures that socio-political community may contemplate for improving the efficiency of a losing BOAL, include the placing of limitations on the increase of certain items of expenditure, especially the non-productive ones. The purpose of such limitations is broadly to place a check on inflation-generating consumption and on investment in relatively non-productive channels. For the covering of the loss primarily the reserve fund of the same BOAL is used at first and sometimes donations are given from the other BOALS which are interconnected in business. From the side of the socio-political communities no donations can be expected for covering the loss. If the socio-political communities intend to keep prices of products or services of a certain BOAL

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under the level of costs or if they intend to stimulate exports even where the attained prices would create losses some kind of compensations ought to be introduced. These compensations will augment the revenues but are not to be understood as a general measure of covering the losses. A word as regards the very purposeful analyses made by the Social Accountancy Service on the causes of losses of the enterprises. These concentrate on the external and internal factors that have caused the losses. The former broadly refer to the events beyond the control of the enterprises themselves, e.g., the prices of imported raw materials and the consequences of the high rates of inflation. The internal factors examined concern the degree of utilisation of capacity set up, conditions of low productivity or poor organisation and any general traces of inefficiency. It is interesting to note the fully decentralised nature of the analysis— operation of the Social Accountancy Service. Its branch offices located in the areas of local communities prepare the analyses in respect of enterprises in the concerned region. The offices at the level of the Republic and the autonomous Provinces present the analyses to the Republic and the autonomous Provinces. The head office for the country prepares summaries of the analyses for the country as a whole. The analysis at these different levels has the eventual result of drawing interest as well as attention of all the bodies outside a BOAL or an enterprise in respect of its performance; and any initiative that is necessary from outside it is to be triggered. 2. The Indicators Statements of financial position (balance sheets) and income statements are prepared separately for each BOAL and work community. In these accounting statements a special place is given to the specific socio-economic categories. Among them the central place is given to income, i.e., the difference between revenues and material costs with minimum depreciation. Under Article 51 of the Associated Labour Act “income of basic organisations shall be allocated by workers for: (1) the personal incomes and collective consumption of workers, the promotion and expansion of the material base of labour and the creation and renewal of reserves in basic organisations; (2) ensuring the common and general conditions of labour and the development of society. The part of income of basic organisations allocated for the needs referred to in section 1, paragraph 1 of this Article shall represent the net income of basic organisations”. Under Article 53 of the Associated Labour Act “the following common and general conditions of labour and society’s development shall be ensured from the income of basic organisations: (1) resources for the satisfaction of collective needs in the spheres of education, science, culture, health, social welfare and other social activities,…and resources for the satisfaction of collective needs in the sphere of social security; (2) resources for the satisfaction

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of general social needs within the framework of socio-political communities; (3) resources for other needs specified on the authority of law…” While in the income statements the central role is given to income in the sense of a newly created value, in the statements of financial position (balance sheet) the distinction is made between business assets and other assets; business assets constitute fixed assets, current assets and investments out of these assets. Outside business assets there exist reserve assets and common consumption assets. Notions included in the Yugoslav indicators of efficiency are best understood with the help of a simplified structure of both accounting statements. The statement of financial position (balance sheet) is divided always into more substatements within the frame of one statement: Statement of financial position Assets Equities Business assets (Fixed and current Business fund assets) Business obligations Uncovered loss Reserve assets Reserve fund Common consumption assets Common consumption fund Obligations for common consumption assets The income statement is divided in more substatements as follows: Statement of determination of income Expenses Revenues Material costs and depreciation in Revenue from goods sold and other goods sold ordinary revenues Extraordinary expenses Extraordinary revenues Bal.=Income Bal.=Loss on material costs and depreciation Statement of allocation of income and determination of net income Expenses Income Taxes on income (for satisfaction of general Income social needs within the framework of sociopolitical communities) Contributions from income (for satisfaction of collective needs in the spheres of education, science, culture, etc.)

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Statement of allocation of income and determination of net income Expenses Income Contractual and other expenses for current business needs out of income (interest, insurance premiums, cost of payment traffic, transfer to work communities, etc.) Bal.=Net income Bal.=Loss on obligations out of Statement of allocation of net income and determination of accumulation Expenses Net Income Personal incomes (composed from net Net income personal incomes and taxes on and contributions from personal incomes) Addition to the common consumption fund Bal.=Accumulation Bal.=Loss on personal incomes Statement of allocation of accumulation Allocation Addition to the reserve fund Addition to the business fund

Accumulation Accumulation

Statement of determination and covering of loss Loss Loss on material costs and minimum depreciation Loss on obligations out of income (reduced on interest, insurance premiums, cost of payment traffic and some other items) Loss on personal incomes Uncovered loss at the beginning of the period

Covering Reduction of the reserve fund Donations Temporary reduction of the business fund

Bal.=Uncovered loss at the end of the period

Under Article 140 of the Associated Labour Act the results of the labour of workers and of the business of basic organisations shall obligatorily be stated through the following indicators: On the basis of Article 143 of the Act the following indicators were also introduced:

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At this point we do not discuss the real value of each of these indicators or the methodological problems of comparison of each of these indicators computed for different organisations in the same period of time or for the same organisation in the different periods of time. We shall stress only the fact that there does not exist any one indicator which could give us a basis for a comprehensive judgment of efficiency of a BOAL. Each of the indicators can give us only the basis for a limited partial judgment. But the difficulty lies in the fact that different indicators have varying dynamics or even move in quite opposite directions. Hence a judgment on the efficiency of a BOAL can be formed only when we have succeeded in relating these different indicators into a system of interdependent indicators where each is functionally dependent on the others. In this way only it becomes possible to arrive at an adequate interpretation of the whole. In western countries one of the powerful tools for decision-making and of control of efficiency can be found in linked indicators on the basis of the rate of return (for instance Du Pont’s, General Electric’s, etc.). Taking into account Yugoslav conditions and socio-economic peculiarities the present author developed a couple of years ago a new system of interrelated indicators. In this system are included all the prescribed indicators and some others in addition. The general idea of this system can be seen from the chart appearing at the end of this article. A short explanation of each indicator is as follows: (1) Coefficient of gross personal income per worker; prescribed as I-7, expressing the general level of satisfaction of personal needs. (2) Rate of taxes on and contributions from personal income per worker; prescribed as II-1. (3) Coefficient of net personal income per worker; prescribed as I–8, expressing the initial interest of workers as consumers. (4) Coefficient of addition to common consumption fund per worker; not prescribed, but used in business policy. (5) Rate of gross personal income to income; not prescribed, but used in business policy. (6) Coefficient of income per worker; prescribed as I-1 with certain similarity to the macro economic category of national income per capita. (7) Rate of gross personal income to net income; not prescribed, but used in business policy. (8) Coefficient of net income per worker; prescribed as I-3 with certain similarity to the macro economic category of national income without taxes per capita. (9) Coefficient of proportion of allocation of net income; not prescribed, but used in business policy. (10) Coefficient of return on business assets; prescribed as I-6. (11) Coefficient of proportion of the pooling of labour and resources; prescribed as II-4.

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(12) Rate of accumulation to income; prescribed as I-4. (13) Coefficient of socio-economic return on business assets; prescribed as I-2. (14) Rate of accumulation to net income; prescribed as I-5. (15) Coefficient of reduced socio-economic return on business assets; not prescribed. (16) Coefficient of return on own capital; not prescribed, but of extreme importance for judging efficiency of business on the basis of comparison with the interest rate for loans. (17) Coefficient of financial independence; not prescribed, but very important. (18) Rate of accumulation to revenues; not prescribed, but used in business policy. (19) Coefficient of turnover of current assets; prescribed as II-6. (20) Rate of current assets to business assets; not prescribed, but in use. (21) Rate of interest and other obligations from income to income; not prescribed. (22) Rate of taxes on and contributions from income to income; not prescribed. (23) Coefficient of taxes on and contributions from income per worker; prescribed as II-2. (24) Coefficient of all taxes and contributions per worker; not prescribed. (25) Inverse rate of fixed assets to business assets; not prescribed, but introduced in this form because of the need to combine the indicators 26 to 28. (26) Rate of non-depreciated value of fixed assets to original value; not prescribed, but in general use. (27) Coefficient of fixed assets per worker in the first shift; not prescribed, but in use. (28) Rate of first shift workers to total number of workers; not prescribed, but in use. (29) Coefficient of gross personal income to loss; not prescribed. (30) Coefficient of loss per worker; prescribed as II-7. Outside the explained system of interrelated indicators remain the coefficient II-3 which is known as an indicator of reproduction ability, the coefficient II-5 which shows the economic rationality in achieving income but is completely indifferent to the substitution of factors, as well the indices II-8 and II-9 which must be explained in detail. In all these cases the word “coefficient” is used for the relation between different but comparable economic categories, the word “rate” for the relation between a part and the whole of the economic category, and the word “index” for the relation between the achieved and the planned values of the given economic category or the relation between the achieved value during a given period and the achieved value in the preceding period. In literature these words are frequently applied inconsistently. A short explanation of mutual relations of the indicators follows. The workers enter the BOAL in order to ensure for themselves, among other things, a continuous satisfaction of their personal needs. Hence they are first

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interested in the indicator (1) i.e., gross personal income per worker. While the numerator is on the whole not problematic, the denominator requires at least that the number of workers is established in terms of the number of those working full-time, as some workers have a longer, and others a shorter, working time. If, for the sake of comparing this indicator as it appears in different BOALs, we wish to exclude the influence of the varying qualificational structures, it would additionally be necessary to establish the number of workers conditionally unskilled. The dynamics of the real gross personal income per worker is obtained when the indicator for the year in question is corrected with the indices of prices. But gross personal income per worker is still a category which must be explained analytically. Therefore it is useful to break the indicator down in the following way: Coefficient of gross personal income per worker (1) = Rate of taxes on and contributions from personal income per worker (2) + Coefficient of net personal income per worker (3) + Coefficient of addition to common consumption fund per worker (4) Now we are faced with the question of how to explain the co-efficient of gross personal income per worker (1) in the broader context of the conduct of business in the BOAL. There exists the possibility of relating it to income as a newly created value. Here we come to the following mutual relation: Coefficient of gross personal income per worker (1) = Rate of gross personal income to income (5) × Coefficient of income per worker (6) Taken by itself, a higher income per worker does not necessarily mean greater efficiency in the conduct of business, irrespective of the circumstances in which the workers perform the work. Better equipment of workers with the means of work makes for higher income per worker, but as a rule it cuts down the share of gross personal income in the overall income. There exists also the possibility of explaining the coefficient of gross personal income per worker (1) by means of the following indicators: Coefficient of gross personal income per worker (1) = Rate of gross personal income to net income (7) × Coefficient of net income per worker (8) Here we mean by net income the income from which the taxes on and contributions from the income as well as other obligations from income have been deducted but which includes gross personal income as well as accumulation. A higher net income per worker is in the situation of an unchanged income per worker the result of smaller taxes, contributions and other obligations, which in

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the BOAL are to be deducted from the income. We now no longer calculate per worker the taxes on and the contributions from the income, but rather that part of the income which is distributed among the workers themselves as gross personal income or which remains in the BOAL as accumulation. But we still cannot see in a higher net income per worker, while disregarding the role of the resources, a higher efficiency in the conduct of business. Significant for the interpretation of the gross personal income per worker (1) are the following indicators: Coefficient of gross personal income per worker (1) = Coefficient of proportion of allocation of net income (9) × Coefficient of return on business assets (10) × Coefficient of proportion of pooling of labour and resources (11) In each BOAL labour and resources are pooled, and the proportion of the pooling is indicated by the indicator (11). In the BOAL net income is distributed for the needs of the workers (gross personal incomes) and the needs of the BOAL itself (accumulation); therefore the indicator (9) is clearly of interest. But whereas the part of the net income distributed for gross personal incomes can be assessed only in relation to the workers—e.g., indicator (1)— the part of the net income distributed for the accumulation can be assessed only in the relation to the assets, i.e., by the indicator (10). If we calculate the real or time indices for each of these indicators, we can adequately interpret the index of the gross personal income per worker (1) by the indices from the indicators (9), (10) and (11). The indicator of the gross personal income per worker (1) is clearly outstanding by its paramount importance to the workers as consumers; but for management in the BOAL the indicator of return on business assets (10) is without doubt among the most important. Whether the sum of the accumulation may be indicative of the results of good conduct of business or not, can be assessed only if the sum is compared with the business assets. Hence it is not so important how high the accumulation is in comparison with income or net income, but how fast the rate is by which social resources are being increased. Hence good conduct of business is, from the view point of the BOAL, manifested in both the increase of the gross personal income per worker (indicator 1) and the increase in the return on business assets (indicator 9). These indicators have a direct significance. So far we have offered a somewhat detailed explanation of the indicator of the gross personal income per worker (1); now, the same is in order for the indicator of the return on business assets (10). Here the following relation between indicators can be used: Coefficient of return on business assets (10) = Rate of accumulation to income (12)

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×

Coefficient of socio-economic return on business assets (13)

A higher socio-economic return on business assets (13) does not necessarily mean better conduct of a business. This indicator is significant primarily for the assessment from a wider social view point where our attention is focused on how social resources enable the BOAL to create income. Otherwise the indicator says nothing about the conduct of business as regards the resources and their increase. In view of this circumstance a higher indicator as such may not permit any expanded reproduction, while even a lower indicator may make it possible. But there exists also the opportunity to express the return on business assets (10) with the help of the following indicators: Coefficient of return on business assets (10) = Rate of accumulation to net income (14) × Coefficient of reduced socio-economic return on business assets (15) We think, however, that the explanation of the indicator of the return on business assets (10) can be rather expressively presented by the indicators: Coefficient of return on business assets (10) = Coefficient of return on own capital (16) × Coefficient of financial independence (17) Still more important is the interpretation of the indicator of return on business assets (10) by technical business indicators where the following mutual relation is obtained: Coefficient of return on business assets (10) = Rate of accumulation to revenues (18) × Coefficient of turnover of current assets (19) × Rate of current assets to business assets (20) By calculating the real and the time indices for each of these indicators we shall arrive at a good interpretation of the index of the return on business assets (10) by means of the indices (18) to (20). What the burden of the interest and other obligations from income, of the taxes on and contributions from the income, is, can be seen from the following indicators: Income (expressed as 1) = Rate of interest and other obligations from income to income (21) + Rate of taxes on and contributions from income to income (22) + Rate of gross personal income to income (5)

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+

Rate of accumulation to income (12)

If we are interested in the average burden of the taxes and contributions which the workers in a given BOAL pay, we need the following equation: Coefficient of taxes and contributions per worker (24) = Coefficient of taxes on and contributions from income per worker (23) + Coefficient of taxes on and contributions from personal income per worker (2) Further, we need to offer an integration of the proportion of the pooling of labour and resources (11). Here we shall need the following indicators: Coefficient of proportion of the pooling of labour and resources (11) = Inverse rate of fixed assets to business assets (25) × × ×

Rate of non-depreciated value of fixed assets to original value (26) Coefficient of fixed assets per worker in the first shift (27) Rate of first shift workers to total number of workers (28)

By calculating the real and the time indices for each of these indicators, we are again in a position to interpret adequately the proportion of the pooling of labour and resources (11) by means of indices (25) to (28). Finally, in the case of a loss we can establish the following relations among indicators: Coefficient of gross personal income per worker (1) = Coefficient of gross personal income per loss (29) × Coefficient of loss per worker (30) We can thus see how the indicators of the conduct of business may be brought into a system. But we can speak of the system of indicators only when the indicators are interrelated through addition and/or multiplication. In such a system each indicator occupies a fixed place: it is used to interpret other indicators, and in turn these serve to interpret it. This alone can represent the dialectical interrelationship of the indicators. All this requires that some of the indicators be presented in a way different from that to which we are used in literature and in the applied field. We are specifically referring here to the fact that traditionally the relation between one amount and the other is very often multiplied by 100, which gives us the percentage-rate instead of the rate, or the percentage-index instead of the index, etc. To do away with the multiplying by 100 is certainly a minimal requirement not difficult to satisfy.

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3 Conclusion A few concluding observations on the indicators may be made in order to provide a proper perspective as regards their utility. First, these are financial in nature, partaking of financial ratios in some cases but going beyond by focusing on some major aspects such as personal incomes and accumulation. Second, these mainly are the indicators that the law has laid down; none are of a technical nature. Nor are any indicators that aim at reflecting the social interests relevant to the socially owned Yugoslav enterprises determined except for what the “accumulation” and “income” indicators reflect. Third, the indicators have the merit of being applicable to all enterprises and are based on uniform accounting conventions and stipulations; hence, within limits, they have the advantage of being comparable among enterprises and among regions. In fact, they show up the relative position of the production units at the lowest, i.e., BOAL, level. Fourth, the very fact that even financial indicators have been “externally” determined for the enterprises in Yugoslavia is itself worth notice in the background of absence of such an attempt in most other countries. They are not a complete model; yet, they represent a substantial step in the right direction. Last, the task of building up other socio-economic indicators appropriate to each enterprise or sector of enterprises remains in Yugoslavia.

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9 Government and Public Enterprise in Latin America HORACIO BONEO

1. Introduction The task of describing the relations between the government and public enterprises is not an easy one, particularly when the study treats a region in which, despite similarities, there are notable differences from one country to another.1 The additional fact that there exists no widely accepted theoretical framework within which to order the empirical data serves only to further complicate matters. It is therefore difficult to avoid some description (or a formal analysis) of the types of structures that exist in each country. This paper, however, will attempt both a theoretical and an empirical analysis, keeping in mind the difficulties this synthesis presents. The section that follows concerns the definition of regulations, the basic unit of analysis for relations between the government and public enterprise, and that of regulatory systems. It is also necessary to define in theoretical terms the ideal conditions for optimal relations between the government and public enterprises. It is important to note that, as the regulatory systems are constantly changing, this paper cannot reflect with great precision the actual systems in force at a given moment. The examples and references employed here have been collected over the last five years in the course of constant investigations; it is hoped that, in spite of any minor errors caused by lapse of time, this paper reflects adequately the principal problems in the relations between the government and public enterprises.

1. Although the paper frequently refers to the Latin American region as a whole, it is mainly based on direct contact with the cases of Argentina, Perú, Venezuela and Uruguay, as well as extensive readings on some of the remaining countries, particularly Brazil and Mexico.

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2. Optimal Relations and Ideal Characteristics of Regulatory Systems The establishment of production goals, a freeze on hiring, the introduction of performance evaluation, the naming of a high government officer to the board of directors, the requirement that official banks be used for all financial transactions, and a Minister’s suggestion by telephone to the chairman of the board, are all examples of relations that usually exist between public enterprises and the government. In spite of the diversity and range of these examples, they have in common the following: each represents an attempt by the government to influence the behaviour of the enterprises. For lack of a better term, these actions will be called regulations. Included in this term are all attempts, explicit or implicit, formal or informal, on the part of the government and related organisations, to influence the conduct of public enterprises, such that the latter will produce the results desired by the former. Though it is theoretically conceivable that one regulation would suffice to produce the desired results2 the fact is that in most cases there exists a variety of regulations; in the following discussion the set of regulations will be termed the regulatory system. As a point of departure in the analysis of the situation in Latin America, the following paragraphs will be devoted to the question of the necessary theoretical conditions for optimal relations in an ideal regulatory system. The first condition for such a regulatory system is the perfect congruence between the policies and objectives of the government and the regulations which are used to enforce these policies. This implies that the regulations should be a logical consequence of the policies and objectives. Furthermore, public enterprises are not the only means available for the implementation of these policies. If there are alternative tools for policy implementation, a comparison will be required to identify the cases in which public enterprises are the most effective policy tools. The second condition for the optimal functioning of a regulatory system is the congruence between the information and analysis which each specific regulation would require, and the administrative capability of the organisations responsible for the formulation of regulations and the supervision of their implementation. As we shall see later in this discussion, this is one of the crucial conditions in the actual functioning of the regulatory systems. The third condition concerns the effectiveness and the neutrality of the regulations. A regulation is effective when its real impact on the behaviour of a public enterprise coincides with the one desired by the government. A regulation can be considered neutral when its impact is limited only to those aspects of

2. This would be, for instance, the case of a public enterprise operating in a perfectly competitive Paretian world, where the order to maximize profits would result in a social optimum.

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behaviour that the government wishes to influence, and when no disfunctional impact occurs in other areas of the public enterprise activity. The fourth and final theoretical condition relates to the actual heterogeneity of the government and the multiplicity of organisations which attempt to influence, in one way or another, the behaviour of public enterprises. Be it by way of a single regulatory agency (like a holding company) or by way of other mechanisms of co-ordination, the necessary internal congruence of the regulatory system must be achieved. As can be seen, the conditions are quite exacting. Even if we do not attempt to achieve optimal solutions, but only strive for “satisfactory” solutions in a context of bounded rationality,3 the design and operation of a regulatory system is a very complex issue. The remaining sections attempt to provide a comparison between this ideal system and the current conditions found in Latin America. 3. The Relations between Policies and Regulations: Problems of Congruence In ideal terms, the only acceptable source for regulations is the divergence that can be found between “autonomous” behaviour, public enterprises and the “desired” behaviour—as indicated in government objectives. Related to a policy of industrial development, for example, we may find regulations that introduce a preferential treatment for public enterprises’ local suppliers, designed to overcome the search by public enterprises for more economical foreign supplies. Even though this may be the only acceptable explanation in terms of optimal relations in the regulatory system, it is by no means the only one. There are a considerable number of factors—legitimate or otherwise—that could explain the forms that regulations assume at any given time. Some of the regulations find their origin in the control of the use of public funds. This is quite common in Latin American administrative systems based, unfortunately, on the assumption of dishonesty. The almost automatic application to public enterprises—via inertia—of regulations designed in response to the quite different problems and characteristics of the government is also quite common. Another usual phenomenon is the existence of regulations that remain in force long after the policies that produced them have disappeared. Internecine bureaucratic power struggles, etc., are further reasons for a number of regulations. The Latin American cases—even though the range of situations is diverse— tend towards two different prototypes. The first, represented in the figure below, characterises the present configuration in countries which, like Peru and Uruguay, have extensive regulatory systems:

3. The concepts of “satisfactory” solutions and “bounded rationality” are used here in Simon’s sense.

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Figure 1: Incongruency between Government Policies and Regulatory System.

Note that the area of congruence (C) is small and that two types of divergence are present. The first (Area A) is found in the existence of regulations which do not pertain to clear government policies or which pertain to policies which had been only vaguely defined. The regulations belonging to this area are, for the most part, ritual or conventional, and are frequent in Latin American systems. A typical case is that of Peruvian public enterprise, officers being required to have the authorisation of the Executive Branch, by means of an Executive Act, in order to travel outside the country. By stretching imagination we may link this regulation with a policy of saving foreign exchange. But, given that in most cases the reason for travel is to produce or to save foreign exchange, or, as in other cases, the expenses are paid by foreign organisations, the arguments behind this restrictive regulation appear to be rather weak. Among other cases of ritual compliance with irrelevant regulations we can mention those related to the adoption of private business structures in the organisation of state production activities. In the case of joint-stock companies, Commercial Codes require a minimum number of participants and, in certain cases, the deposit of a nominal amount of shares as a warranty by the directors of the enterprise. The strict application of these norms to state enterprises has rather absurd results. For example, 99.98% of the capital of EDELCA in Venezuela belongs to the Venezuelan Corporation of the Guayana and the remaining 0.02% to the Venezuelan Corporation for Development, presumably to fulfil the requisite of a minimum number of partners. For similar reasons, 99% of the capital of DIANCA in Venezuela belongs to COVINCA, and the remaining 1% to the Investment Fund of Venezuela. But the Investment Fund owns 100% of the stock of COVINCA! The statutes of the Companía Venezolana de Navegación, a 100% state-owned enterprise, require that “members of the board

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must deposit ten shares of the company stock, as established in Article 244 of the Commercial Code”.4 While these examples may be relatively trivial and have been included principally to emphasise the ritual character of some regulations, this is not always the case. The regulations affecting foreign travel by functionaries have caused serious problems for the operation of certain Peruvian enterprises. Area B on the other hand, refers to policies or objectives of the government which could be implemented through public enterprises but for which corresponding regulations do not exist. A typical example is the case of regional development. Most Latin American countries confront difficult regional imbalances and attempt to correct them. But in almost all cases they do not seem to be able to effectively use existing public enterprises as a policy tool. We seldom find regulations such as the one existing in Italy which requires 40% of IRI’s investment to be done in the underdeveloped South. The situation described above—rather small C congruence area and large A and B—exists in those countries in which the regulatory system is extensive. There are other cases, mainly in some of the smaller countries, in which the number of regulations is small and therefore the area A is much smaller. A few observations. First, in actual practice no country fits perfectly in any of the categories. Even in countries characterised by extensive regulatory systems, not all enterprises are subject to the same regulations. There are often a certain number of public enterprises—usually joint-stock companies—which operate on the periphery of the regulatory system. Second, it is not uncommon in Latin America for the formal and explicit regulatory system to be replaced by established ties with certain “political functionnaires”. These ties—a kind of informal and primitive regulatory system— can influence the behaviour of a public enterprise as much as, or more than those established by the formal system. It is important to point that this type of informal system requires a different method of analysis and that the characteristics of this situation differ considerably from those described above.5 4. More on the Relation between Policies and Regulations: Considering the Alternatives The congruence between government policy and regulatory system is but one of the conditions which must be satisfied in order that optimal relations obtain. The other condition already outlined is that, given the characteristics of the policies, the instrumentality of the enterprises offers itself as the best alternative in realising a given end.

4. Compañía Anónima Venezolana de Navegación (CAVN), Estatutes, Article 25.

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It is usually overlooked that public enterprises can only serve as an effective instrument of policy in a limited number of cases and that there are usually powerful alternative mechanisms for the implementation of the policies. Let us take the example of a policy dealing with import substitution in respect of basic products. In certain areas of production—let us say fertilizers or steel— there exists the possibility of the creation of a state enterprise or the expansion of one already in existence. There are also alternative measures: subsidies, fiscal and customs exemptions to the private sector, negotiation with foreign investors, etc. No one of these alternatives is necessarily the best; they might be inefficient or costly or they might run the risk of political problems. The point that must be stressed—for it is frequently forgotten—is that the perfect functioning of the regulatory systems requires the explicit consideration of alternative instruments other than the public enterprises. This is a frequent problem in Latin America and the cases of inadequacy in the choice of instrument seem to fall into three categories. The first type of inadequacy relates to the attempt to secure markets for certain public enterprises which, apparently, are incapable of functioning under competitive conditions. Thus, Uruguayan state enterprises had to channel 20% of their advertising expenditures through the government broadcasting SODRE in spite of its scant audience. A second inadequacy relates to the notorious inability of the government to capture public enterprise profits, which causes the government to impose on profitable public enterprises functions for which there already exist other state agencies. Certain Venezuelan public enterprises have been ordered, for example, to implement housing programmes for employees although Venezuela has important institutions which specialise in this type of activity. A third type of inadequacy concerns the excessive manipulation of public enterprise prices as an anti-inflationary measure: the policy of the Argentinian Government with respect to prices and tariffs during 1979 and the first half of 1980 is a pertinent example. Of course, the question of prices includes numerous cases of cross-subsidisation. These are but a few examples; it is possible to cite a hundred similar cases. Naturally, each case requires a discussion of its individual merits, but a panoramic vision of the situation suggests that there are frequent abuses of public enterprise in spite of clear alternatives of instruments. One more example of irresponsible—although less dangerous —behaviour: to mention the use of enterprises as a policy tool when a dispassionate analysis would indicate that at no time was there any intention of using them as instruments. One frequently hears that a certain company will produce a number of necessary jobs, but the technological options chosen have an implied preference for capital-

5. See, for example, the excellent analysis of the Dominican Republic administration under Balaguer, prepared by Oscar Oszlak for the Latin American Center for Development Administration (CLAD), Caracas, Venezuela.

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Figure 2

intensive methods. Or, investments whose location is deter mined by the availability of raw materials and which are undertaken exclusively because of their profitability and/or foreign exchange saving potential, are mentioned as examples of the policy of regional development. Figure 2 describes the general situation. As can be seen, the effective area of congruence is even more restricted than that in the previous section. 5. Problems of Information and Administrative Capacity The second condition for optimal relations (see section 2 above) is the congruence of the information and analysis which each specific regulation would require, on the one hand, and the administrative capability of the units responsible for supervision and implementation, on the other. Instead of an analysis of the various types of regulations and their respective problems, in this section we shall focus on three typical cases, which can serve as a sketch of the general situation in Latin America. The first type of regulations to be discussed is that in which the government seeks to influence public enterprises by the specification of goals. Whether in its “administrative” version of management by results, or the “planning” version of programme budgeting, these types of regulations are presented as the panacea to both public enterprise management problems and the problems of governmentpublic enterprise relationships.6 From the point of view of the public enterprises, this seems to be an ideal system, at least to the extent that once the goals are established, they are free to decide how they will be achieved. From the view-

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point of the government, the definition of the results to be achieved and of the resources to be used facilitates enormously the task of overall planning. It is rarely, however, that the problems of information and of the administrative capability necessary for the accurate definition and later evaluation of the goals, are discussed. In order to demonstrate the complexity of this question we will now turn to a few typical examples of problems that arise in public enterprises. Imagine that a state monopoly finds it necessary to determine (a) price and production levels and, on the basis of these, (b) an estimate of the funds the company will contribute to the Treasury (or the subsidies that will be necessary). This demands the knowledge of the production and demand functions, by no means an easy task. Even the criteria used to define price and production levels need to be evolved. Given that we can expect the government not to exploit its position as a monopoly, we may assume that instead of a goal of maximum economic benefit (marginal cost=marginal revenue), a goal of maximum social benefit (price=marginal cost) will be set. But, what if at the production level thus defined, subsidies are required, and these are derived from a regressive tax structure that will have a greater negative effect on societal welfare than monopoly pricing? And what if there are imperfections in the factor markets? The problems get even worse if we consider a multiple rather than a singleproduct enterprise, or if we introduce additional objectives in relation to exports, the creation of new jobs or the saving of foreign exchange. Or, if we were considering the case of a public enterprise in an oligopoly situation, the fixing of prices and production levels has to incorporate the possible reactions of the other oligopolistic enterprises.7 To this we should add that it may be necessary to impose a system of incentives and sanctions related to the goals that have been set, unless, of course, we place a considerable faith in the public spirit of the managers. Such a system of incentives and sanctions does not exist and would not be easy to introduce in Latin American administration. It seems clear that, in spite of its clear advantages, the specification of goals requires: (a) a very large amount of rather complex information, and (b) a small number of extremely well-equipped officers. A second type consists of those regulations that attempt to influence the decisionmaking criteria employed by public enterprises. The most obvious option is to explicitly define these criteria such that they are available to public enterprises for their internal use in the selection of alternative and later in the evaluation

6. See Jorge Irisity, “Relaciones presupuestarias entre gobierno central y empresas públicas” and Osvaldo Albano “El presupuesto integrado de las Empresas del Estado”, Documents presented to the Seminar on Public Enterprises and its relation with Central Government (Caracas, CLAD) for some extreme formulations.

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process. An alternative—not perhaps as obvious as it might seem—would be to select personnel for the high administrative positions from among people whose background makes it probable that they will act according to the government’s objectives. The administrative requirements for the first alternative need not be discussed here—as it is, they are much like those of regulations concerning goals —but the second alternative bears comment. The attempts to influence the behaviour of public enterprises through the selection of certain types of people for the boards is particularly frequent in Latin America. The basic premise is simple: once appointed the directors will continue to act as they did in their previous roles. If one wishes to introduce in public enterprises “commercial criteria”, the most direct way is to include in the boards people with experience in the private business sector.8 If one wishes these enterprises to follow the doctrine of the party in power, nothing seems to be more effective than the inclusion in the boards of a few distinguished members of the same political party. If a Minister wishes to assure smooth communication between the Ministry and an enterprise, he may appoint personal friends or faithful functionaires to these positions. One can discuss the effectiveness of these practices, but they assure the reduction of both the amount of information and of administrative capability necessary to the functioning of the system (an explanation in itself for the considerable diffusion of this practice.9 The third type of regulations concentrates neither on goals nor on criteria; rather it attempts to influence specific actions which will produce, or which are hoped to produce, the desired results. This is the most traditional regulation in Latin America and, while on the wane, it is still more prevalent than the other two. The forms that this type of regulation (which will be called direct) adopts, are various. In some cases they prescribe a given and well defined process for decision-making. This is the case of the norms and regulations on purchasing used in Argentina and Uruguay. In other cases direct orders are given, as for example, the requirement to Peruvian public enterprises to use the National Bank for all short-term bank operations. The Contralorías or Tribunales de Cuentas (Latin American equivalents to the French Court des Comptes) usually introduce a number of minor regulations, ranging from the use of revolving funds to travel expense reporting. Another common mechanism is to transfer the final decision on certain matters from the public enterprises to some unit of the government. We already mentioned the requirement of approval through Executive Order in Peru for trips abroad. In Argentina, purchases above a given amount required the specific consent of the Corporatión de Empresas Nacionales. In Uruguay, the hiring of 7. J.von Neuman and O.Morgenstern, The Theory of Games and Economic Behavior (Princeton: Princeton University Press). The situation is quite well described by Due: “Some of the aspects of an oligopoly situation are similar to a military campaign or to a poker game.” John F.Due, Economic Analysis (Spanish version: Buenos Aires, EUDEBA, 1967).

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new employees must be approved by the Civil Service Office and the General Accounting Office. In Venezuela, some forms of credit require the approval of the President and the Cabinet. The administrative requirements for the implementation and supervision of this type of regulations are different from those of the first two types. Direct regulations usually require only taking into account the legitimacy of the action, that is, whether it complies with the norm or rule. No consideration of the opportunity of the action is usually necessary, nor is compensation for the cost of the action to the enterprise required. Very large amounts of simple information characterise these regulations, and a system based on them has few qualitative prerequisites and can be easily administered by middle-level personnel, in greater or lesser number according to the number of existing rules or norms.10 The following chart sums up the principal characteristics of the regulations that have been discussed: Type of regulation 1. Regulation of goals 2. Regulation of decision-making criteria 3. Direct Regulations

Information Personnel requirements complex few high-level personnel simple few trustworthy simple

many middle level pers

Under the best of conditions the design of regulatory systems should be made independently of considerations of administrative capability. Once the best system has been designed—which probably would include emphasis on goals and results—the necessary administrative capability has to be created. Unfortunately, in the case of Latin America just the opposite seems to have occurred. The current administrative capability seems to have determined the characteristics of the regulations. Thus, Latin American regulatory systems tend towards direct regulations or toward the use of appointments as a tool, the negative consequences of which will be examined below.

8. A similar recommendation was given by Appleby in his well-known study of Indian Public Administration. Paul Appleby, Re-examination of India’s Administrative System (New Delhi, Government of India, Secretary of the Cabinet, 1956). 9. There are also additional reasons. In some cases—for example Perú— the honorarium received by the Ministry’ functionaries integrating the boards was a mechanism used to increase the rather low salaries. 10. In the cases when final decisions are made outside the public enterprise, the requirements with regard to information and administrative capability vary according to the type of decision that is being submitted to the outside arbiters. However, as public enterprises usually control the technical information on which they base their recommendation to the outsiders, the role of the latter is limited to a sort of veto power over the usually single option proposed by the enterprise.

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6. The Effectiveness and Neutrality of the Regulatory System A relatively obvious condition for an optimal regulatory system is that the regulations effectively induce in public enterprises the desired behaviour. This is not as simple as it seems, and there are some difficulties inherent in all types of regulations. First, regulations should be reasonably feasible. In Uruguay, for example, the state railroad, a structurally deficitary enterprise in fierce competition with road transport, was governed by an Executive Order requiring that prices be fixed at a level assuring an adequate return on capital. This is a clear case of a regulation that is not feasible. If prices were fixed in this manner, the railroad would have lost the greater part of its business to the road competition and its deficit would have increased. For this reason public enterprises in Latin America often practise the colonial wisdom of “obedience without compliance”. Second, regulations must not be ambiguous. A typical case: a paragraph is usually introduced in Venezuelan budgets, which states that: “during the fiscal year all important modifications in public enterprise programmes…which represent significant changes in the budget, must be analysed by the National Budget Office and approved by the Council of Ministers within 30 days.” What is “important” for the legislators may not be so for the enterprises, which during the last few years have almost never considered a budget alteration to be “important” enough for submission. Orders which direct enterprises to foment technological research and development, without specifying the methods for doing so, the priorities, or the amount of funds to be spent, are further examples of the lack of clarity found in regulations. Another important problem in the design of regulations concerns the balance between what the regulations seek to achieve and the preference functions of the enterprises at which they are directed. The greater the incompatibility between the intent of government regulations and the autonomous behaviour of enterprises, the greater the burden that will fall upon the apparatus in charge of the supervision of the implementation of the regulations and the greater the incentives and/or sanctions necessary to support the implementation of the regulations. If there is not an adequate balance between the two elements, regulations tend to become ritual acts or tend to be effective only in the case of small or weak enterprises. All in all, the most difficult problem in the design of regulations is to avoid dysfunctional effects in areas of the behaviour of the enterprises, which are distinct from those meant to be influenced. Often regulations effective in some desired area produce negative secondary effects in other areas, the magnitude of which may counteract the positive effects. One reason why this is so common is that regulations seldom cover all facets of an enterprise’s behaviour. Direct regulations of actions by public enterprises most frequently produce negative results because, given the nature of the regulations (the control of specified

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actions), the attempt is to influence only restricted areas of entrepreneurial behaviour. A norm that defines strictly the due process of purchasing—such as existed in Uruguay—searches for safeguards for public funds which will make misuse more difficult. Similarly, mechanisms for the control of imports, as existed in Peru, are attempts to reduce to a minimum foreign exchange expenditures. This concentration on one aspect of the enterprises’s behaviour produces the regulation’s major defect and the dysfunctional effects already mentioned. Inevitably regulations affect other areas. In the examples given, the misuse of public funds may be curtailed and foreign expenditures may be reduced (although even these results may be doubtful in many cases), but there may also be quite serious repercussions in other areas: a fall in profits, delays in the completion of projects, interruptions in production, drop in morale, severe administrative costs related to the implementation of the controls, etc. Generally, the principal problem with the regulation of isolated acts is that even when they are effective in terms of their explicit objectives, they produce secondary negative results in other areas and their impact on the overall functioning of the enterprise can be extremely negative, whatever the point of view or criteria used to evaluate the results. While negative secondary effects are characteristic of the regulations of specific actions, by no means are other types of regulations free from such negative effects. If the goals established for the public enterprises are expressed in terms of quantity, the effort made to reach those goals may cause qualitative problems with respect to the products. The negative secondary effects of the attempts to influence public enterprise behaviour via appointments are too well known to merit further discussion. The actual cycle of the impact of regulations can be seen in figure 3, which differs greatly from the initial expectations of the government. 7. Internal coherence in the regulatory system In its actual functioning, the government can be seen as a more or less heterogeneous grouping of loosely-connected units, each emphasising different aspects of government functions. Regulation of public enterprise is shared among a number of different units of government such as the Presidency, the legislature, the various Ministries, the planning and budget offices and, of course, the Contralorías and Tribunales de Cuenta, to mention only the most important. As regulations have their origins within different sectors of the government, there can be internal contradictions in the regulatory system. The Ministry of Finance may pressure a fertilizer company to cut its operating deficit through price increases at the same time as the Ministry of Agriculture wants low prices in order to favour agricultural development. A planning agency may demand of a railroad enterprise that it close down some of its unprofitable lines

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Figure 3: The actual impact of regulations.

in order to rationalise its overall system, and at the same time the enterprise may receive from other sectors pressure to maintain these limits in operation. It is almost impossible to avoid these kinds of contradictions since each governmental agency will always put different emphasis on different goals. In the words of V.V.Ramanadham, “there is need for promoting an integrated approach to the basic problems of the public sector undertakings”.11 An adequate regulatory system needs some mechanism that assures internal coherence of all the regulations in force. Two possible solutions come to mind. The first is the creation of a unit to co-ordinate regulations, process the requirements of all other government agencies and design a coherent body of regulations. This is one of the possible—and perhaps most important—functions of a holding company. However, the Latin American experience suggests that two problems are most likely to arise. In some cases, the role of the holding company, which should be to receive, adjust and transmit government policy, becomes that of isolating public enterprises from the rest of the government. In other cases (here the Corporación de Empresas Nacionales in Argentina would, in its brief existence, be a good example) a weak agency does not perform any reasonable role and each government unit will continue issuing regulations addressed to the enterprises within the holding. The second solution is to use the mechanisms of co-ordination already existing in the government. One such case is the Cabinet, where more serious contradictions can be avoided. The planning system can also contribute to the elimination of these problems, save that in most Latin American countries the

11. V.V.Ramanadham, The Control of Public Enterprises in India (Delhi, 1964), p. 85. His suggestion of a co-ordinating mechanism at the level of the Cabinet Secretariat is interesting.

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planning agencies are usually weak and often limit their actions to large investment projects. Another mechanism frequently employed in the region is the representation on the enterprises’ boards, of the various Ministries and agencies related to the enterprises, hoping to solve co-ordination problems at that level. Nevertheless, the few empirical analyses that exist of the functioning of public enterprise boards12 suggest that such a practice is not very effective. 8. Conclusions The previous sections provide ample evidence that the eternal problem of public enterprise—the reconciliation of control and autonomy—continues to trouble governments and public enterprises in Latin America. In the context of this discussion, control has not been conceptualised as the safeguard of public funds from the designs of dishonest employees; rather it has been used in the most general sense of the adjustment of public enterprises to the policies of the government, policies which supposedly express societal welfare.13 At the same time, autonomy is not a value in and of itself; rather it is important to the extent that it is a precondition for efficiency in production. Finally, the optimal regulatory system, and the regulations of which it is composed, have been defined, as discussed at length, as the mechanism through which a balance between control and autonomy is attained. Given that no real system is perfect, under normal conditions we may expect to find cases in which a certain reduction in efficiency is tolerable for the sake of a greater accord between public enterprise and government policy, or, on the other hand, cases of greater autonomy and entrepreneurial efficiency at the probable cost of less accord between public enterprises and government policy. Historically, Latin American public enterprises have had to make their way under the worst of the conditions. Inbred in a long-standing system of administrative formalism, they have been subjected to regulations that have seriously undercut the possibility of productive efficiency. The regulations did not, however, result in the reconciliation of the behaviour of the enterprises to government policies. Various Latin American nations, in the last few years, have attempted to simplify their regulatory systems by means of the elimination of the more cumbersome regulations or the transformation of a good number of enterprises 12. See OFIPLAN, Investigatión sobre Presidencies Ejecutivas (San José, Costa Rica, OFIPLAN, mimeo, Julio 1976) and INAP, “Burocracia Empresarial del Estado y Empresas Públicas” Lima, Informe de Investigación, Convenio INAP—Pontificia Universidad Católica del Perú, Diciembre de 1976, 13. To relate government policies with societal welfare is a rather strong assumption in many Latin American cases. For a discussion of the point, see Horacio Boneo, Saber Ver Las Empresas Públicas (San José: EDUCA, 1980).

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into joint-stock companies which are only partially subject to the regulatory system. This has not furthered the process of adjustment between the behaviour of public enterprises and the policies of the government. Instead, a new economic group has been created which somehow operates on the margin of government policies. The Brazilian case is the most extreme example of this phenomenon. The task that confronts Latin America is not, of course, to re-establish antiquated, inefficient regulatory systems. It is the rather difficult challenge, one requiring imagination and innovation in constructing new systems which can achieve the necessary congruence between the objectives, often contradictory, and productive efficiency. BIBLIOGRAPHY This bibliography only contains works on public enterprises in Latin America. It is a partial result of a larger effort under way. The works contained herein have been written after 1970, since for those published earlier there exists an excellent bibliography published by the Latin American Center for Economic and Social Documentation (GLADES), Economic Commission for Latin America, Santiago, Chile, in 1972. ABRANCHES, Sergio Henrique, “The Divided Leviathan: State and Economic Policy Formation in Authoritarian Brazil”, (Ph.D. Dissertation, Cornell University, 1978). ABRANCHES, Sergio Henrique, “A questao da empresa estatal—Economia, Politica e Interesse Publico”, Revista de Administracao de Empresas, Out/Dez 1979. ABUSADA-SALAH, Roberto, “Industrialization Policies in Peru, 1970–1976”, Austin, Institute of Latin American Studies, The University of Texas, Technical Papers Series No. 16. ALBANO, Osvaldo (Coord.), “La descentralización de la actividad productiva de bienes y servicios del Estado Venezolano”, Caracas, Cbmisión de Administración Pública, 1975. ALVAREZ, Augusto C. y Arvids KALNINS K., “La prestación de servicios públicos en Colombia”, Revista Latinoamericana de Administración Pública, No. 2, Julio de 1974. AMARAL MONCH, Maria da Conceicao, “As sociedades da economia mista e as empresas púlbicas: controle e responsabilidade”, Revista de Direito Administrative, Jan/Mar 1977. AMAT Y.LEON, Carlos, La Economía de la Crisis Peruana, Lima: Fuhdación Friedrich Ebert-ILDIS, 1978. ANDRADE BERZABA, Andrés, “Origen y Naturaleza de las Empresas Públicas” Revista de Politica y Administración, No. 4, En/Ab 1976. ANDRIEU, Pedro Enrique, Empresas Públicas: et Rol del Estado en el crecimiento económico y social, Buenos Aires, Editorial El Coloquio, 1975. ANGUEIRA, María del Carmen, “Capitalismo de Estado e Industria en Argentina: la Fábrica Militar de Aviones, 1927–1956”, Ponencia presentada al VI Simposio de Historia Económica de América Latina, Vancouver, Agosto 1979.

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ARANDA SAN MARTIN, Antonio, “Las Formas de Partici ción Popular” Nueva Economía, 2, En/Ab 1972. ARRIECHE, Víctor José y Gustavo CHUECOS, “La Empresa Pública en Venezuela”, Revísta de Politica y Administración, 4, En/Ab 1976. ASSOCIACAO DOS DIPLOMADOS DA ESCOLA SUPERIOR DE GUERRA, “A Estatizacao da Economia Brasileira: A Possivel Convivencia e a maior importancia dos meios disponiveis de cada um” Revista da Associacao Commercial, XXXVIII, 1106, Agosto 1976. BAER, Werner, “O Crescimento Brasileiro e a Experiencia Desenvol-vimentista: 1964– 1974”, Estudos CEBRAP, 20, Ab/mai/Jun 1977. BAER, Werner and Adolfo FIGUEROA, “The impact of increased state participation in the economy on the distribution of income: some reflections based on the cases of Brazil and Peru” Paper presented at the Second BAPEG Conference on Public Enterprise in Mixed Economy LDC’s, Cambridge, Mass., 1980. BAER, Werner and Annibal VILLELA, “The changing nature of development banking in Brazil” Journal of Interamerican Studies, XXII, 4 , Nov. 1980. BAYLEY, John, “Presidential Control of the Extended State: Emerging Trends in Latin America”, Austin, Institute of Latin American Studies, The University of Texas, Technical Papers Series 11, 1977. BARLETTI, Bruno y Luis FERNANDEZ, “Empresas Públicas y Burocracia Empresarial del Estado”, Lima, INAP, 1976. BARQUIN ALVAREZ, M., “El control del Ejecutivo y la Administración PúblicaFederal sobre el sector paraestatal”, Documento presentado al Seminario sobre Regulacion de la Empresa Pública, México, 1979. BARROS Filho, Adhemar de, “Burocracia e Politica—Dos Fatores de Estatizacao da Economia Brasileira” Administracao Paulista, XXX, Jul/Dez 1977. BAUDIN, Louis, Estatizacao ou Economia Livre?, Sao Paulo, Ed. Tangará, 1978. BOENINGER, Edgardo y Eduardo PALMA, “Empresas Estatales: el caso chileno y un análisis general” Documento presentado al Seminario sobre el Proceso de Planeamiento y las Empresas Públicas en América Latina,. Lima, Perú, 1978. BONEO, Horacio, Las Empresas Estatales en América Latina, Caracas, Centro Latinoamericano de Administración para el Desarrollo, 1979. BONEO, Horacio, “Planificación, Presupuesto y Empresas Públicas en America Latina”, Estitdios CEDES, 2, 4, 1979. BONEO, Horacio, “Political Regimes and Public Enterprises”, Paper presented at the Second BAPEG Conference on Public Enterprise in Mixed Economy LDC’s Cambridge, Mass., 1980. BONEO, Horacio, Saber Ver las Empresas Públicas, San José, EDUCA, 1980. BONEO, Horacio, “Empresas Estatales: Tres Preconceptos y sus consecuencias”, Revista Argentina de Administración Pública, Año 1, Nos. 3/4, Abr/ Set 1980. BRESSER PEREIRA, Luiz C., “Notas Introdutorias ao modo Techno-burocratico ou Estatal de producao”, Estudos CEBRAP, 20, Abr/Mai/Jun 1977. BREWER CARIAS, Allan Randolph, Las Empresas Públicas en el Derecho Comparado: Las Empresas Públicas en el Derecho Comparado: Estudio sobre el Regimen de las Actividades Industrials y Comer ciales del Estado” Caracas, Universidad Central de Venezuela. CABIESES, Hugo y Carlos OTERO, Economía Peruana: un ensayo de interpretatión, Lima, DESCO, 1978.

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CALCANA DE TEMELTAS, Josefina, “Formas de Integración y de Control de las Empresas Estatales de Servicio Público”, Caracas, Comisión de Administración Pública, 1971. CAMPERO, Guillermo (con un anexo de Pablo BALERA), “Gestión de la Empresa y Participatión de los Trabaj adores”, Nueva Economía, No. 2, Ene/Abr 1972. CARRILLO CASTRO, Alejandro (Coord.), Las Empresas Públicas en México. México, Ediciones INAP, 1976. CARRILLO CASTRO, Alejandro, La Reformà Administrativa en Mexico, México, Ediciones INAP, 1978. CARRILLO CASTRO, Alejandro, “Là regulation jurídico-administrative de la empresa pública en México”, documento presentado al Primer Seminario Latinoamericano sobre Políticas Públicas, Sao Paulo, FUNDAP/CLACSO, 1979. CARVALHO, Getulio, “Petrobras: duas decadas e um dilema” Revista de Administracao Pública, 9, 1, Jan/Mar 1975. CARVALHO, Getulio, Petrobras: do Monopolio aos Contratos de Risco, Rio de Janeiro, Forense Universitaria, 1976. CARVALHO, Getulio, “A empresa publica e o gerente professional: nota em torno de um relatorio”, Revista de Administracao Pública, Jul/Set 1976. CARVALHO PEREIRA, José Eduardo, Financiamento Externo e Crescimenta Economico no Brasil; 1966–1973, Rio de Janeiro, IPEA/INPES, 1974. CAVAROZZI, Marcelo, “The Government and the Industrial Bourgeoisie in Chile, 1938– 1964”, Ph.D. Diss., Department of Political Science, University of California, Berkeley, 1972. CAVAROZZI, Marcelo, “El Rol de los Partidos Gobernantes y las Organizaciones Públicas en la generation de las Políticas de Industrializatión”, Austin, The Institute of Latin American Studies, The University of Texas, Technical Paper Series, No. 8. CENTRAL UNICA DE TRABAJADORES DE CHILE, “Normas Básicas de Participatión de los Trabaj adores en la Directión de las empresas de las áreas social y mixta” en Nueva Economía, #2, Ene/Ab 1972. CINCUNEGUI, J., “Objetivos da firma publica: um caso”, Documento presentado al Primer Seminario Latinoamericano sobre Políticas Públicas, Sao Paulo, FUNDAP/ CLACSO, 1979. CHUAYFFET CHEMOR, E., “Formas Legales de control administrative de las empresas públicas en México”, Documento presentado al Seminario sobre Regulatión de la Empresa Pública, México, 1979. CLAD, Taller sobre Análisis de los Aspectos Fundamentals de la Gestión de la Empresa Pública en Venezuela, Italia y España: Informe Final, Caracas, CLAD, mimeo, 1980. CLAD, IRI e IILA, Informe Final del Seminario sobre la gestión de las Empresas Públicas de América Latina e Italia, CLAD, 1978. CLAEH, La Empresa Pública en Uruguay, Montevideo, CLAEH, Serie Investigaciones No. 1, 1977. CLEAVES, Peter S., Bureaucratic Politics and Administration in Chile, Los Angeles, University of California Press, 1974. COLLIER, David (Ed.), The new authoritarianism in Latin America, Princeton, Princeton University Press, 1979. COMISION MULTISECTORIAL DE EMPRESAS DEL ESTADO, Informe Final, Lima, mimeo, marzo 1976.

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CONCLAP, “A Participacao do Estado no Economia Brasileira: Documento Básico da IV CONCLAP”, Revista de Financas Públicas, XXXVII, 332, Out/Dez 1977. COSTA BACIGALUPO, Emilio, “Aspectos Legales, Administrativos e Institucionales que regulan la gestión de las empresas públicas en Perú” Primer Coloquio Técnico sobre el Presupuesto como Instrumento de Evaluatión de la Gestión Empresarial, Lima, Die 1975. CORDERO, S. y S.GOMEZ TAGLE, “Estado y Trabaj adores de las empresas estatales en México”, Documento presentado en la Décima Asmablea General de la ALAP, Mexico, 1978. COTRIN NETO, A.B., “Teoria da Empresa Pública em sentido estrito”, Nevista da Ordem dos Advogados do Brasil, VI, 16, Mai/Aug 1975. COTRIN, NETO, A.B., “Da naturaleza juridica das subsidiarias de Empresas Estatais”, Revista de Direito Administrativo, Abr/Jun 1977. CUADERNOS DE MARCHA, Chile, Montevideo, No. 40, Agosto 1970. CUPERTINO, Fausto, Os Contratos de Risco e a Petrobras, Rio, Civilizacao Brasileira, 1976. DAIN, Sulamis, “Empresa Estatal e Capitalismo Maduro”, Documento presentado al Primer Seminario Latinoamericano sobre Políticas Públicas, Sao Paulo, FUNDAP/ CLACSO, 1979. DIAZ-LEAL ALDANA, Carlos, “Origenes, Historia y Perspectiva de la Comisión del Rio Papaloapan” Revista de Politica y Administración, No. 4, Ene/Abr 1976. ECHEVERRIA, Abel, Las Empresas Públicas en el Desarrollo National, Quito, Dirección Nacional de Personal, 1977. EVANS, Peter, Dependent Development: the alliance of multinational, state and local capital in Brazil, Princeton, Princeton University Press, 1979. FALABELLA, Gonzalo, El Desarrollo de la Planificación en Chile y Perú: Cáracter y Condicionamientos, Caracas, Fundación Fiedrich Ebert/ILDIS, 1976. FARIA, Walter, “Limites a Intervencao do Setor Publico na Economia”, Revista do Servico Publico, Jan/Mar 1974. FIGUEROA, L. y G.SABERBEIN, “Empresas del Estado en Perú”, Documento presentado al Seminario sobre el Proceso de Planeamiento y las Empresas Públicas en América Latina, Lima, Perú, 1978. GARCIA RAMIREZ, S., “Panorama sobre la empresa pública en México” Documento presentado al Seminario sobre Regulatión de la Empresa Pública, México, 1979. GIANOTTI, Jose Arthur, “Em torno da questao do Estado e da Burocracia”, Estudos CEBRAP, No. 20, Abr/Mai/Jun 1977. GILLIS, Malcolm, “Allocative Efficiency and X-Efficiency in State-owned Enterprises: some Asian and Latin American cases in the mining sector”, Austin, Institute of Latin American Studies, The University of Texas, Technical Papers Series No. 13, 1978. GINESTAR, Angel, “Empresa Pública versus Empresa Privada: un replanteo de la controversia en términos de eficiencia”, Revista Latinoamericana de Administration Pública, No. 2, Jul 1974. GLADE, William, “The political Economy of public enterprise controls: a conceptual view”, Documento presentado al Seminario sobre Regulacion de la Empresa Pública, México, 1979.

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GOMEZ DE ROSA, Raúl (Ed.) Memoria de la la Convention Nacional para Ejecutivos Financieros y Administrativos de las Empresas Públicas, Lima, EMADIPERU, 1972. GOMEZ LOPEZ, Rafael (Coord.), Estado, Política Económica y Administratión Pública, Caracas, Comisión de Administration Pública, 1974. GOMEZ TAGLE, S., “La industria electrica nacionalizada: bosquejo de un panorama general”, Documento presentado a la Décima Asamblea General de la ALAP, México, 1978. GORDILLO, Agustín, “El control de las empresas públicas en América Latina”, Documento presentado al Seminario sobre la Regulación de la Empresa Pública, México, 1979. GRAHAM, Lawrence, “The administration of public enterprises: co-ordination and control dilemmas for contemporary States”, Documento presentado a la Décima Asamblea General de la ALAP, México, 1978. GUADAGNI, Alieto, Economic Problems of the Greater Buenos Aires Electric Supply System, Buenos Aires, Institute Torcuato Di Tella, Centro de Investigaciones Económicas, 1972. GUDIN, Eugenio y Roberto SIMONSEN, A Controversia do Planejamento na Economia Brasileira, Rio, IPEA/INPES, 1978. HERBSTER DE GUSMAO, Oswaldo, Estudio sobre las Instituciones Autonomas de Costa Rica, San José ICAP, Reimprimido en 1973. HILGER, Marye Tharp, “Decision-Making in a Public Marketing Enterprise: CONASUPO in México”, Journal of Interamerican Studies, Vol. 22, No. 4, November 1980. IANNI, Octavio, Estado e Planejamento Economico no Brasil (1930–1970), Rio, Civilizacao Brasileira, 1971. INSTITUTO NACIONAL DE ADMINISTRACION PUBLICA, Control de Empresas Públicas en México (dos volúmenes con materiales del Seminario Franco-Méxicano sobre Control de Empresas Públicas), México, IMAP, Junio de 1980. INSTITUO PARA LA INTEGRACION DE AMERICA LATINA, El Régimen Legal de las Empresas Públicas Latinoamericanas y su Actión International (Volumen I: Argentina, Brasil, México, Volumen II: Chile, Paraguay, Uruguay), Buenos Aires, INTAL, 1977. IRISITY, Jorge, “Aspectos Teórico-Metodólogicos que sustentan el sistema de control y evaluación de la gestión de las empresas públicas”, Primer Coloquio Técnico sobre el Presupuesto como instrumento de evaluación de la gestión empresarial, DGPPASIP, Lima, Perú, Diciembre de 1975. KAPLAN, Marcos, “El Leviathan criollo: Estatismo y Sociedad en la América Latina contemporánea” México, mimeo, 1977. KAUFMAN PURCELL, Susan, “The Nature of the Mexican State”, Washington, Wilson Center, Latin American Program, Working Papers #1. KELLY ESCOBAR, Janet, “The comparison of state enterprises across international boundaries: the Corporation Venezolana del Guayana and the Companhia Vale do Rio Doce”, Paper presented at the Second BAPEG Conference on Public Enterprise in Mixed Economy LDC’s Cambridge, Mass., 1980. KERBUSCH, Ernst J. (Ed.), Cambios Estructurales en el Perú (1968–1975), Lima, Ed. La Confianza, 1976.

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LAVERGNE, Néstor y Dante CAPUTO, “Para una revalorizatión de las políticas de Comercio Exterior”, Documento presentado al Primer Seminario Latinoamericano sobre Políticas Públicas, FUNDAP/CLACSO, Sao Paulo, 1980. LIZANA, Lucía y Adriana REYES, “Estructura Actual del área de Propiedad Social”, Nueva Economía, No. 2, Ene/Abr 1972. LOPEZ FERNANDEZ, Armando, “La intervention del Estado y sus actividades como Empresario”, Revista de Política y Administratión, No. 4, Ene/Abr 1976. LOWENTHAL, Abraham F. (Ed.), The Peruvian Experiment: Continuity and Change under military rule, Princeton, Princeton University Press, 1975. MADRIGAL, Roberto y Salo Davi SEIBEL, “La Empresa Pública: Selectión de Inversiones en un Mercado Oligopólico” Caracas, Comisión de Administratión Pública, 1973. MARGARITI, Antonio I., Las Empresas Estatales, Buenos Aires, Bolsa de Comercio de Buenos Aires, 1978. MARTINS, Carlos Estevam, Capitalismo de Estado e Modelo Politico no Brasil, Rio, Edicoes do Graal, 1977. MARTINS, Luciano, Pouvouir et Développement Economique: Formation et Evolution des Structures Politiques au Brésil, Paris, Editions Anthropos, 1976. MARTINEZ NOGUEIRA, Roberto, “Los procesos de formulation e implementación de políticas y sus consecuencias sobre las empresas públicas”, Revista Latinoamericana de Administratión Pública, No. 2, Julio 1974. MARTINEZ ZULETA, Anibal, “El control de la eficiencia y efectividad de las empresas públicas”, Ponencia presentada por la Contraloria Genral de Colombia en el X Congreso de Entidades Fiscalizadoras Superiores, Nairobi, Kenya, Junio de 1980. MATED, Fernando, “El papel del sector público y de las empresas públicas en la integration económica de América Latina”, Austin, Institute of Latin American Studies, The University of Texas, Technical Papers Series No. 6, 1977. MONTEVERDE BUSSALLEU, J.J., “Informe Preliminar sobre la regulatión de la Empresa Pública en Perú”, Documento presentado al Seminario Internacional sobre Regulatión de las Empresas Públicas, México, 1979. NESS, Walter L., “A empresa Estatal no Mercado de Capitals”, Rev. Bras. Mercado do Capitals, Vol. 4, No. 12, set/dez 1978. NETTER, Klaus, “Cooperation among State-Trading Organizations of Developing Countries”, Les Cahiers du CETAI, No. 79–15, Juin 1979. NOVOA MONREAL, E., “Las Empresas Públicas y el Estado”, Documento presentado a la Décima Asamblea General de la ALAP, México, 1978. ODLE, Maurice, “Conflicting Attitudes toward Public Enterprises: The Commonwealth Caribbean”, Vol. IX, No. 6, Sep. 1975. O’DONNELL, Guillermo, “Burguesia Local, Capital Transnational y Aparato Estatal: Notas para su Estudio” México, ILET, 1978. OFIPLAN, “Investigation sobre Presidencias Ejecutivas (Diagnóstico Preliminar)”, San José, Costa Rica, OFIPLAN, Julio 1976. OLIVEIRA WERNECK, Arnaldo, “As Atividades Empresariais do Cover no Federal no Brasil” Revista Bras. Economia, 23, 3, Jul/Set. PARRA LUZARDO, Gastón, La Nationalization Petrolera: Para quién y Para qué?, Maracaibo, Universidad del Zulía, 1974. PIQUER CARNEIRO, J.G., “Para Controlar a Empresa Estatal”. Revista de Financas Públicas, Vol. XXXVIII, No. 332, Out/Dez 1977.

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PINI, José, “Las Empresas Públicas en Uruguay”, Documento presentado a la: Décima Reunión de la Asamblea General de ALAP, México, 1978. REICHSTUL, H. and L.COUTINHO, “Tendencias Recientes do Investimento Empresarial do Estado”, Documento presentado al Primer Seminario Latinoamericano sobre Políticas Públicas, FUNDAP/CLACSO, Sao Paulo, 1980. REVISTA LATINOAMERICANA DE ADMINISTRACION PUBLICA, Números Especiales dedicados a las Empresas Públicas en América Latina Mexico, ALAP, Nos. 8 y 9, 1979. REZENDE, F., “Las Empresas Públicas en la Economía Brasileña”, Documento presentado al Seminario sobre el Proceso de Planeamiento y las Empresas Públicas en América Latina, Lima, 1978. RODRIGUEZ PEREGO, Nicolás, Aspectos Jurídicos de las Empresas Públicas, Caracas, Comisión de Administratión Pública, 1974. RUIZ MASSIEU, J., “Una aproximación al control jurisdiccional de las empresas públicas”, Documento presentado al Seminario International sobre la Regulatión de las Empresas Públicas, México, 1979. RUIZ TAGLE, Eugenio, “Organizatión del área social en el sector de industrias de materiales y de elementos para la constructión”, Nueva Economia, No. 2, Ene/Abr 1972. SACHICA, L., “Regulation de las empresas públicas en Colombia”, Documento presentado al Seminario Internacional sobre la Regulatión de las Empresas Públicas, México, 1979. SADER PEREZ, Rubén, La Empresa Estatal y los Contratos de Servicios, Caracas, Ediciones C.V.P., 1968. SANCHEZ ALBAVERA F. and J.ESTEVEZ OSTOLAZA, “Cooperation between state trading organizations in Latin America”, United Nations Conference Trade and Development, TD/B/C, July 1978. SAN MARTIN, Salvador, La formula SEGBA y las Empresas del Estado, Buenos Aires, Ediciones Troquel, n.d. SANT’ANNA E SILVA, Sebastiao, “O Controle Financiero das Empresas Estatais”, Revista de Service Publico, set/dez 1973. SAULNIERS, Alfred, “State Trading organizations: a bias decision model and applications”, Paper presented at the Second BAPEG Conference on Public Enterprise in Mixed Economy LDC’s, Cambridge, Mass., 1980. SAULNIERS, Alfred, “ENCI: Peru’s Bandied Monopolist”, Journal of Interamerican Studies, Vol. 22, No. 4, November 1980. SAULNIERS, Alfred, “Public Enterprises in Latin America: An Annotated List of Recent Research Papers”, Journal of Inter american Studies, Vol. 22, No. 4, November 1980. SERRANO, Guido, “La inversion en la transición al socialismo”, Nueva Economia, No. 2, Ene/Abr 1972. SERCOVICH, Francisco C., “State-owned Enterprises and dynamic comparative advantages in the world petrochemical industry: the case of commodity olefins in Brazil”, Cambridge, Mass., Harvard Institute for International Development, Development Discussion Paper No. 96, May 1980. SUZIGAN, Wilson (Ed.), Industrial Politica, Institucoes e Desenvolvimento, Rio de Janeiro, IPEA/INPES, 1978.

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SILVA, Maria da Conceicao, A Divida do Setor Publico Brasileiro: Seu papel no financiamento dos investimentos publicos, Rio de Janeiro, IPEA/INPES, 1976. SILVA CIMMA, Enrique, El Control Público: Filosofía y Principios, Caracas, Contraloría General de la República, 1976. SINGER, Paul, A Crise do “Milagre”: Interpretacao Critica da Economia Brasileira, Rio Edicoes Paz e Terra, 1976. SOLARI, Aldo y Rolando FRANCO, “La inserción de las empresas públicas en el aparato estatal uruguayo”, Documento presentado en el Seminario sobre el Proceso de planeamiento y las empresas públicas en América Latina, Lima, 1978. SUZIGAN, Wilson et alii, Crescimento Industrial no Brasil: Incentives e Desempenho Recente, Rio, IPEA/INPES, 1974. TACITO, Caio, “Controle das Empresas do Estado (Públicas e Mistas)”, Revista de Direito Administrative, Jan/Mar 1973. TOPIK, Steven, “State Enterprise in a Liberal Regime: the Banco do Brasil, 1905–1930”, Journal of Interamerican Studies, Vol. 12, No. 4, November 1980. TORRES GOITIA, H., “Las Empresas Públicas en Bolivia”, Documento presentado al Seminario Internacional sobre la Regulación de la Empresa Pública, México, 1979. TREBER, Salvador, La Empresa Estatal Argentina: su gestión económicofinanciera, Buenos Aires, Editorial Macchi, 1968. TREBAT, Thomas and Jan Peter WOGART, “Introduction” to the Special issue devoted to Public Enterprise in Latin America, Journal of Interamerican Studies, Vol. 22, No. 4, November 1980. VASCONCELOS DOMINGUES, Carlos, “As empresas públicas e seu controle: analise comparativa”, Planejamento, Vol. II, Nos. 5 e 6, set/dez 1974. VELASCO ALVARADO, Juan, La Revolutión Peruana, Buenos Aires, EUDEBA, 1973. VILLACA, Maria Jose, “A Estatizacao da Economia Brasileira”, Digesto Economico, Ano XXXIII, No. 249, Mai/Jun 1976. VTLLANOVA VILLETA, Annibal y Wilson SUZIGAN, Politico, do Governo e Crescimento da Economia Brasileira 1889–1945, Rio de Janeiro, IPEA/ INPES, 1975. VILLARREAL, Rosario de y Rene VILLARREAL, “Public Enterprises in Mexican Development under the Oil perspective in 1980”, Paper presented at the Second BAPEG Conference on Public Enterprise in Mixed Economy LDC’s, Cambridge, Mass, 1980. VILLELA, Annibal, “As Empresas do Governo Federal e sua importancia na Economia Nacional”, Revista Brasileira de Economia, 1972. VILORIA, Enrique, “Empresa Multinacional, Integratión Latinoamericana, Administratión Pública”, Caracas, Comisión de Administratión Pública, 1973. VILORIA, Enrique, “Estado, Desarrollo y Empresa Pública en Venezuela”, Caracas, Comisión de Administración Pública, 1974. VILORIA, Enrique, “Las funciones de la empresa pública en América Latina”, Revista Latinoamericana de Administratión Pública, No. 2, Julio de 1974. VILORIA, Enrique, “Análisis de la Experiencia del Holding de Empresas Públicas con especial referencia al caso venezolano”, Caracas, mimeo, 1975. WITKER, J., “El holding como instrumento de control y coordination de las empresas públicas” Documento presentado a la Décima Asamblea General de la ALAP, México, 1978.

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YANEZ, Alfonso, “Problemas Práctices para la organizatión, implementatión y puesta en funcionamiento de un sistema de control y evaluación” (el caso de México)”, Primer Coloquio Técnico sobre el presupuesto como instrumento de evaluación de la gestión empresarial, DGPP-ASIP, Lima, Diciembre de 1975.

10 Executive Control Over Public Enterprises in Africa YASH GHAI*

1. Introduction Without doubt, one of the most striking features in the African countries since their independence around the 1960s is the burgeoning of the public sectors of their economies, either through the nationalisation of foreign investments or the establishment of new enterprises by state agencies, and frequently a combination of both. The expansion of the public sector has taken place in countries which claim to be aiming at a socialist development and those which are committed to a capitalist development. Unfortunately, despite considerable experience with public enterprises in these countries, no clear theory which explains their establishment or operation has emerged. In so far as there is a legal theory, it is based on the institutional features which determined the form of public enterprises in Britain. A fundamental characteristic of this form is a careful balance between the control by the government of the policy of the enterprises and the operational autonomy of the enterprise, vested in its management. Restatements of this balance are made frequently and ritually in African countries, especially when a new enterprise is being established, and whether the country aspires to socialist or capitalist development. This balance is reflected in the legislation and institutions of the public sector, whether it is a public corporation or a company. Yet it is clear that in practice the situation is quite different. Many of the characteristics which are supposed to be the advantages and strengths of public enterprises—autonomy to pursue their commercial goals, freedom from the red tape of the bureaucracy, financial independence, competitive recruitment practices—are negated in a large measure through the controls which governments introduce over their operations. In most countries there is a strong tendency to pull

* I am grateful to the Swedish Agency for Research Cooperation with Developing Countries (SAREC) for a grant which enabled me to study aspects of public enterprise in Africa.

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back the public enterprises into the orbit of the government and fasten on them the constraints and practices of the department. While a measure of government control over the public sector is implicit in the constitutional theory of public enterprise, it is clear that the balance between autonomy and control that prevails in practice needs to be reviewed. In countries with autonomous public enterprises which are not working well, greater government control is frequently advocated; while in countries with a highly centralised public sector, greater enterprise autonomy is advocated as a cure for inefficiency. It is obvious that in most instances these responses are too facile, overlooking many other deficiencies in the public sector, as well as misconstruing the true functions of control. Discussions in Africa about control and autonomy, and the efficiency of the public sector have suffered from an inadequate attention to political considerations. Public enterprises are an emanation and extension of the state, and their dynamics can scarcely be understood without some appreciation of the role of the state and the social groups who control its apparatus. Unlike in the developed countries of the West, the state in Africa emerged before indigenous social classes had effectuated their appropriation of and control over economic resources. The role of the state has therefore been not so much to maintain the dominance of superior economic groups, as to enable groups which have acquired control over the state apparatus to establish an economic basis for themselves.1 Public enterprises have lent themselves particularly well to this task. The apparent autonomy of public enterprises in a developed economy and stable class structure is unlikely where the ruling coalitions are shifting and insecure, and the control of the state gives access to vast economic resources. The distinctions between the government and enterprises tend to become blurred, and the government has often a vested interest in hiding the inefficiency of enterprises. Discussions of public enterprises also suffer from an assumption of the autonomy of the domestic economy. Little regard is paid to the numerous ways in which external factors influence the operations and performances of the enterprises. African economies are small and dependent, particularly vulnerable to the vagaries of the international economic system. Planning for the public sector becomes extremely difficult when the government has so little control over international prices, monetary system, recession, interest rates, etc. The constraints on policy making which arise from these factors severely limit both the policy control by governments and operational autonomy of the enterprises. Quite apart from this general dependence on the international system, public

1. See particularly, I.G.Shivji, Class Struggles in Tanzania (1976); P. Nowrojee, “Public Enterprise in Kenya” in Yash Ghai, (ed.) Law in the Political Economy of Public Enterprise (1977); and C.Meillasoux, ‘A Class Analysis of the Bureaucratic Process in Mali’ Journal of Development Studies (1970) Vol. 6, No. 2 97–110.

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enterprises in Africa are dependent in a particular way on foreign corporations. A large majority of public enterprises are forms of joint ventures between a local government and a foreign company. Even when the foreign company may not have equity in the enterprise, it is likely to be entrusted with a management or licensing agreement, under which some key policy and most operational decisions are made by it. The expansion of the public sector has served to hide the real extent of private, foreign investment in Africa, since it tends to take on a public form, but a realistic analysis of the public sector, and particularly the potential of executive control, must proceed from an examination of numerous agreements and documents which link public enterprises to foreign corporations. This paper examines some aspects of the control exercised by the government over public enterprises, by looking at the experiences of Ghana, Nigeria, Tanzania, Kenya and Zambia. It starts off by a general discussion of autonomy and control, and then proceeds to specific instruments of control. The conclusion attempts to relate the African experience to some general theoretical considerations about the state in the Third World. 2. Management and Control Control is a broad concept. It can mean, at one end, the enunciation of general principles of policy and, at the other, supervision of the minutest aspect of the administration of an enterprise. It includes the setting of targets as well as the supervision of the operations of the enterprises to ensure that these targets are achieved, comprising therefore a vast range of activities. There is, consequently, the danger that in the pursuance of control, a controlling authority may arrogate to itself functions that belong elsewhere. There is the danger particularly of confusing control with management. The constitutional theory of the public enterprise, at least as developed in the British system, posits a fundamental distinction between control and management. At its narrowest, management is the carrying on of the operations of the enterprise. It includes the detailed planning of the operations, and activities like the hiring of staff, construction of the plant, purchase of raw materials, marketing and pricing. It generally also includes the raising or expenditure of money. These functions have of course to be carried out within the parameters of legislative and administrative regulations, so that there may, for example, be regulations determining the maximum price at which the products of an enterprise may be retailed. So long as these regulations are set out in broad terms and as general principles, the distinction between control and management is maintained; but it is threatened the more specific the regulations or ad hoc the interventions become. Various reasons can be deduced for keeping the separation between control and management. Implicit in the distinction is a measure of autonomy for the public enterprise. This autonomy is particularly valued in constitutional and political systems where either the existence or role of public enterprise is

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controversial, or the distancing of the government from the enterprise is desirable for political reasons. In such situations, the separation of control from management is likely to be clearly provided for. It is considered important that the party in power should not be able to exploit public enterprises for partisan purposes. Nor should the balance between the public and private sectors be alterable at the whim of that party. For these reasons, the tasks of management are vested in independent bodies, and the government’s rights to direct how those tasks should be discharged are closely circumscribed. The exercise of the powers of direction should as far as possible be open and public. The separation of control from management serves another constitutional function. The measure of control that is vested in the government enables it to ensure that effect is given by the enterprises to public purposes. The enterprises are operated through public moneys, and are in a sense owned by the public. Their purposes should therefore be determined by bodies which are responsible to the public. There is always the danger when bureaucratic bodies are set up— and public enterprises are essentially that—that they will pursue goals of their own, and seek to extend their powers. Controlling power in another body would help to counteract these tendencies. The separation of management from control also makes possible a broader political accountability of the exercise of power by the enterprises. In so far as the government has a basic responsibility for policy making and supervision, it can be held accountable to Parliament and other bodies for the way in which these powers are exercised by it. (It is very difficult to make operating, industrial enterprises responsible in this way.) The government is not accountable for the day to day operations of the enterprises or deci sions as to the implementation by the enterprise of its general mandate (which is vested in the enterprise), unless the statute has given the government specific responsibility in any of these matters. A rigid adherence to this distinction, as in the British constitutional system, may shelter enterprises unduly from public enquiry as regards a vast area of decision-making and operational activities. (As we shall see, the distinctions have not generally been adhered to in several of the countries which are the subject of this paper.) A further justification for the distinction between management and control is said to be based on grounds of efficiency. The enterprises are set up as distinct from the government departments because it is considered that the government staff and methods are not conducive to efficient business undertakings. The enterprises operate best if they are left with a real autonomy to make their own decisions, with minimal outside interference, especially that which is politically motivated. The government is not competent to make the kind of decisions that are necessary. The separation of control and management enables government and enterprise to pursue the goals for which they are best equipped. It allows greater efficiency because the functions of the government and the enterprise are clearly defined and understood. By virtue of the same factors it allows for greater accountability of the government and the enterprise; it becomes easier to ascribe liability for shortcomings in policy or operation.

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The theoretical case for the distinction between control and management becomes weaker when one realises that between policy and execution there is no sharp line. And even when such a line can be perceived, there is no effective way to prevent one party from trespassing into the territory of the other. Efficiency can then suffer, and the situation becomes aggravated because accountability is difficult to exact, and mutual recriminations result. Although the justifications given for the specific forms of public enterprise in the developing countries are often no different from those in Europe, there are both theoretical and practical reasons for greater control. In Europe nationalisation was intended to make available increased resources, and common ownership of disparate enterprises would help to bring about rationalisation. For the rest, the enterprises would continue to perform their old role in the economy (the broad principles of which are accepted) and would be run along the lines established by the private sector. Given these limited functions of the nationalisations, it was not surprising that the role of the state should be confined to that of broad directives. In developing countries, the reasons for the establishment of public enterprises are different, or at least are frequently presented as if they are different. Whether the government of a developing country has opted for a socialist or capitalist road of development, it aims towards a transformation of the economy. Most developing countries place a much heavier reliance on public enterprises to develop and change the economy than the Western countries do. They are employed to speed up industrialisation, open up new regions, exploit natural resources, localise the management and control of the economy, and strengthen the government in its relationship with outside economic forces. In some countries which desire to move towards some socialist system, public enterprises have the responsibility to change the fundamentals of the economy and property relations. For the achievement of these tasks the enterprises are vested with scarce resources—money, raw materials, manpower—and the general performance of the economy comes to depend more and more on the success or otherwise of the public sector. The government’s stake in the public sector becomes enormous, and acts as an incentive towards increasing intervention, uninhibited often by political considerations due to the dominance of a single party. Thus both general and partisan considerations lead to greater executive intervention than in the Western countries. Since the market mechanism in many developing countries is little developed, the forms of control are often direct. The governments are unable to exert as much control through pricing or banking policies as in the more advanced market economies. Public enterprises offer the prospect of a more direct form of control. These reasons are by no means exhaustive, but they do constitute a different approach to the problem of public sector autonomy than in Europe. While efficiency is always an important goal, it may be argued that the order of priorities indicated by this list of reasons requires primacy for policy. When important national goals are at stake, inefficiency, it may be argued, is a price

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one may have to pay for getting developments off the ground. In addition to these economic considerations, the political systems of many developing countries have diverged in important respects from the European, particularly British, model, and the rationale for the precise control-management dichotomy which developed there may not be applicable. As we shall point out later, political considerations, which argue for a weaker moral case for deviance from the British model than the economic, have in fact accounted more for the deviance than the latter. It is important to clarify that in none of these arguments for a more activist role for the government is there an underestimation of the desirability of efficiency. A greater political role may be urged because the bureaucrats and technicians may have a natural tendency towards the norms of the private sector and they may have less sensitivity towards broader national goals. There is little reason why the setting of political goals should result in inefficiency; if setting of political goals becomes an ad hoc exercise, this will result in inefficiencies, fundamental political goals will surely be put in jeopardy. So a defence of a larger political role which is based on a derision of efficiency is short-sighted and misplaced. 3. Types of Control With these preliminary considerations, we turn to an account of the provision for control over the public sector and a brief assessment of its efficacy, before we conclude by examining the reasons for the record of the effectiveness with which control has been exercised. The basic focus of the chapter is on the control purported to be exercised by the government. This is of course the most common form of control, and the literature is concerned largely with this. But it is important not to overlook other controls: democratic (through central or local assemblies), judicial, administrative (through conseil d’etats, ombudsmen), political (pressure groups), special interests (workers, consumers). These latter controls become particularly important in situations, as in most developing countries, where the distinction between government and enterprises becomes increasingly blurred. If the government ignores the distinction between control and management, then accountability from the public sector can only be exacted by bodies outside the executive branch. Controls have been classified in different categories in the general literature; formal and informal; statutory or non-statutory; positive or negative; a priori or ex post facto; judicial or administrative; legal or political. While these classifications are important for analytical purposes and draw our attention to the range of methods possible, it is necessary to remember that what is desirable is a system in which all these controls operate coherently and harmoniously. If one thinks of control as a system, various aspects become obvious. A good system of control should incorporate at least the following features: instructions and guidance to the management of the enterprise from the policy makers, a method

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of dissemination of policy within the enterprise, a mechanism to correct errors in instructions or implementation as shown up in practice, a method to prevent the management and policy makers from going beyond their mandates, and a system of accountability to ensure that policy has been carried out at minimum cost. Such a system calls for clear articulation of policy, a good system of communications, and a functioning feedback and monitoring mechanism. The establishment of such a system will call for a mix of legislation and administrative decrees, a priori and ex post facto controls, and adequate legislative, executive, judicial and financial controls. The system cannot work well unless there is coherence in the government as regards public sector policy as a whole, it is consequently necessary to pay some attention to the manner in which the government organises itself for policy articulation for and supervision of the public sector. There may of course arise problems from conflicts between the government and the legislature, the government and the courts, although these are likely to be unimportant in most developing countries where the dominance of the executive is so marked. Problems are more likely to arise from external factors, particularly balance of trade and payments. It is necessary to have procedures for review to ensure an optimum fit between resources, capacities and goals. We discuss later the resources for control. Here it is sufficient to identify them: a clear policy within a broadly articulated ideological framework, effective information flows, sensible deployment of manpower, financial control, and a good accounting system. We examine in some detail the specific provisions for the control and supervision; beginning with the government’s control over the management of the enterprise. The three direct major means of control are the power of appointment and dismissal of members and senior officers of the enterprise, the power to give policy directives to the Board of the Directors as to the discharge of its functions, and the power to sanction and approve specified board decisions. 4. Government Control: Policy Directives Where the basic charter of the enterprise is provided by the legislature, its broad policy functions are likely to be established in the legislation. The directives that the government gives cannot override these statutory functions; and the governments’ powers may thus seem to be severely circumscribed. But in practice the functions and policy as laid down are either too broad and general, or so many functions are prescribed that they cannot all be carried out. So it is up to the government to specify functions and policy in the one case and to determine priorities in the other. An example of the former is the provision in the Ghana Industrial Holding Corporation Decree 1967, which defines the objects of the Corporation as the establishment and operation of manufacturing and commercial enterprises in or outside Ghana in an efficient and profitable

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manner. (Sec. 2.) An example of the latter is the National Milling Corporation of Tanzania, whose functions include (a) to provide, develop and promote the establishment and operation of efficient marketing facilities for the specified agricultural products in the interest of the farming community and the economy of the United Republic; (b) to develop and promote facilities for the effective commercialisation of the specified agricultural products with a view to advancing the national policy on the rationalisation of the internal market; (c) to control and regulate the production and marketing of the specified agricultural products; (d) to conduct and carry on, either on its own or in participation with any other person, the business of— (i) producers, cultivators, manufacturers and processors of such agricultural and other products as the Board may, from time to time, decide; (ii) importers, exporters, wholesale dealers and retailers of such merchandise as the Board may, from time to time, decide; (e) to provide facilities for the inspection, classification and grading of the specified agricultural products; (f) to undertake, finance or provide facilities for research in the production and marketing of the specified agricultural products; (g) to acquire by agreement and hold interest in any company or firm carrying on business concerned directly or indirectly with the specified agricultural products; (h) to establish branches within the United Republic or elsewhere; (i) to continue to manage the affairs of and carry on the business of any firm the interests of which are vested in or acquired by the Corporation under the provisions of the repealed Act or which may be acquired by or become vested in the Corporation after the enactment of this Act, whether or not such business relates to the production, processing, manufacture or marketing of any specified agricultural products; (j) to advance money on loan, give guarantees for the benefit of or provide management or other services to persons, companies or firms engaged in the production, processing, manufacture or marketing of any specified agricultural product. The directions that the minister may give may be general or specific. In Ghana the minister is authorised to give directions of a general character as to the general policy of the corporations and “the corporation shall be bound to comply with such directions”. (State Fishing Corporation Instrument 1961 Part XI.) As regards directives to the Ghana Industrial Holding Corporation, the law requires the Minister for Industries to consult the Ministries of Finance and Economic

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Affairs and to obtain the approval of the Council of Ministers, before general directives are issued (reflecting the pivotal role of the corporation) (1967). In Tanzania as well as Nigeria the minister has power to issue general as well as specific directives. When the parastatal body is a company, there is generally no explicit powers of giving directions, but provision may be made in the articles of association (as with some companies in Zambia). In so far as the company is fully owned by the government, the government appoints the Board of Directors, and can give it such instructions as it wishes. When there is an outside partner, the matter may be governed either by the general rules of company legislation, so that each partner will appoint directors according to its share of the equity, or the parties may enter into a specific agreement on how the decisions of the company are to be made and on the composition of the board. Sometimes such arrangements are accompanied by a management contract (as discussed below) whereby the external partner is vested with management responsibilities, and has most decision-making powers. The responsibility for day to day operations, as well as for most policy matters, is vested in the managing company. In these circumstances, the ability of the minister to determine the policy of the company through instructions to his nominees on the board is severely reduced. The power of the minister to give directives to the parastatal may be very significant. By enunciating in advance the policies and objectives of the parastatal, the directive can be a powerful means of control. The legislative enumeration of objectives and policies has to be supplemented or qualified by the minister; moreover the change of circumstances may affect priorities and policies, which can be done through directives. Directives can play a vital role in those countries which try to plan their economies through the formulation of national policies of development and the allocation of resources to different sectors of the economy. In many developing countries, which attempt so to plan their economies, legal provisions for the implementation of the plan are inadequate, if not totally absent. In such circumstances, the directives can fill that gap, by specifying the policies the parastatals have to follow and the targets they have to achieve. Most of the countries under review claim to plan their economies, prominently Tanzania and Ghana under Nkrumah. The directive is little used in these countries, partly because, as we examine later, alternative methods of control may be possible, or, as more likely, planning is not efficient. In Tanzania the plan had little impact on practice; it was quite customary to set up projects which had not been discussed or identified in the plan. A recent review of the projects put up for finance by the Ministries for the fiscal years 1969–1970 and 1970–1971 demonstrates that these projects are for the most part not included in the Five Year Plan estimates. The position since then has scarcely improved. The second Five Year Plan which ran up to 1974 did not mention Tanzania Fisheries Corporation which was set up in that year. Co-ordination between sectoral ministries and control ministries has been very poor; some parastatal bodies have their budgets approved by the Treasury outside the parent ministry control, so that no integration of revenues and expenses has been

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possible in overall planning.2 While the leaders have over the years tried to elaborate their policy and ideological position, these have remained at a somewhat abstract and general level, and have not provided a sufficient basis as a guide to the managers of parastatals on what operational policies are expected of them.3 In these circumstances the ministerial directives could play an important role in setting policies and targets, but there is little evidence that they have been so used. Such non-use of general directives is also to be found in other countries. A slightly greater use is made of specific directives, where these are allowed (and even where they are not). One may explain the absence of directives by the presence of other methods of communications, formal or informal. Informal discussions are common in the United Kingdom, obviating the need for formal directives, unless the board resists governmental pressure in these informal contacts. In developing countries, since the boards are composed predominantly of governmental officials, there may be less need for directives. If this is so, the absence of directives need not be a serious problem (although informal pressures, which in the context of developing countries, would be almost impossible to resist, may distort the areas of the respective responsibility of the government and the parastatal, and encumber the parastatal with a burden it would not assume on the basis of its commercial judgment). There is, however, little evidence that governments have coherent policies for the public sector, and that these are communicated to the parastatals. In the absence either of coherent policies or, where these do exist, of their communication, the government is forced into either a passive role or into numerous ad hoc interventions, often with contradictory objectives. The latter course is more likely, since either the operations of the parastatals are subject to numerous approvals of the government, or the parastatals operate with so many constraints, like foreign exchange, domestic cash flows, wages policy, that constant references to the government are necessary. It is therefore not surprising that we find that the parastatals are (subjected to ad hoc and inconsistent interventions.4 These interventions render impossible what would be possible with government control through general directives: for the parastatals to have advance notice of government priorities, targets and constraints and to formulate their own policies and operations in the light of these. Before we discuss these interventions, we turn to the composition of the governing and management bodies of the parastatals, over which the government has considerable control.

2. See particularly P.C.Packard, “Management and Control of Parastatal Organisations”, in Towards Socialist Planning (Uchumi Editorial Board, 1972) and “Public Sector Control” in The Quarterly Journal of Administration Vol. VII (1973) 293–312. 3. See Ghai, ‘Law and Public Enterprises in Tanzania’ in Ghai (ed.) op. cit.

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5. Government Control over Appointments etc. When a parastatal is fully owned by the government, it is customary for the powers of the appointment to the board to be vested in the government. The members of the Board of the National Bank of Commerce in Tanzania are appointed by the Minister of Finance, although the Chairman is appointed by the President. The General Manager is appointed by the Board acting with the approval of the Minister (sec. 5, National Bank of Commerce Act, 1967). No qualifications are set out for Board membership. It would be true to say that the Tanzania provisions are found in other African countries, or at least represent the reality, if not the law. It is also true to say that although the appointment of the General Manager (who is as a rule the Chief Executive, and often a member of the Board) is vested in the Board, his actual appointment is usually made by the President. This matter has attracted particular attention in Zambia, where most of the important enterprises are government companies, under whose articles of association both the Chairman and the General Manager are to be appointed by the Board. Nevertheless the President regularly appoints to and dismisses from these posts.5 The result of the discretion given to the government has often been the appointment of political friends of the minister and unsuccessful parliamentary candidates of the ruling party.6 The other major group from whom members are drawn is the public service, although it is not always clear (to them or to others) whether they are appointed in their personal capacities or as representatives of ministries. In most instances, the board members are ill-suited to the tasks of policy formulation or management. Retired or unsuccessful politicians have seldom shown much understanding of the technical or commercial aspects of the operations of the parastatals, while civil servants, although they have some skills and are closer to the thinking of their ministers and aware of government policy, are not sufficiently oriented to the exigencies of the industrial and commercial world. While in most parastatals with full government ownership, policy and management are vested in the Board, some countries have provided for a twotier system. The outstanding examples of this are the parastatals in Egypt. The Egyptian High Seas Fisheries Company has for example, two bodies: the board of

4. See for example O.Teriba, ‘Accountability and Public Control of Public Corporations— the Experience of Western Nigeria’ by D.J.Murray (ed.) Studies in Nigerian Administration (1978). 5. See J.M.Mulwila & R.K.Mushota, ‘Company Law and some doctrinal problems concerning the management of parastatal companies in Zambia’, in The Comparative and International Law Journal of Southern Africa Vol. XIII, No. 3, 1980, 265. More detailed discussions are found in Mulwila, Parastatal Companies and the Law in Zambia (Ph.D thesis, London 1980) and Mushota, The Control of Mining Companies under Zambian Company Law and Mining Law (Ph.D thesis, Birmingham University.)

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directors consisting of nine members) and a general or plenary meeting consisting of 15 members). Management responsibilities are vested in the board, while supervisory functions are with the plenary meeting, which also has the power to approve important changes in the constitution of the company. In some ways the meeting acts in a capacity similar to the general meeting of shareholders in private companies. The plenary meeting is composed of representatives of various relevant ministries, and would appear to be structurally well suited both for policy guidance and co-ordination of government policy although it introduces an additional layer and thus greater distance between the government and the management. Unfortunately it is not clear that the meeting has played an important role, partly perhaps because it is convened only once a year or so. Therefore like the general meeting of shareholders, it tends to be ritualistic and formalistic. Wide ministerial discretion in the appointment and dismissal of members also means that they have little independence of the government.7 In so far as the basic responsibility for policy and management is vested in it, an independent board is necessary to achieve the autonomy of the enterprise. Because the board con sists of compliant politicians and civil servants, the government is able to influence the decisions of the board without the necessity of a formal directive. Indeed the board is more properly perceived in Africa as an extension of the government than as an independent body which shields the management from the pressures from the government. This is particularly striking in Zambia where the President is automatically the Chairman of the largest enterprise, Zambia Industrial and Manufacturing Corporation (ZIMCO), to whom the great majority of state-controlled companies in Zambia belong today. At the same time the Managing Director of ZIMCO is the Permanent Secretary in the President’s Office. This pattern is repeated in the sectoral ministries, with the minister and his permanent secretary being respectively the chairman and the managing director. The Board of the National Development Corporation in Tanzania used to be (before an amendment in 1967) more or less the economic cabinet, with the President as Chairman. Now it is more usual for the permanent secretary to be the Chairman. Where a fully owned government corporation establishes a company, that company has a board of directors. Since such companies are established under the general regime of company legislation, there is normally no provision for government directives unless included in the articles of association. Control would therefore need to be exercised by a proper briefing of the members of the

6. See Teriba, op. cit. R.C.Pozen, Legal Choices for State Enterprises in the Third World (1976) (for Ghana). 7. See Report of the Working Party on Statutory Corporations and State-Owned Companies (Nigeria, 1967); also the investigation by the Azu Crabbe Commission into the Affairs of the National Development Company in Ghana (1966).

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board, over whose composition the government or the parent ministry/ corporation has total control. In Anglo-Saxon legal systems, the Government or any other shareholder cannot give instructions to its nominees as how to vote at the board meetings. The directors are intended to use their own judgment and any attempt to fetter their discretion is void.8 This is the position in strict theory; in practice a competent ministry would try to ensure that its nominees are well briefed. But it may happen that the chairman and the executive chief are appointed by a different authority than the other members, and co-ordination may not be easy. Also, the company’s board constitutes an extra layer between the relevant ministry and the operating units. The danger is either that the parent corporation will be ignored in practice by direct dealings between the minister and the company or the company may escape all official control. There is of course a third possibility, a kind of sectoral control exercised by the parent corporation which itself is aware of and responsive to government policy. This can and no doubt happens sometimes, but the interposition of so many layers between the supreme policy-making body and the operating unit provides too many hostages to fortune. Where the enterprises are companies in which the government is part owner, the composition of the board is determined by the proportion of shares held by different parties or, more commonly, by a specific agreement, whereby the minority (foreign) partner may obtain greater rights than it would under the normal rules of company law. The specific provisions about such companies will be discussed in subsequent sections. 6. The Effectiveness of Parastatal Boards Most studies have indicated that the boards have seldom played a useful role. They meet infrequently, (even if there are statutory provisions for regular and periodic meetings, as in Ghana where monthly meetings are stipulated in the law), rarely make policy proposals or criticise proposals presented to them, are not consulted over important decisions, and appear to exercise little control over the management.9 There are various reasons for this. The civil servants who sit on the boards are senior bureaucrats, who can devote only limited time to the affairs of the parastatals, and who find themselves on a large number of such bodies. It is consequently difficult for them to assimilate the information necessary to make decisions, even when such information is available ahead of the meeting, which is rare. What is quite striking about the boards is the absence of real world businessmen from them, specially in view of the justification which is traditionally put forth for organising the public sector outside the departmental framework that this way the use of outside talent, normally to be found in the

8. Selanger United Rubber Estate Ltd. v. Cradock [1968] 2 All E.R. 1073.

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private business sector, can be harnessed. One of the reasons for the failure of the parastatals has been the lack of commercial expertise and orientation of the boards and the management. As has been well demonstrated in a study of Tanzania (Packard), the boards have been quite innocent of the criteria and concepts that commercial men must employ (cash flows, opportunity costs, feasibility studies, etc.) and tend to employ criteria which they have carried over from their civil service departments.10 Decisions are made more by the circulation of the file, which collects marginal comments as it winds its way round the corridors; initiative and aggressive policies are shunned in favour of caution and indecision; and there is undue emphasis on procedure at the expense of substance. The problem is aggravated by the rules whereby success is defined and rewarded, for these too travel over from the department, so that the important consideration becomes the avoidance of risk and possible mistake. Promotion comes in due course if nothing untoward (albeit nothing spectacular either) has happened. There is of course a slight danger in overdoing this theme, for in some countries the public sector has been a training ground for competent managers with a commercial outlook, especially at a time when skills from the private sector were either unavailable or unacceptable for political reasons (as in Tanzania). But it would be true to say even where the problem of inadequate skills and orientation has been correctly diagnosed, as in Kenya and Nigeria, the governments have seldom been able to apply the necessary remedial measures, due no doubt to political considerations mentioned earlier. In 1964 Nigeria announced in an important statement that the “Board of a public corporation, being a policy-making organ, should be composed of men of suitable educational qualification, ability, experience and integrity, who need not primarily be selected on the basis, of their political standing or affiliations; and the Board should have a mixed membership of standing and experience in business or other public enterprises”.11 In Kenya an official committee recommended that the members of the board should be appointed by the relevant minister with the approval of the President, and that no person should be appointed to more than one board except for the purposes of essential coordination. The Chairmen, who should cease to be full-time and executive, should be appointed by the President; ministers, assistant ministers, MPs and civil servants should not be eligible; and no person should be chairman of more than one enterprise except where this is essential for co-ordination.12 An official committee in Zambia also criticised the practice whereby the minister and his permanent secretary are automatically chairman and managing director (later changed to vice-chairman) of an enterprise related to his ministry, on the grounds

9. Pozen, op. cit., Teriba, op. cit., Review of Statutory Boards (Kenya, 1979), Mulwila and Mushota (respective thesis) op. cit. 10. P.C.Packard, ‘Corporate Structure in Agriculture and Socialist Development in Tanzania’ East African Journal of Rural Development Vol. 5 (1972) 163.

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that a minister was unlikely to be able to exact accountability from an enterprise if he wore these “two hats”, and also unlikely to be able to devote the time to the various enterprises of which he would become chairman.13 Another commission recommended that these board members who are in government employment should not exceed half of the total membership, and that a special commission should appoint the managing director (the latter recommendation being rejected by the government, so that the President continues to appoint that post).14 A further important reason for the inefficiency of the board is the lack of clear definition of its functions and authority. The legislation about a parastatal tends to ascribe important policymaking and supervisory functions to the board, including powers to hire and fire the staff and to determine their salaries and other conditions of work. But, as we shall see, the governments in practice retain or re-acquire control over so many instruments of policy—finance, public sector salaries, pricing, investments, hiring —that few policy functions remain to the board. In these circumstances it is not surprising that the board may lose morale and become irresponsible. The board’s supervisory functions are also-difficult to discharge because it may lack authority. Normally a board’s authority comes from its control over the budget, the power to appoint the chief executive and other senior staff, the positive sanction of bonus and the negative one of dismissal. In many instances, the chief executives of the parastatals do not owe their appointment or dismissal to the board (in fact the reverse may happen sometimes in practice; the chief executive is appointed first and he then helps to put the board together). The relatively minor role of the board is in fact not a feature unique to the public sector. The boards of directors as such play a limited role in large private companies: policy-making and management are effectively dominated by a small group of executive directors and other senior staff. The non-executive directors are handicapped by similar problems of lack of access to information, inability to evaluate it, infrequent and short meetings. But at least in two respects parastatals are different from large companies. The owners of these companies, the shareholders, are interested primarily in profits, and so long as reasonable returns on their investment are achieved, they are not too concerned about the policies and operations of the company. The government as owner can scarcely take this position, since profits are not the primary reason for government participation in industry. The second difference is that in private large companies, management autonomy is facilitated by the wide dispersal of share holding, so that rarely is 11. That this statement had little effect is obvious from another government policy statement in 1968 that the appointment of board members “should no longer be based on political considerations”. “Members should be men of integrity and good personal records in the community. Regard should be had to ability, experience and specialised knowledge of candidates.” The Policy of the Federal Military Government on Statutory Corporations And State Owned Companies. 12. Review of Statutory Boards, op. cit.

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there a single shareholder or well co-ordinated group of shareholders with sufficient shareholding who can exercise control over the management (and at least Anglo-Saxon company law is biased in favour of management dominance). In parastatals the government is either a sole shareholder or a majority shareholder, and has at its disposal numerous resources to exercise control and supervision. But it is clear that this control is not exercised through its control over the board. It would be true as a general rule that in so far as the board is left largely free to discharge its policy and supervisory roles, it does so in isolation from government policy or guidelines. Neither general directives nor the composition of the board tend to facilitate government control. Hence it is not surprising that the boards are seen increasingly as anachronistic and dysfunctional. (And yet so much of burden of reform of public enterprises is the more efficient composition of the boards with greater autonomy for them.) The concept and composition of boards represent the twin ideas of control and autonomy. By ensuring that the boards are responsive to government policy and directives, government control is achieved. Yet by acting as a buffer between the government and the management, the boards are intended to enhance autonomy in detailed planning and operations of the parastatals. The boards discharge their functions best if the government directives are of a general and policy nature, and if the board has both the ability to translate them in operational terms, and the authority to, on the one hand, resist ad hoc petty interventions by the minister and on the other, to ensure compliance with its policy by the management. Unfortunately most of these conditions are lacking in many countries. 7. Government Control: Specific Decisions Government control over parastatals is exercised largely through the provision of its consent to specific projects and decisions of the parastatal. These are generally required for major financial and investment decisions, but in some instances relate to quite minor and routine matters. Some illustrations may be given from a sample of legislation. The National Milling Corporation of Tanzania requires the permission of the minister before it can give directions as to the sowing, harvesting and marketing of crops, although these constitute the main functions of the corporation (s. 8). The Minister can give directions to the corporation as to matters which shall be taken into account in determining the price of any agricultural product purchased by it; the manner in which such price may be computed and the instalments by which such price shall be paid (s. 9). In Nigeria the permission of the government is required for capital development

13. The Mwanakatme Commission Report 1975. 14. Mulwila, op. cit.

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projects, acquisition or disposal of buildings and land, establishment of rates and scales of charges for services to the public. The Ghana legislation of 1965 provided for wide consultations and the approval of the minister. The situation was complicated by necessity for reference to and approval of a statutory body, the State Enterprises Secretariat (SES), which had been set up to oversee the public sector. The corporation had to consult the SES and the minister for trade in determining general pricing policies (sec. 3, Part II); and it required ministerial approval for the increase of its authorised capital, loans and senior managerial appointments. It could establish the terms of service of its employees only after the approval of the SES, and could not sack any of them except with the same approval. In addition, the President of the Republic was vested with general overriding powers: he could, in the national interest, take over the management of all or part of the affairs of the corporation, reconstitute the board and appoint, transfer, suspend or dismiss any of the employees of the corporation. In Tanzania the President has even wider powers in other respects. He can dissolve a corporation, transfer its assets to another, and transfer its employees to another. (Public Corporations Act, 1969.) Many of the above controls are contained in the instrument setting up the parastatals. But a parastatal can be subject to other controls, some of which apply also to the private sector, and are a part of the government’s regulatory mechanism of the economy. Some of these controls are legislative in origin, others are administrative, e.g., as part of the allocation of government funds. A brief account of these controls is necessary to establish the range of instruments available to the government. In most countries there is some form of control on prices (e.g., Kenya, Tanzania and Ghana). In Tanzania and Zambia an industry can only be set up after governmental approval. Control is also exercised through a licensing system. Licenses are also required for imports and for the use of foreign exchange (as in almost all the countries). In Zambia official permission is required for a wide variety of transactions involving foreign parties.15 All the countries require government decisions for tax exemptions, rebates on imported raw materials, work permits for foreigners, and most of them are enacting laws subjecting the use of foreign technology, patents, and trade marks to official permission. These regulations apply to the public sector units as much as to the private sector. They provide the government with a number of instruments to guide and influence the conduct of the public enterprises. But there is reason to believe that in some countries at least, these controls do not work effectively for the public sector (not that they always work well in relation to the private sector). In Tanzania, for example, representatives of major public corporations sit on bodies which decide on the allocation of licenses. In others permissions are readily

15. Industrial Development Act, 1977.

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granted for public enterprises, especially when they are seen to be competing with private sector firms. Since, as we shall see later, many major private firms operate through public enterprise forms as co-partners with government agencies, the efficacy of the regulatory mechanism over the private sector is thereby greatly diminished. In fact one reason frequently cited for the predilection of foreign firms for joint ventures is the ease with which they can obtain governmental approval for lincenses, permits, use of foreign exchange, etc., and the generally favourable official treatment. (a) Employment Governments have exercised extensive control over the employment of enterprise staff. We have already noted the tendency to appoint senior politicians and civil servants to the boards and senior executive positions, in order to strengthen government control. The governments have exercised less direct control over employment at lower levels. In so far as governments have exercised control, it is less for reasons of control over policy than to ensure certain parities between conditions of employment between the civil service and the public enterprises. It is not therefore proposed to spend much time on the issue, except to note certain developments. One justification for setting up a parastatal as an agency separate from the government is to enable it to recruit highly qualified people by offering salaries (and other benefits) in excess of what is possible in the civil service proper. The more attractive scales in the parastatals have not resulted in the recruitment of highly qualified staff; more frequently than not, the public servant from the relevant ministry has been moved over to the parastatal, often doing nothing different from his previous job, but now compensated handsomely. In course of time this produces resentment among those public servants not so fortunate as to be able to move to the public sector, and pressures build up to equalise salaries and other benefits between the public and parastatal services. The ability of the parastatals to recruit the best possible talent is thus considerably reduced and they are no longer competitive with the private commercial sector. Sometimes official encroachment goes beyond this, and the ministries require participation in the appointment of at least the senior staff. In Ghana the minister and the SES were to approve appointments of the senior staff of SFC (indeed Cabinet approval was also needed), while in 1968 Nigeria set up a special commission with responsibility for the appointment of senior staff of specified corporations (on the analogy with the public services commissions).16 Zambia had, between 1977–79, the Parastatal Bodies Service Commission, which attempted to standardise terms of employment and sought a say in the appointment of senior staff. Tanzania has had for a long time a presidential committee (SCOPO) which has made numerous inroads into the autonomy of enterprises in hiring of staff and the terms of their employment.

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Apart from these explicit provisions, governments or ministers have intervened on policy or personal grounds. Gihoc has been instructed that it cannot make more than 10 persons redundant without governmental approval, while accounts are related of gross over-manning in most countries which the managements are not allowed for political reasons to trim. Moreover, it is not unusual for a minister to require a corporation to appoint his cronies.17 (b) Finance Perhaps the most important single means of control is finance. In almost all cases, government approval is needed for raising new finance, whether as capital or loan, and traditionally parastatals are under-capitalised, making it necessary for them to go to the government annually for fresh funds. Again, in some countries parastatals are not allowed to build reserves for future investments or contingencies, as the government can require surplus to be transferred to a government fund. The result is that through the control of financial flows, the government can control various aspects of the operations of the parastatal. In several countries the governments exercise control also through the budgetary process of the parastatal. The basic responsibility for the budget lies with the board of directors, but in many instances the government’s permission is required for the budget to be put into operation and the law may require the submission of the production plan as well. The 1965 legislation in Ghana required the corporation to prepare a production and financial plan which had to be submitted to the minister three months before the beginning of the year to which it applied. The law specified the minimum information that the plan had to contain: the expected turn-over and gross receipts for the year; a full breakdown of the corporation’s expected expenditure in terms of purchases, wages and salaries, overheads, administrative costs, sales costs and financial costs such as loans and bank charges and the production plan. The plan had to indicate the costs incurred and income accrued in foreign currency; it had to show the quarterly targets. The minister, whose approval of the plan, after he had consulted with the SES, was necessary, could require the corporation to provide additional information in the plan. The general manager had to provide quarterly reports on progress, indicating whether targets had been met, and if not met, the reasons for the failure. (Part IX.) In Tanzania there were no provisions for the 16. This body was, however, abolished in 1975 by Decree No. 17, which also vested “in the appropriate corporations all the functions formerly performed on its behalf by the dissolved Commission, subject to any policy guidelines that may be laid down by the Federal Military Government from time to time”. 17. This was found to be the case in most commissions of enquiries into the affairs of public enterprises in Ghana and Nigeria established after the over-throw of civilian governments.

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prior approval of the budget of a parastatal when the corporations were set up in the sixties. But since the corporation lacked (and still lacks) financial selfsufficiency in practice the government had a major say on the budget. Since the mid-70s, most new corporations are required by law to submit their budget proposals to the government for prior approval. There also exists general legislation which compels all parastatals to supply important financial information to the government, with the government having the power to require the institution concerned to vary its proposals.18 In fact in Tanzania control through fiscal devices has become perhaps the most important means of control. In part this has been achieved through legislative means, in part through administrative measures. It is worth looking at the developments in Tanzania, for they illustrate both the range of controls possible as well as the difficulties of enforcing these controls.19 The government has been able to acquire control over the enterprises through the regulation of finance. At first the public corporations had wide financial independence and powers. They were vested with an initial portfolio and provided with a grant. The corporations were free to raise their own loans, domestically and internationally, although they might require the consent of minister of finance; they were free to enter into equity partnerships, and so obtain resources from elsewhere for investments; they were free to dispose of the surpluses of profits made by their associate and subsidiary companies. There was little scrutiny over investment decisions. But later partly the ‘reckless’ investment and expenditure policies of the corporations, and partly the increasing shortage of foreign reserves, opened the way to control through the fiscal and budgetary process. Through the monopoly of its financial intermediaries, the National Bank of Commerce (NBC) and the National Insurance Corporation (NIC), the government was able to exert close control on the allocation of financial resources. Between them the Bank of Tanzania and the Treasury were able to control the allocation of foreign reserves. The shortage of money meant that the government was able to exercise significant control over the investments of the corporations. The corporations were not able to generate sufficient surpluses of their own, and so were heavily dependent on government grants and loans for their development and often also for their operational activities. In 1973, for example, profits accounted for just over a quarter of the investments of public enterprises, and in previous years the proportion of profits as part of the total investments was even lower. In 1970 the government began a process of annual planning. The annual plans attempt to make a detailed and careful assessment of the financial resources available to the government and to allocate them for different purposes. As the annual plans have become more sophisticated, they have included various

18. Parastatal Organisations (Financial Provision and Control) Act, 1975. 19. For references, see Ghai, op. cit., pp. 239–244.

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financial plans and allocations. They have become the basis of the development budget. The plan allocates the investible surplus for the coming year to the parastatal sector for designed projects, and a foreign exchange budget allocates the foreign currencies available for the following year to the parastatals. As the public sector has so far generated little surplus of its own, the budget has become a major source of policy and control. Various provisions have been enacted to ensure that the surplus from different public institutions goes into government revenues, enhancing the importance of the budget as a means of control over the public sector. Before control through the special budgets could be really tight, it was necessary to control the borrowing policies of the corporations. The legislation in relation to most corporations sets out their sources of finance—initial grants, special government subventions and loans, profits, and loans negotiated independently by the corporations. It was often necessary to get some kind of govern ment underwriting for the loans; and the government therefore had the possibility of control there as it did where ministerial approval was required. In fact what has been done is to leave such provisions relatively undisturbed, but make their application somewhat redundant through the establishment of new institutions. The Tanzania Investment Bank (TIB) and the Rural Development Bank (RDB) have been set up to negotiate all foreign loans on behalf of the public sector. Grants which may be given to the government by foreign agencies (which were previously channelled directly to the corporations) are now given to the TIB and the RDB to administer for the industrial and agricultural sectors respectively. Through the powers of the Minister of Finance to given general directives to their boards, as well as his power to appoint a majority of the members (the other nominating bodies are the NBC and the NIC, who, along with the Government, are shareholders of TIB), the Government is now in a position to control the loan policies, and thus the investment programmes, of the corporations. It was still necessary, however, to control the income from profits. If the corporations were supposed to be profit-generating, and if some corporations had initially been vested with profitable enterprises, like the Diamond Mines, it was clear that they might have considerable leeway. The surplus of some corporations could be ordered to be paid to the Consolidated Fund, but in relation to most corporations, there was no such provision, and indeed the early philosophy had been to make them financially independent by increasing profits and building up reserves—the charters of most big corporations actually have provisions for reserve funds. While ministerial directives could be used in some instances to require the surplus to be turned over to the government (although it is doubtful if such directives for transfer for funds to the Consolidated Fund could in fact be issued without explicit legislation on the subject), an additional difficulty was that in relation to some corporations, especially the National Development Corporation (NDC), the largest of them all, the surplus of the corporation itself might not amount to much. Its income came from the dividends

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from its shares in the subsidiary companies. The Companies Ordinance, under which these are incorporated, provides for the decision about dividends to be made by their directors, and while in the case of subsidiaries the corporation’s board can direct the decision of the directors through its nominees, control over associates may not be so easy. The internal rules of the company as set out in its memorandum, and articles, might require the use of surplus in particular ways. It might in any case be difficult for the government to supervise and monitor the implementation of such directives on the part of recalcitrant corporation or company boards. In 1972 the government began to tighten up control over the operations of the actual productive enterprises. In that year was enacted the Companies (Regulation of Dividends and Surpluses and Miscell. Provisions) Act, which gave wide powers to the Minister of Finance. The Act applies to institutions specified in the Schedule, which include both purely private sector companies and public enterprises, and constitute the more important economic enterprises in the country. The Act limits the dividends that such companies or any other company can pay to its shareholders: the limits are defined by reference to a percentage of the profits (80 per cent) or the average of the profits of the three previous years, or to the level of the assets of the company after the payment of the dividends (not less than 120 per cent of the par value of the paid-up share capital). The minister has powers to vary these limitations; he can approve a higher rate of dividends (after parliamentary approval) or he can reduce the level of dividends (in the case of a specified company). In addition the minister can require a specified company to declare dividends and specify the minimum rate if “in his opinion it is in the national interest or in the interests of the shareholders desirable to do so”. Every specified company is required to submit to him, not later than thirty days before the commencement of each financial year, a cash flow budget setting out the estimated income, the sources of income, and the particulars of the estimated expenditure. The minister can require a company to invest a specified part of its estimated income in such government securities or other investment prescribed in the order of the minister. In order to ensure that the specified companies do not try to escape from these provisions, the Act forbids the dissolution or winding up of such companies without the written consent of the minister. The Act was strengthened two years later by an amendment which prohibits the reduction of the share capital of a specified company without the consent of the Treasury Registrar. In 1974 control over public enterprises through the regulation of their finances was taken a step forward by requiring all the specified companies which are also parastatals to submit additional information to the Treasury Registrar: apart from the cash flow, an enterprise has also to provide its projected production and investment levels for the following financial year. The proposed financial “and other operations” of the parastatal are subject to review by the Registrar in consultation with the sectoral and planning minister. In his review the Registrar

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shall take into account “(a) the adequacy, feasibility and realism of the proposed financial and physical results; (b) the standards of the past and proposed financial management and budgetary control; and (c) the consistency or otherwise of the proposed operations with the national planning and policy objectives, with particular reference to fiscal, credit, surplus generation and output expansion objectives”. He has no specific powers beyond review, the results of which are to be sent to the manager of the enterprise, and to the Ministries of Planning and Finance, in addition to the sectoral ministry. An Act of 1975, however, empowers the Minister of Finance, with the consent of the President to direct any parastatal organisation to pay to the government as dividend, loan, contribution or otherwise such portion of its net profits or surplus as he specifies. These provisions have created a new financial system for not only the public enterprises, but also some major companies in the private sector. The legislation dealing with the regulation of dividends and the submission of cash flows information does not apply to the public corporations, except in a few cases. In so far as their income depends on dividends, the legislation can, however, have a significant effect on their finances. The borrowing powers of the older corporations are not amended in law, but in practice they are now bound by the new scheme. Nevertheless, the legislation on the newer corporations is beginning to prescribe more accurately the legal position as regards borrowing and other financial matters. The Small Industries Development Corporation, set up in 1975, requires the consent of the Ministry for Industries for borrowing, although the sources from which money may be borrowed are not specified. The Corporation Sole (Est.) Act of 1974 does so specify, in addition to requiring ministerial consent. A corporation sole can borrow only from the Government, the NBC, TIB or RDB, unless the regulations under the Act enable it to borrow from additional sources also. The newer corporations are also required to submit to the sectoral minister two months before their financial year the detailed budget of income and expenditure during the year. The budget is subject to ministerial approval, with amendments if the minister deems it necessary, and thereupon it becomes binding on the corporation. Only very limited deviation is allowed from the budget allocations. The new provisions not only make a massive assault upon the financial autonomy of public enterprises, but also give the government very significant powers to direct the affairs of the productive units or enterprises, by-passing the parent corporation. The former system whereby the corporations had the basic responsibility for the conduct of the companies has been breached in important ways. If this trend continues, one may question the need for a corporation at all. Should not all enterprises be directly responsible to a ministry? Should not the logic of the corporation sole be extended to the entire productive public sector? It is thus obvious that the financial provisions give governments a significant basis for control. They have the means to acquire information about cash flows, projected investments and other expenditures; they have the means to veto new

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projects and control the loans a parastatal may raise; and they have the power to instruct a parastatal as to the ways in which it must distribute its funds. How far the governments have the capacity to exercise these powers, and, in so far as they are exercised, how far they ensure conformity with national fiscal and production planning, is another matter, and the record appears to indicate a far from sensible or effective use of the powers. It is important to state that Tanzania has gone further in this regard than any other African country. Kenya, for example, still has no provision whereby enterprises have to submit their budgets for government approval, although it has been recommended by an official committee that such a system be adopted. Neither Zambia (under legislation) nor Nigeria (in practice) review and approve budgets. But with shortages of finance and particularly of foreign exchanges, the approval of the government is in practice necessary at various stages of a corporation’s planning and disbursement of funds. (c) Accountability and Information Flows Financial controls are also tied to ex post facto review of the parastatals. The financial accounts which have to be provided annually are an important source of information for the government. There are other provisions for the disclosure of information. It is clear that the extent of information the government has will determine its ability to exercise control over the parastatal. It is therefore important to establish the information that has to be disclosed to the government, the degree of its accuracy, the frequency and regularity of its transmission, the disaggregation of accounts and other information. Most parastatals are required to prepare and present to the government annually financial accounts and a report on their activities. The form of the accounts is not specified as a rule; normally a balance sheet and profit and loss account would be required. In the case of companies, the reporting requirements of the companies legislation would apply; these are similar to those for corporations (in Ghana the corporations are required to submit accounts in conformity with the requirements of the Companies Code). Sometimes the period within which the report should be submitted is specified. In addition, the parastatals are required to keep proper books of accounts. There is also provision for independent audit of the accounts, either by a government auditor or by one appointed with the approval of the government. It is customary to provide that the accounts and (where they are required) the reports would be tabled by the minister in the legislature. Occasionally reporting on a more frequent basis may be stipulated, as under the legislation in Ghana, where the internal auditor has to submit a monthly report on the internal audit work carried out during that month and the managing director has to submit a quarterly report on the operations of the corporation, particularly by reference to the projected plans.

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Although the accounts would be more useful if they were supplied more frequently as required under the Ghana legislation and if a detailed format for the preparation of the accounts were issued by the government (especially as the companies legislation seldom incorporates the strides made in the US and Europe as regards the disclosure of information), the current provisions do constitute a basis for some informed evaluation of the performance of the parastatal. Unfortunately they are seldom complied with. The accounts of most public enterprises are years in arrears. No accurate information is available to the management on stocks, turnover, reserves, etc. And in so far as accounts are prepared, they are often done, even though delayed, rather to conform with the law than to provide a basis for evaluation and decisionmaking. The problem is aggravated by the fact that in many instances the sponsoring ministries are unaware that reports and accounts have not been received, indicating that they do not even look to them as a basis for evaluation or policy. Another problem is the lack of sanctions for default; as a rule no penalties are imposed on either the parastatal or its managers (although in so far as the parastatal is a company, the company legislation probably provides for a fine). Ghana attempted to remedy this by a decree in 1973 which provides that where the accounts of a statutory corporation have not been submitted on time, the relevant minister or the Minister of Finance in conjunction with the other minister may make an order requiring the withdrawal of all or part of the emoluments of the persons responsible for the default until such time as the default has been made good. It is further provided that no person can employ an accountant (or another person) who was in charge of the preparation of the accounts of a statutory corporation unless that corporation provides a certificate that he has done satisfactorily all that was required to prepare the accounts for submission to the government auditors; only the Minister of Finance can waive this restriction [Statutory Corporations (Amendment) Decree, 1973]. Tanzania has also tried to deal with problems of inefficiency by providing for penal sanctions. One law states that “the employee of a parastatal is guilty of an offence for which he can be imprisoned for up to two years if by any wilful act or omission, or by his negligence or misconduct, or by any reason of his failure to take reasonable care or to discharge his duties in a reasonable manner, he causes his employer to suffer a pecuniary loss…” [Written Laws (Misc. Amend.) Act, 1970.] This section is broad enough to cover a person who has been negligent in the keeping of accounts, for such negligence can lead to serious miscalculations in pricing, etc. by the parastatal. Tanzania has also set up an inspectorate for the control and supervision of parastatal funds, whose duties include the examination of the expenditure of the funds, and the investigation of the conduct and the performance of their functions by parastatal employees responsible for the control or maintenance of the accounts of the parastatals. The minister can provide for penal sanctions if there is a breach in these responsibilities. [Parastatal Organisations (Financial Supervision and Control Act) 1965.] Other countries have some provisions to deal with similar defaults, but there are hardly

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any instances of prosecutions or the application of sanctions. The usefulness of proper records and accounts cannot be over-emphasised; no business can expect to succeed in their absence. The audits that are undertaken seldom deal with questions of efficiency. They do not examine how far the organisation has attained its economic and social goals and at what cost. It has been argued that a straightforward, traditional audit to check the accuracy of accounts is unsuitable for public enterprises, both because their major function may not be the maximisation of profits, and because they are not subject to the ordinary discipline of the market and of private ownership. Waste, inefficiency and corruption can go unchecked for long periods. Few countries under review have a systematic provision for the examination of the efficiency of the parastatal sector, staffing levels, overlap of functions etc. A great majority of the reports/accounts are not particularly informative. The accounts traditionally contain two items—the balance sheet and the profit and loss account. One is concerned with the evaluation of the assets and liabilities of the enterprise, and the other with its trading record. In the preparation of both these documents, there is a great deal of scope for subjective judgments. This renders difficult an objective evaluation of the record of the enterprise, as well as comparison with other enterprises, which may have used different accounting conventions. Some countries have tried to standardise the conventions and procedures for the accounts of enterprises (as in Tanzania through the Tanzania Audit Corporation), but in many countries, each enterprise has its own accountants from the private sector and there may not be a standard practice (as in Kenya). But the great difficulty with using the accounts/reports is the relative paucity of information contained in them. The data are largely financial, and generally appear in a highly aggregated form. If the purpose of public enterprises was solely to make a profit, their record could to a (limited) extent be judged by these data, but public enterprises have broad social and economic purposes and need to be judged on a series of different criteria. Greater use should be made of the report (as opposed to accounts) for information and analyses relevant to this task. In many developing countries the rules about the information that needs to be disclosed in these documents are based on practices of several years ago. (The company laws of all countries under consideration are based on outmoded British legislation.) Since then there has been a greater appreciation of the function of disclosure as devices for control and accountability, and the laws in the West as well as the codes of practice drawn up for the transnational corporations require a more extensive disclosure than is to be found in the developing countries. It is necessary to have a greater disaggregation of the financial data, presenting a clearer picture, for example, of the different operations/units (and of crosssubsidation between them) of the enterprise. In the report, the enterprise should be required to discuss matters relevant to the purposes for which the enterprise has been established. It ought also to discuss the relevance and the impact of its activities on national policies. In the context of developing countries, it would mean that the report should discuss the impact of enterprise activities on foreign

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exchange, local value added, internal backward and forward linkages, employment and worker participation, pricing, marketing and the interests of consumers. There should be an evaluation of prductivity and unit costs. The enterprises should be required to indicate its future plans and the targets for the following year. The precise information which each enterprise should provide would no doubt vary from one enterprise to another, but public enterprise bodies have broad social as well as economic functions, and their reports should reflect this broad mandate. 8. Ad Hoc Inquiries As a substitute for systematic and regular reviews some countries appoint ad hoc commissions or committees of enquiry.20 These commissions have broad ranging terms of reference and are enabled to seek such evidence of past record as they wish. A great deal of our information about the performance of public enterprises comes from these reports. Their evaluation of past performance and the recommendations provide a valuable basis for policy. Some of the committees are set up explicitly to look at the structures, procedures, and criteria of a public corporation and have pre-dominately a policy advising function; others are set up to investigate a scandal or well publicised inefficiencies or waste, and policy recommendations are incidental to that primary function. The latter kind have been more important in developing countries. They are often appointed after the overthrow of a regime, and are intended to expose its corruption, maladministration or tyranny. As such their reports sometimes suffer from an unfair bias, although the open nature of their proceedings and the rules of procedure and evidence may ensure a measure of fairness and impartiality. These reports provide a picture of the state of the enterprise; defects in administration; calibre of management; relations with the government; methods of accounting, procurement, pricing policy, etc. There is little doubt that they can be the basis for policy in the re-organisation of the enterprise, re-formulation of guidelines, investment criteria, etc. To an extent they have been so utilised. In other instances, however, the recommendations have been ignored either because preoccupation with the evil deeds of the previous regime is no longer profitable or the political realities rule out drastic action. Thus the report of enquiry into the Ghana Fishing Corporation (1966) during Nkrumah’s regime is an interesting and illuminating paper, but in course of time the political will to implement the policy implications of the report weakened, and the corporation appears to have gone on as previously. Politics apart, if these enquiries are to help in policy formulation, correction of errors, and control by the government, the terms of the

20. One of the earliest and best known of these is the Report of the Coker Commission of Inquiry into the Affairs of Certain Statutory Corporations in Western Nigeria (1962).

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enquiry should be carefully drafted, the membership should reflect the relevant skills and experience, and the committee should be backed up by a research and administrative team. For this reason, and also because the results of such efforts are cumulative, it is often proposed that the system of enquiries and reviews should be institutionalised. Several countries have attempted to set up inspection units with that purpose in mind. The system is often linked to the government machinery for the co-ordination of policies towards the public sector, to which we now turn. 9. Co-ordination of Government Policy Few countries have organised an efficient system for the co-ordination of government policy towards the parastatal sector. As we have seen, it is not unusual for several different ministries to be involved in the activities or decisions of a single parastatal, and the need for co-ordination in relation to particular parastatals as well as the public economy as a whole and its various sectors is obvious. That does not mean that the need is always recognised or, when recognised, adequately met. Some countries with a private economy bias avoid a central body for co-ordination, since that smacks of central planning; they prefer their public enterprises to be run as individual units, rather as if they were private entities. Kenya and Nigeria are examples, although both have now recognised the need for central government institutions to produce greater uniformity of practices, and coherence in the public sector.21 The device of a holding corporation or a general development agency may achieve co-ordination between different operating institutions (e.g., production, processing and marketing), but it does not necessarily solve the problem of coordination between the agency and the government. Although it would seem that co-ordination at this level is easier if the government has to deal with one operating agency, the concentration of functions in one such agency sometimes means that it becomes a large and powerful body with the resources to defy government guidelines; and because its functions may straddle those of various ministries, control may be difficult. On the other hand, a proliferation of institutions leads to problems of control and supervision, especially if each institution has a board of directors of its own. There is no standard mechanism for the government co-ordination of the public sector. Some countries have experimented with a ministry of public or nationalised industry, but this can cause conflicts between that ministry and the ministry within whose portfolio the particular industry may fall, and the minister may end up merely as a co-ordinator at the cabinet level. There is of course virtue in this, but it can also lead to such a diffusion of responsibility that no real control is possible. Where no specific arrangements are made, the basic responsibility is with the sectoral ministry, and overall government co-ordination takes place through a special committee of the Cabinet (Nigeria) or through the President’s office (Tanzania). In practical terms

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in such instances, the Ministry of Finance comes to play a dominant and coordinating role, because of the dependence of the parastatals on government finance, rather than the ministry of planning, as one would imagine. (Tanzania is a good example of this.) If the ultimate control and co-ordinating functions are to be vested in the President or the Prime Minister, it is often necessary to equip his office with a special secretariat for this purpose. Tanzania has recently enlarged the functions of the Presidential Standing Committee on Parastatal Organisations (SCOPO) to give it possibilities of greater control and supervisory role (General Notice 1286, 1976). It is instructive to look in detail at the experiments of Ghana and Zambia to coordinate policy towards and control over the public sector. We start with Ghana. The public sector was rapidly expanded under President Nkrumah in the 1960s. The enterprises were established under various legal instruments which lack uniformity in setting out the administrative procedures to be followed by the corporations. In 1964 the government undertook a major review of the operations of the enterprises and found that all but one of them had shown consistent losses, which the government attributed to inefficient management, excessive salaries, heavy overheads, and poor accounting procedures. It proposed a series of organisational and administrative reforms to improve performance. These included, somewhat contradictorily, greater autonomy for the management of the enterprises, and closer control co-ordination and supervision of the public sector. Autonomy was to be provided for by the emphasis on the application of strict business principles, initial capital grants and ministerial control to be limited to accountability to Parliament. For the latter purpose, the government established The State Enterprises Secretariat (SES) Legal Instrument N. 457 of 1965 as a body corporate. The objects of the Secretariat were to promote the efficient and profitable operations of the enterprises engaged in trade or industry, within the framework of government policy, and to hold shares on behalf of the government in any enterprises and to represent the government’s interest in joint ventures where the government was a party. More specifically, it was charged with the following functions: to receive and take action on reports submitted to it by various statutory corporations; set annual production and financial targets for them; convey government policies to them and to ensure adherence to them; advise on and prescribe salaries and conditions of employment; initiate training schemes; co-ordinate the supply requirements of the enterprises including the placing of indents and the execution of contracts for such supplies; and to carry out periodic inspections of the corporations with a

21. The Kenyan Report, op. cit., said, “In the absence of a central co-ordinating body, the Government has not found it easy to deal with the problems which have faced parastatals from time to time. As a result such problems have tended to accumulate. Consequently, while there are notable exceptions, there is clear evidence of prolonged inefficiency, financial mismanagement, waste and malpractices in many parastatals.”

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view to insuring that they operate according to the provisions of their incorporations. The SES itself was responsible to the President. The enterprises continued to be responsible to their relevant minister despite the new functions of the SES, although most of them were given new charters which made clear the general co-ordinating functions of the SES. The minister’s own autonomy was qualified by the provision that communications between him and the enterprise had to be channelled through the SES, and he had to consult with the SES before exercising the more important of his powers, like the appointment of senior staff, approval of loans, etc. The SES was, under its own charter, vested directly with important functions in relation to the enterprises, e.g. to set annual production and financial targets, and was to receive quarterly and annual reports. If one read the charters of the enterprises together with that of the SES, there was considerable ambiguity about the precise role of the minister and the SES in the direction and control over the enterprise. Although the charters provided for the government to give directions to and set targets for the enterprise, it was not necessarily incompatible with a wide measure of operational autonomy for the board and the manager. The charters did keep a reasonably sensible separation between policy and operations. It is difficult to tell how the system of centralised control would have worked, for it was overtaken by events. In 1966 Nkrumah was overthrown and the question of the extent and organisation of the public sector came under a fresh review. A U.N. mission which undertook the review did find that the relations between the SES, the relevant minister and the enterprise were unclear. The SES held no shares as was envisaged; had not set annual targets for all corporations and had not placed any indents. It had made occasional inspections (in the form of liaison visits) but had no real powers to influence policy; it had only one director on boards, out of about seven members. It had no power to change managing directors or other senior management staff, to provide local currency requirements or to secure foreign exchange/import licenses. Despite the requirement in their charters, the enterprises preferred to deal directly with the ministries. The U.N. mission was critical of the concept of the SES, which it found to be bureaucratic, government rather than commercial in its orientation and decisionmaking. It had failed to inspire confidence in the enterprises, who had consequently made little use of its services. It urged the abolition of the SES and its replacement by a more commercial type body, acting as an ordinary holding company, insulated from political pressures. Although its detailed proposals were not all accepted, its basic idea was, and was the genesis of the Ghana Industrial Holding Corporation (GIHOC). GIHOC was established by decree in 1967, which also abolished the SES, and vested its assets and liabilities in the GIHOC. The majority of the enterprises which had been under the general supervision of the SES were transferred to the new corporation. The enterprises lost their own corporate character, as companies, and their assets were directly

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vested in GIHOC. The former companies became divisions of GIHOC, only GIHOC having the power to enter into contracts, recruit staff, etc. The board of GIHOC appoints managers of these divisions, who are responsible to a group manager (in charge of a sector) and through him to the general manager. The GIHOC has considerable autonomy from the government: there appears to be no sponsoring ministry; the board is appointed by the Cabinet, but once appointed enjoys considerable freedom of action; it appoints its own chairman and the managing director; is free to borrow from the private sector; and decides on how much of its surplus should be declared as dividends to go to the government; and has complete control over staffing matters. But the operating enterprises, which are intended to enjoy wide delegated powers, are considered to be tightly regulated by the GIHOC and allegedly do not enjoy the decentralisation of powers implicit in the abolition of SES. Zambia provides another interesting study. Most of the important enterprises are in the form of the company. At first Zambia established a number of companies which operated as holding companies in different sectors. Of these the most important was the Industrial Development Corporation (INDECO). It set up several subsidiary companies and expanded rapidly. It was then faced with the problem of coherent management of the group and of operating as a single economic unit. Its problems were compounded by the management contracts it had entered into with the previous owners of assets it had acquired. It found it difficult to influence its subsidiary companies, to promote inter-company cooperation, and to police them. In 1969 it decided to form sub-groups and to decentralise control. It set up six sub-holding groups, in the main areas of INDECO activity, and transferred to each of them INDECO shares in the relevent company, each of the sub-group companies being in turn wholly owned by the INDECO. Each sub-group or division was headed by a divisional managing director who reported directly to the INDECO managing director, although each division had its own board of directors. The new system did not work well, since it distanced INDECO from the operating companies, led to new bureaucracies, and a complicated decision-making process prone to delays. So the system was abolished in 1975. In 1970 INDECO had itself become a subsidiary of a new holding company, ZIMCO, in which were also vested other holding companies, like the mining MINDECO and finance FINDECO. By 1976 ZIMCO held total equity of ten holding companies, and direct equity in the operating of copper mining companies. This somewhat top-heavy arrangement was altered in 1978 when the government dissolved all but three holding companies, and vested the subsidiaries of the remaining directly in the ZIMCO. The government was unsure, however, how ZIMCO should exercise supervision over its vast empire, constituting the bulk of the public sector. Between 1971 and 1978, ZIMCO had no managing director or other staff of its own. It existed purely as a policymaking body, rather like a cabinet. Indeed it affinity to the Cabinet was emphasised by the fact that its board of directors included all the key ministers, with the President himself as the Chairman. The

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board also included all the managing directors of the holding companies. This blend of the political and the professional was intended to ensure that policies with macro-implications were formulated with the blessing of the government, and that matters requiring expert processing could be expedited by the Board. The major holding company device thus appeared to be used to control and supervise the public sector, but in practice the position was more complex. The responsibility for the supervision of the operations of the subsidiaries was entrusted to portfolio ministries although neither the extent of the responsibility nor the nature of authority that was derived therefrom was specified. This responsibility was transferred in 1969 to a new Ministry of State Participation, of which the President was also the minister in charge. The attempt to control the public sector through a super ministry did not appear to succeed, and the ministry was abolished the following year, with the transfer back to portfolio ministries of functional responsibilities, although the President, as Chairman of ZIMCO, retained an over-lordship of the sector. Ministers became chairmen of subholding companies in their sector, and their permanent secretaries became vicechairmen. This system in turn was abolished in 1978, due to the demands it imposed upon the minister’s time, and the conflict between his role as chairman and as minister required to regulate and supervise the company. The supervisory functions were restored to ZIMCO which won its former staff back. Despite all these changes, it is far from clear that the government has been able to bring coherence into the planning of the public sector or enhance governmental control. We see a shift from centralisation to decentralisation, from the holding company to a ministry, that has been the standard response in other countries as well. 10. Control of Joint Ventures What passes for a public sector enterprise is, in Africa, very commonly, a form of joint venture between government in some manifestation and a foreign transnational corporation, under which not only is the enterprise carried on through foreign management but the latter holds a significant stake in the equity of the enterprise. This arrangement creates increased problems of control for government.22 A joint venture usually takes the institutional form of a company in which both the host government or a government corporation, and the foreign company hold shares. Particularly in the systems of law derived from the English, it is not much of an exaggeration to say that boards of directors are completely free in the management of the enterprise from intervention by the shareholders. Where a foreign company is to manage a joint venture, the agreement which it reaches with its government partner will often restrict the rights of the latter to exercise its shareholding powers in certain ways, and even curtail the usual powers of the board. Taking a common field for joint ventures—the hotel sector —contracts while spelling out in detail the obligations of the host partner, which

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frequently runs the hotel, in relation to standards of design, construction and maintenance, give power over virtually all the aspects of staffing and running the hotel to the foreign partner but do not specify in detail its obligations. In other sectors as well where management contracts are common, most of the powers, except that of capital structure are vested in the foreign partners. The decisions on production, pricing, distribution and marketing, recruitment, purchasing policies and cross-subsidisation are all made by the foreign partner. In some instances governments undertake in these contracts not to exercise their legal powers under the regulatory legislation (e.g., as to work permits, registration of profits, etc.). It is not the legal provisions that alone result in this concentration of decisionmaking power in the hands of the foreign partners for control is less a function of legal provisions than of access to the technological resources, the knowledge of the market, pricing, technology, and the organisational skills essential for decision-making. Not only does the transnational corporation have greater resources and experience in a particular industry but is in many ways able to control the flow of information to government directors. The ineffectiveness of the latter is increased by the fact that, as in public enterprise generally, they tend to be busy civil servants with neither the time nor the skills to influence policy or control management. Naturally it is the very resources and expertise of the foreign company that the host government wishes to take advantage of; the problems lie in firstly the inability of government to negotiate contracts under which unnecessarily wide powers are given to the foreign partner, and secondly in the inability of government and its directors to exercise effectively even these powers it retains. 11. Conclusion The result of these controls and the manner in which they are exercised is to qualify out of existence the autonomy of parastatals that is one of the main justifications for their existence. They have limited control over their assets, cannot freely hire and fire their staff, have little financial independence and are unable to engage in meaningful long-term planning because they have little control over many of the resources necessary for such planning. The exercise of these controls by the government leads to delays. It leads to the loss of initiative by the management and produces habits of reliance on and deference to ministers and officials. It blurs the distinction between management and supervision, and

22. For a detailed study of the provisions of management contracts, see Yash Ghai, Management and Technical Services Contracts between Transnational Corporations and Agencies of the Government in the Third World (UNCTNC, New York, 1980, unpublished).

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policy and its execution.23 It makes it difficult to ascribe responsibility for failure which in turn results in a further deterioration in standards and performance. Despite these instruments of control, the paradox is that the government has limited control over the policies of the parastatals. There are several reasons for this. In many instances the governments do not have a coherent or clear policy towards or for the public sector. The governments do not know what they want of the public sector, and policy-making is left to the parastatals by default. When the making of policy for and the giving of directions to the public sector is not centralised by the government, there is often a lack of co-ordination so that inconsistent and contradictory directions are given. There are inadequate means whereby the government can keep itself informed of the policy and performance of the public sector. There are serious deficiencies in the flows of financial and other information, and mechanisms for feedback and review are seldom used, even when they exist, which is rare. In the majority of the cases, the government officials are not qualified to evaluate and use such information. The superior commercial and technical skills and experience of managers in the public sector as compared with those of the controlling civil servants means that the former can escape substantial control if they wish to, although not, as we have seen, petty ad hoc interventions. We thus have a further paradox. On the one hand, governments complain about the lack of accountability of the public sector and its failure to comply with government policy. On the other hand, managers of public enterprises complain about incessant government intervention and consequently their own lack of autonomy or managerial freedom, to which they ascribe the inefficiencies of the public sector. Both are right. The ad hoc nature of intervention by the government manages to erode the autonomy of the enterprise without ensuring that its own policies, if they exist, are communicated to and enforced upon the enterprise. In such a situation, it is not surprising that there is a lack of accountability and that enterprises become irresponsible. Whatever degree of control the government may be able to impose on public enterprises, the overwhelming impression an observer of these enterprises has is one of an almost total lack of accountability. No one seems answerable to anyone, neither the employees to the manager, nor the manager to the board, nor the board to the government, nor the government to the legislature or the public. Little reliable information about the public sector is available to the public. No criteria for the evaluation of the enterprises are established, and there are few cost and benefit analyses. Inefficiency and corruption can easily be hidden. Few sanctions are provided, and, where provided, are seldom imposed. The discussion in this paper has proceeded on the assumption that the governments do want greater accountability of the public enterprises, but fail to achieve it. The assumption itself, however, is questionable. Just because the

23. See Teriba, op. cit, and the Kenya Report, op. cit.

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governments have assumed such extensive control over the public enterprises, they are anxious to hide from public scrutiny their shortcomings (except when it becomes expedient to make them scapegoats for their own failings or to demonstrate the evils of a regime freshly overthrown). Nor are individual ministers, who tend to treat parastatals under their ministry as their fiefdom and use them for their own aggrandisement, keen that the affairs of the parastatals become public knowledge. The government itself is often deeply implicated in the corruption and inefficiency of the public sector. Public enterprises are frequently used as a means of patronage and a source of wealth and power for political and administrative leaders. The managements are either too weak to be able to expose the corruption of the government or too involved in it to want to. The movement of officials back and forth from the public service to the public sector produces an identity and common interests between controllers and management which makes supervision and true accountability impossible. Thus while some groups within the establishment may be interested in control, almost nobody is interested in accountability.

11 Government Relationships with Public Enterprise in Papua New Guinea ROBERT H.FLOYD*

1. Introduction Since independence the Government of Papua New Guinea’s participation in and ownership of non-financial public enterprises (NPEs) has expanded, in part due to pressing requirements of establishing necessary national institutions and infrastructure. The purpose of this paper is to describe the public enterprise sector in Papua New Guinea with particular focus on identifying the NPEs, reviewing their institutional and financial arrangements, and their role in the economy. As a result of the description some problems arising with increasing government participation are highlighted. The organisation of the paper is as follows: Section II defines nonfinancial public enterprises and the taxonomy employed in this paper for their analysis. It also reviews the NPEs in Papua New Guinea, their size and importance in the economy and their recent financial performance. Section III discusses the relationships between the Government and NPEs, including the institutional arrangement for control, the information flows, and the budgetary, financial, and taxation relationships. NPE’s roles in resource allocation, growth, development, and other matters are briefly reviewed in Section IV, and other economic roles are briefly reviewed in Section V. Current and feasible pricing practices, as well as implicit subsidies, are reviewed in Section VI. Conclusions are drawn in Section VII. 2. Background NPEs in Papua New Guinea. For purposes of this paper NPEs are defined to encompass all “…government-owned and/or controlled units which sell

* The author is a Senior Economist in the Fiscal Affairs Department of the International Monetary Fund. He retains full responsibility for the contents of this paper, which does not necessarily reflect the views of the Fund.

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industrial or commercial goods and services to the public on a large scale”.1 This definition implies no particular legal form. Indeed, public enterprises in Papua New Guinea take three legal forms, namely, statutory authorities, companies, and a government department. Statutory authorities are corporate bodies established individually’ by special statutes. Although many of these authorities perform essentially quasi-governmental functions, the Electricity Commission (ELCOM), the Harbours Board, Air Niugini (the Airline Commission), and the Housing Commission perform essentially commercial functions and are properly classified as NPEs. However, the Housing Commission is not considered in this paper owing to expected changes in its status. With the exception of Air Niugini, of which up to 16 per cent has been owned by Ansett Transport Industries, Ltd. of Australia, these are wholly-owned government corporations. As of 1979, there were 17 companies legally organised as private companies in which the Government directly owned an equity interest.2 Seven were whollyor majority-owned by the Government, and four enterprises in the oil palm industry were equally owned by the Government and private interests. All 11 are appropriately classified as NPEs. However, for illustrative purposes only five are specifically considered in this paper: the PNG Shipping Corporation Pty., Ltd. (PNGSC), Mainport Corgoes, Ramu Sugar Ltd., the Food Marketing Corp., Pty., Ltd. and collectively the oil palm industry joint ventures.3 Although the Post and Telecommunications Department (P and T) is organisationally a division of the Department of Public Utilities, it is operated on commercial principles and is self-accounting. Except for the on-lent proceeds of international and domestic borrowings, its financial operations are entirely extrabudgetary. In this paper it is classified as an NPE. The Central Government also indirectly owns equity in about 50 companies through the portfolio holdings of the Investment Corporation of Papua New Guinea (ICPNG) with a majority interest in five. The Investment Corporation is a statutory authority established by the Investment Corporation Act of 1971 with the object of facilitating equity ownership in private enterprise by Papua New Guinea citizens and institutions. To this purpose it was authorised to buy and sell shares in enterprises and to establish and manage unit trusts or mutual funds if this were necessary to sell the shares. Initially, the Investment Corporation received capital grants for investment through the Central Government’s budget, but no budget funds have been received since the financial year 1974–75. New 1. IMF, Draft Manual on Government Finance Statistics (Washington, D.C., 1974), p. 29. 2. A distinction is made for statistical purposes by the Government between public and private companies. A public company is one in which the Government owns directly 75 per cent or more of the outstanding equity. All other companies are private. This distinction is not employed in this paper. 3. The information on which this paper was based was originally obtained in 1979. It is understood that the Food Marketing Corporation is now defunct and that the PNG Shipping Corporation and Mainport Cargoes have been placed into receivership.

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investments are now financed from earnings on the portfolio and sales to the Investment Corporation Fund. The Fund is a separate entity to which citizens of Papua New Guinea may subscribe and to which the Investment Corporation in turn sells selected equities. However, the Investment Corporation has made only limited sales of the equity it has acquired, and there have been no direct sales to the public. As of June 30, 1977, only about 13 per cent of the combined portfolio was held on behalf of the Investment Corporation Fund. Furthermore, since all sales have been to the Investment Corporation Fund, all equities that have been purchased by the Investment Corporation still remain under its management. As a result the Investment Corporation has in effect evolved into a holding company whollyowned by the Government. For purposes of this paper, those enterprises in which the Investment Corporation and the Fund own a majority interest and those which it otherwise controls are considered to be NPEs, In total, under the definition of NPEs employed in this paper, 20 NPEs were identified in Papua New Guinea as of 1979. Fifteen were directly owned by the Government, and five were indirectly owned through the Investment Corporation of Papua New Guinea. Four are statutory authorities or departmental enterprises, and the rest are private companies. A complete listing of all government equity holdings is found in Table 9. Nine NPEs have been selected for somewhat more detailed consideration in this report. These are indicated by asterisks in Table 9, are shown separately in Table 1, and were selected in an effort to obtain a broad cross section primarily for illustrative purposes. Taxonomy of NPEs in Papua New Guinea. The NPEs in Papua New Guinea that were selected for more detailed consideration and certain other NPEs are taxonomically classified in Table 2. In the markets for factor inputs all of the enterprises are competitive buyers.4 In domestic markets for their outputs, ELCOM, P and T, the Harbours Board, and, for illustrative purposes, the Ramu Sugar Corporation may be classified as monopoly sellers.5 The domestic operations of Air Niugini may also be classified as a monopoly.6 The remaining enterprises operating in domestic markets may be expected to face either direct competition or indirect competition from close substitutes. Air Niugini, PNG Shipping Corporation, and the four oil palm industry joint ventures, sell in international, or export markets. Air Niugini operates in an industry in which international prices are largely set by international agreement and are administrative in nature. Although PNG Shipping participates in a consortium with two other shipping companies and is a member of a shipping conference in which maximum rates are set, other shipping services are available to consumers and prices can be cut. Consequently, the enterprise is classified as a

4. This ignores the availability of free water as an input to hydro-generation of electricity by ELCOM.

5. Ramu Sugar Ltd. had not yet commenced operations as of 1979. However, it was the intention of the Government at that time for Ramu Sugar to have a monopoly in domestic markets for most raw and processed sugar. Protective tariffs were to be used as necessary to ensure the monopoly. Although the Government owned all of Ramu Sugar, it planned to encourage private sector participation.

Table 1. Papua New Guinea: Government Ownership of Selected Nonfinancial Public Enterprises

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Table 2. Papua New Guinea: Taxonomy of Selected Nonfinancial Public Enterprises

1. International routes only. 2. There is some private production of electricity, but it is not in direct competition with ELCOM. 3. Some competition is provided by small charter aircraft, but there is no competition on Air Niugini’s domestic routes from any scheduled service.

competitor. The palm oil industry joint ventures sell in a competitive international market. ELCOM and P and T provide public utility services often provided by governmental or quasi-governmental entities to individuals. The Harbours Board provides an infrastructure service almost always provided by governmental or quasi-governmental entities. Most of the domestically oriented enterprises that face competition are involved in agricultural or non-traditional commercial activities. In international markets both Air Nuigini and PNG Shipping Corporation operate in essentially non-traditional commercial markets. The palm oil industry joint ventures operate in an essentially agricultural and highly competitive market. In Papua New Guinea there are no public enterprises in natural resource extractive industries operating in either domestic or export markets.7 Size and Importance of NPEs in the Papua New Guinea Economy. Very little data are available to gauge the importance of NPEs in the overall economy. Table 3 presents some available indicators including a staff estimate of value added in the four statutory authorities (see Table 10) .8

6. Air Niugini may face some competition from charter services, but for all practical purposes it has a monopoly on its scheduled routes.

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Value added by four statutory authorities totalled about K52.9 million in 1976– 77. Although this was only 4 per cent of GDP, it represented a sharp increase from slightly more than 2 per cent in 1973–74. Furthermore, this may understate the importance of the enterprises. Gross fixed capital formation by the four selected statutory authorities equalled 13 per cent of non-government gross fixed investment in 1976–77, and if the selected government-owned companies for which data are available are included, the proportion rises to 22 per cent mainly due to large investment by the palm oil industry joint ventures. Recent Financial Performance. When evaluating the overall performance of public enterprises, an important indicator of financial performance is the rate of return earned by an enterprise. In public

7. In general, public enterprises having a monopoly position in output markets are in the form of statutory authorities while those in competitive markets are organised as private companies. However, there is no necessary relationship between legal form and market status, as illustrated by the intention for Ramu Sugar to enjoy a monopoly position. 8. Estimates of value added in the other selected public enterprises were not possible primarily due to the limited scope of operations or the limited availability of data.

Table 2. Papua New Guinea: Taxonomy of Selected Nonfinancial Public Enterprises

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enterprises, just as in private enterprises, profits may be used toevaluate the efficiency of the management of the resources allocated,to the enterprise. However, other objectives may effectively constrain the profitability of an enterprise, which, therefore, cannot beproperly evaluated in isolation. In addition to the rate of return,the individual and overall flows of financial resources between theGovernment and enterprises should be monitored. Since seriouserrors may result from looking at individual transactions in isolation from other elements, it is best to analyse the overall net flows. Data on the financial performance of selected public enterprises over the period 1973–74 through 1976–77 are shown in Table 4. None of the enterprises organised as government companies have generated profits over the period. However, if interest payments to loan capital are also taken into account, the palm oil industry joint ventures showed a return to capital of about K 0.4 million over the four-year period, or an average annual return to invested capital of about 0.8 per cent. The failure of these enterprises to generate profits probably reflects one or more of the following factors: (a) efficiency of management (perhaps reflecting uncertainty of objectives); (b) high start-up costs or low initial operating revenues that are not expected to continue; (c) improper allocation of scarce resources to the industry; or (d) the existence of government objectives other than profitable operations for these enterprises. However, losses cannot be justified in the long run by problems: arising in the gestation period and, consequently over the longer run they must result from one of the other three causes. For the four commercial statutory authorities the situation is different. The financial performance of these enterprises is summarised in Table 5. The average annual rate of return to net total assets varies from about 4 per cent for the Harbours Board to about 9 per cent for the Post and Telecommunications Department during the four-year period 1973–74–1976–77. With the exception of the Harbours Board these average rates have tended to rise over the period, and the weighted average of the marginal rates of return over the period have varied between about 0 and 30 per cent. The more profitable operations of the statutory authorities reflect to some extent requirements in their loan and project agreements with various international lending institutions that certain minimum: rates of return be achieved.9

9. The rate of return shown in Table 5 is defined as the ratio of the sum of profits and long-term interest payments to net assets (total assets less current liabilities). This is essentially a ratio of payments to capital to the sum of long-term assets and working capital employed in the enterprise and it differs slightly from the rates defined in the loan agreements which are based on net fixed assets.

Table 4. Papua New Guinea: Financial Flows Between the Government and Selected Nonfinancial Public Enterprises 1973/74±1976/77

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Sources: Financial statements and data provided by the Papua New Guinea authorities. 1. The overall financial results of current and extraordinary operation stated before income taxes and dividends but after allowances for depreciation and other special reserves. 2. Excludes unrealized gains on foreign exchange but includes realized losses on foreign exchange transactions. 3 The ratio of the change in profits to the change in net assets

Table 5. Papua New Guinea: Financial Performance of Four Selected Nonfinancial Public Enterprises, 1973/74±1976/77

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Financial Flows. In general the selected NPEs were net recipients of funds from the Government over the period 1973–74–1976–77. Even if funds on-lent from various international lending agencies are excluded, ELCOM and the Harbours Board have absorbed K 4.4 million and K 7.1 million in government funds, respectively. P and T, after excluding net drawings of K 6.3 million from the IBRD, had only a small K 1.3 million net flow from the Government. Except for P and T, most of these funds represented government purchases of equity. The other selected public enterprises have not yet generated profits and have been net recipients of government funds largely because of government equity purchases. In the absence of knowledge about the Government’s objectives it is difficult to appraise the implications of these financial flows. However, the existence of net flows to the enterprises, especially after adjusting for on-lent concessionary loan proceeds, indicates that investment requirements exceed the internally generated funds available. Borrowing for investment need not be unusual. However, in this case the borrowing requirement seems to suggest that profit levels and more broadly the rate of return may be inadequate, especially in view of the current low levels of loan repayments. This suggests that current pricing policies may reflect other implicit objectives. 3. Relationships with the Government Institutional. Each statutory authority and most companies owned directly by the Government fall within the administrative purview of a technical ministry, and for most matters related to financing they are also subject to review or approval of the Department of Finance. The various administrative and financial arrangements for statutory authorities are largely specified in their enabling legislation.10 A summary of many of the institutional arrangements for the selected NPEs is provided in Table 6. Since the institutional arrangements prevailing between the technical ministries and the statutory authoritatives vary greatly and generally are of little economic importance, they are not reviewed in this paper. Even the particulars of financial matters vary between enterprises. For example, the Harbours Board and ELCOM are required by their enabling legislation to have the Minister for Finance’s approval for any borrowing. In the case of Air Niugini, the same requirement exists, not in the enterprise’s enabling

10. These include the Papua New Guinea Electricity Commission Ordinance No. 47 of 1961, the National Airline Commission Ordinance No. 69 of 1973, the Papua New Guinea Harbours Board Act No. 17 of 1964, and the Post and Telegraph (Finance) Ordinance No. 43 of 1970. The Public Bodies (Financial Administration) Ordinance No. 69 of 1969 also specifies many requirements relating to financial matters for statutory authorities.

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Table 6. Papua New Guinea: Control Channels for Selected Nonfinancial Public Enterprises1

1. Excludes Ramu Sugar which is not yet in operation. 2. In addition, one director is appointed by the PNG Banking Corporation, a public financial institution. 3. Includes New Britain Palm Oil Development Ltd., Higaturu Oil Palms Pty., Ltd., Higaturu Processing Pty., Ltd., Hargy Oil Palms Pty. Ltd. 4. In the cases of Higaturu Oil Palm and Processing Companies, one member of the Board is appointed by the provincial government.

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legislation, but rather because the enterprise is subject to the Public Bodies (Financial Administration) Ordinance No. 69 of 1969, which contains such a provision. In addition to approving loan negotiations, the Department of Finance must generally approve contracts of statutory authorities exceeding K 100,000 in amount. The Department of Finance has no specific responsibility for review or approval of pricing, wage, and employment policies and practices of statutory authorities. However, under existing practices rate schedules for the four statutory authorities are submitted to Cabinet for approval, and the Department of Finance comments on all submissions even though it plays no initial role in the formulation of the rate schedule. Consequently, the Department of Finance becomes involved with the structure and level of these enterprises’ rate schedules only at an advanced stage in the price-setting process. The Department of Finance is not directly involved in investment planning of NPEs. The Government’s authority in these matters is largely concentrated in the National Planning Office on all matters and especially on investment. The Government is represented on the boards of statutory authorities by varying numbers of directors. The enabling legislation usually specifies the size of the board, but the composition is effectively determined by the recommendations for appointment to the board that are made by the relevant technical minister. Although outside directors often outnumber directors that are government employees, the government directors appear to exercise decisive roles on matters put before the board. However, when appointed from different agencies, they may not represent a co-ordinated position, especially when specific government policy has not been determined in advance of board meetings. Directly owned government companies are treated differently. In general, they are regarded as purely commercial undertakings and have more independence than the statutory authorities. In many cases the Government’s involvement is essentially incidental to its involvement in development projects. Every foreign and domestic company must register with and obtain approval from the National Industrial Development Authority before commencing operations. In this connection, all new companies, including both government-owned and privately owned companies, must negotiate a master agreement for implementing government objectives. The master agreements can be rather wide ranging, and may include provisions specifying pricing formulae (as in the palm oil industry joint ventures) and investments the company will undertake. In some cases, these pro visions may at least subjectively take into account social objectives and market imperfections, but after the agreements are finalised the firm is expected to operate on an essentially commercial basis. However, owing to their rigid nature, these agreements are not a satisfactory vehicle for routinely transmitting evolving government policy to government-owned companies. The Government’s representation on the boards of directors of government companies is generally equal to the percentage of ownership held by the Government. The Department of Finance, as the actual shareholder, usually

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holds one directorship on most boards. The second director is appointed by the relevant administrative or technical ministry. A third government director is often a representative of a region in which the company has extensive operations. Other government directors could be chosen if necessary on the basis of other criteria, but the existing practices do not make clear the criteria for selection. The Government has expected that the proper role of its representatives on the boards of companies is to act in the best commercial interests of the firm and to ensure compliance with the Government’s policies as reflected in the registration with the National Industrial Development Agency and in the master agreement between the company and the Government. Under existing law directors cannot advocate government policies that are contrary to good commercial practices, and in cases where there are potential conflicts between good commercial practices and the Government’s policies, the role of the Government’s directors is not clear. As with statutory authority directors, there are no established routine procedures for briefing directors on the Government’s wishes. For companies owned indirectly through the ICPNG there are no established institutional arrangements for transmitting government policy other than the Government’s directors on the board of the ICPNG itself. There are no administrative ministries responsible for NPEs owned indirectly through the portfolio of the ICPNG. In a recent institutional development, the Government established planning committees for several statutory authorities with the following functions: (a) to coordinate the technical, economic, and social aspects of the preparation of longterm investment programmes by statutory authorities, and (b) to review papers prepared for meetings of the boards of directors of the authorities in advance of board meetings to comment on their planning implications. The membership of these committees is generally made up of: (a) up to three officials of the statutory authority, (b) one official from the responsible technical or administrative department, (c) one official from any ministry with significant responsibility in the statutory authority’s field, and (d) one representative of the National Planning Office. No such committees have been established for government-owned companies. Information Systems. The flow of information between the Government and the NPEs is conducted at present primarily on an ad hoc basis. In general, annual reports and financial statements are submitted by the enterprises to their directors, but not directly to the Department of Finance or to other relevant departments. Consequently, except for contracts requiring the approval of the Minister of Finance which are submitted directly, information is received by the Government only indirectly through its representatives on the executive boards. Within the Finance Department there is at present no centralised repository information concerning the activities of public enterprises. Recently, efforts have been begun to review the existing information system and to develop additional required quantitative background information for use

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in making qualitative judgments on managerial efficiency. This effort is apparently restricted to information pertaining to government-owned companies and the Investment Corporation. Budgetary and Financial Relationships—Capital Structure. In most of the selected NPEs the Government itself has provided all the equity capital (see Table 7). However, there is minority private sector equity participation, as indicated earlier, in Air Niugini and Mainport Cargoes. In the palm oil joint ventures the Government and private entrepreneurs own equal shares. Government-owned development financing agencies and banks do not appear to be sources of equity capital in the selected enterprises. The portfolio holdings of the Investment Corporation are largely minority interests, but there is a majority equity interest in five companies. In the cases of ELCOM, the Harbours Board, and Air Niugini, retained earnings have been a significant source of equity capital. Longer-term loans are an important source of capital for most selected enterprises, and the Government is frequently the ultimate lender, accounting for about a third of long-term loans to the selected enterprises. In the cases of ELCOM, the Harbours Board, and P and T almost 60 per cent of the collective loan capital represents onlent funds obtained on concessional terms by the Government from the World Bank, the Asian Development Bank, and the International Development Association. However, these enterprises are in the nature of a public utility, and for the remaining more commercially oriented enterprises onlending has not been a source of capital. Banks were a significant source of short-term capital, mainly in the form of overdrafts and some medium-term loans in the cases of Air Niugini, Mainport Cargoes, and the palm oil joint ventures. In these same enterprises suppliers’ credits were also a significant source of capital, and P and T intends to extend its use of this capital source. Debt and equity. The differences in capital structures between various NPEs are sharply illustrated by their debt/equity ratios, which vary between 0.0 and 10. 0 after excluding the Food Marketing Corporation which has negative net capital. If P and T is also excluded on the basis that its capital structure is skewed by its status as a government department, the ratios still vary between 0.6 and 10. 0. The capital structures of government-owned companies are generally more reliant on debt than are those of statutory authorities. The debt/equity ratios appear to be quite high in these cases, perhaps in part due to low profits leaving little scope for a buildup of equity through retention of earnings. There is a tendency at times to distinguish between debt and equity capital for legal or accounting purposes without taking the economic implications fully into account. For example, in 1976–77 K 16.8 million in ELCOM’s debt to the Government was converted to equity with a view to relieving ELCOM from its obligation to pay interest to the Government, and thus mitigate its liquidity problem.11 This cash flow problem could also be interpreted as symptomatic of a more fundamental problem that earnings were inadequate to finance interest payments to debt capital and to generate a return to equity capital, but these

Sources: Financial statements and data provided by the Papua New Guinea authorities. 1. The overall financial results of current and extraordinary operation stated before income taxes and dividends but after allowances for depreciation and other special reserves. 2. Excludes unrealized gains on foreign exchange but includes realized losses on foreign exchange transactions. 3 The ratio of the change in profits to the change in net assets

Table 7. Papua New Guinea: Capital Structure of Selected Nonfinancial Public EnterprisesÐJune 30, 1977

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implications for prices and implicit subsidies would not appear to have been explicitly considered. Similarly, in the accounts of P and T a legal distinction is made between capital arising from advances from the Government and capital arising from the retention of earnings. Whereas interest is to be paid to the Government at an annual rate of about 6.7 per cent on advances totaling K 25.9 million, there is no provision for a return to equity capital arising from retained earnings.12 A similar distinction is made in the accounts of the Harbours Board where only the initial subscription and not retained earnings are considered to be equity.13 Present practices in Papua New Guinea of differentiating between debt and equity capital and even between equity capital arising from initial injections and undistributed profits are of little economic significance. Thus, while there is a special legal obligation in the case of debt capital to generate a positive cash flow to satisfy debt servicing requirements, and while the financial return to equity capital might need to reflect compensation to the shareholder for his greater exposure to risk or his ownership rights to resource rents that would not be reflected in the return to loan capital, efficient resource allocation requires that all forms and sources of capital should be taken into account when formulating economic decisions, especially pricing and investment decisions. Borrowing and Onlending. It has been the Government’s practice to onlend to the statutory authorities the proceeds of loans from international lending agencies on essentially commercial terms and at market rates of interest. To some extent this reflects the terms of loan agreements. Grace periods in repayment schedules are passed on to the enterprises. Since most of these loans have been extended only to statutory authorities, they in effect have been treated more or less consistently with the government-owned companies which generally borrow from commercial sources. The Government has also extended loan guarantees to various enterprises. These practices in effect promote opportunity cost pricing of debt capital by the NPEs while ensuring that the Government captures for public uses the value of the concessions granted. Taxation. The objectives of taxing NPEs should be essentially the same as those for taxing private enterprises; that is, taxes should be designed not only to raise government revenues but also to promote efficient resource usage, an

11. Papua New Guinea Electricity Commission, Annual Report, 1976/77, Note 5 on financial statements. See also Papua New Guinea Electricity Commission, Annual Report, 1975/76, p. 14. 12. The Post and Telegraph (Finance) Ordinance No. 43 of 1970 in paragraph (b) of Subsection (3) of Section 8 and in paragraph (b) of Sub-section (1) of Section 10 provides only for the payment of interest on funds actually advanced from the general treasury resources to P and T. Provisions are not made for dividends or for taking into account retained earnings. Furthermore, there appears to be no consideration of increasing the interest payment on government advances to implicitly provide for a return to equity arising from retained earnings.

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equitable distribution of the tax burden (and, hence, of disposable income), and a stable and growing economy. However, even though the goals of taxation should not differ for public enterprises, special characteristics of public ownership, in particular, the effects of other government policies and social objectives, may significantly alter the effects of taxation of public enterprises. Nevertheless, a strong case can be made for taxing public and private enterprises alike. Furthermore, it is not necessary that the public enterprise be in direct competition with private enterprise for this conclusion to hold. So long as profit taxes, import and export duties, sales and excise duties, property taxes, and any other taxes apply to private enterprises, they should also apply to public enterprises. Failure to do so could lead to distortions in pricing and esource allocation between the public and the private sector.14 Current tax practices in Papua New Guinea differ according to whether the public enterprise is legally a government company or a statutory authority. Government companies are fully liable to all taxes just as is a private company. However, the tax liability of statutory authorities differs among the various enterprises. ELCOM, the Harbours Board, and P and T are fully exempt from all central government taxes. The Harbours Board pays land rates to some local authorities. The Investment Corporation of Papua New Guinea is liable to income taxes, and property taxes. However, most of its income has been in the form of dividends received and long-term capital gains which are not taxable. The Investment Corporation has recently been ruled exempt from customs duties on the basis that it is a government body, even though the statute by which it was established explicitly specifies that the corporation is liable to taxation in all respects.15 In the cases of ELCOM and the Harbours Board, the enterprises are exempt from income tax by their enabling legislation; exemptions from other taxes are not mentioned. P and T, as an integral unit of Government, is exempt from tax. Air Niugini is fully liable to all taxes, and the liability is specified in its enabling legislation. 4. NPEs Role in Resource Allocation, Growth, and Development As previously noted selected statutory authorities accounted for 13 per cent of non-government gross fixed investment in 1976/77, and if some selected government-owned companies are included the proportion rises to 22 per cent. Many of the NPEs, particularly the statutory authorities, operate in important basic industries in which investment decisions have important implications for other

13. Papua New Guinea Harbours Board, Annual Report, 1975/76, Note 2 to the financial statements.

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industries and firms throughout the economy. It is useful therefore to understand the role that NPEs and their investment expenditures are expected to play in plans for development and growth of the overall economy of Papua New Guinea. Investment planning is a relatively new exercise for the Government of Papua New Gunea. Along with the 1978 budget the Government introduced a rolling four-year National Public Expenditure Plan (NPEP). The Plan is prepared in the National Planning Office (NPO) which is within the portfolio of the Prime Minister. The NPEP initially comprised all government-financed outlays, both current and capital, on new projects expected to commence in 1978 and the subsequent three years. Projects already under way were not included in the Plan. Each year new projects will be approved for inclusion in the NPEP only after they have been evaluated in accordance with national objectives, available resources, and other ongoing projects. The Government’s control over the investment expenditures of public enterprises varies with their legal status and the source of financing. For statutory authorities government control is essentially restricted to new projects included in the budget, primarily those financed by the on-lend proceeds of loans from international development agencies or by budgetary grants. Projects financed from operating profits and depreciation reserves have not yet been included in the NPEP, and the Government has no effective tool for ensuring that the selection of such projects is consistent with national priorities. With regard to other public enterprises, the recently established planning committees apply only to statutory authorities, and no such committees have been established for government-owned companies. Furthermore, there is no requirement for any government-owned company to submit any investment plans to the NPO for evaluation and inclusion in the NPEP. At present, for investment expenditures other than those on loan- or grantfinanced projects, there is only one control instrument available to the Government. Contracts in excess of K 80,000 for the Electricity Commission and K 100,000 for the remaining statutory authorities cannot be entered into without the prior approval of the Minister of Finance. However, contract approval is limited in ensuring that projects are properly analysed and evaluated in accordance with national priorities and limited resources. Investment planning requires control at an earlier, policy-determining stage, while approval of contracts would usually deal only with technical aspects such as bidding verification and cash management. In the case of government-owned companies, the Minister of Finance is not endowed with the power of approval over contracts. The main control that the Government has over the companies’ investments is through its representatives

14. For a more detailed discussion, see Robert H.Floyd, “Some Aspects of Income Taxation of Public Enterprises,” Staff Papers, Vol. 25 (June 1978), pp. 310–42. 15. Papua New Guinea, Investment Corporation Act of 1971, Ordinance No. 24 of 1971.

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on the board of directors, and through the master agreements negotiated between the enterprises and the Government. Since the Government’s directors are expected to act in a manner consistent with the best commercial interests of the firm, they may not at present be able to expound non-commercial objectives of the Government. Consequently, the only avenue through which the Government now exercises influence over these companies is in the master agreements. Furthermore, the NPO is essentially confined to reviewing the master agreements with new companies in which the Government will participate as a shareholder for national planning objectives. Subsequent investments not included in the initial agreement may be undertaken by the company by renegotiating the agreement if necessary. However, the NPO would become involved only if additional government funds were involved; projects financed from internally generated funds would not require renegotiation. Clearly, the investment programmes of NPEs constitute an important source of investment in Papua New Guinea. Furthermore, owing to their ramification for almost every facet of the economy, their importance may be greatly understated. Nevertheless, at present the Government exercises only limited control over these investments, and it appears that the extent of the Government’s control is determined by the legal status of the enterprise and the source of financing of the investment rather than by any well articulated policy with regard to the Government’s role in the determination of resource allocation through public enterprises’ activities.16 5. Other Economic Roles of NPEs NPEs in Papua New Guinea do not appear to have been used as instruments to attain predetermined macroeconomic objectives in areas such as price or wage stabilisation or employment creation. There is no evidence that prices charged by particular NPEs have been restrained to assist in holding down the rate of increase in cost of living to any target levels. Furthermore, wages paid by NPEs are subject to the same overall national wage policies as are private enterprises. The provision and creation of employment opportunities has not been a principal objective of any NPE. Furthermore, the creation of new jobs apparently is concentrated in new enterprises in recent years, such as Air Niugini which began operations in 1974 and now employs about 1,600. In established enterprises employment creation has not been particularly important. For example, total gang hours worked in 1974–75 in the ports of Lae, Rabaul, Port Moresby, and Kieta were only 9 per cent greater than in 1972–73.17 Employment in ELCOM totalled about 1,700 in 1972, declined moderately in 1973 and 1974, and rose in 1975 and 1976 to about 1,950.18 Considerations of income distribution have often been cited as justification for employing a uniform price structure. For example, urban electricity consumers are believed to subsidise electricity consumption in rural areas. However, there

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does not appear to have been any efforts made to evaluate the level or effectiveness of these subsidies nor to ascertain their effects on income distribution.19 6. Pricing Practices Current practices of selected NPEs and implicit subsidies. At present three of the statutory authorities appear to set prices at levels designed to yield approximately the rates of return required in their loan agreements with international lending institutions.20 These rates, which are usually defined to be the ratio of operating income to the average of the values of net fixed assets employed at the start and the end of the accounting period,21 vary considerably among loan agreements. There is an apparent reluctance on the part of enterprises to price output to attain higher rates of return than required by the agreements that may reflect either political considerations or a belief that lower prices would indicate better managerial performance. Comparison of the actual performance of the selected NPEs with performance of enterprises in the private sector suggests that there may currently be implicit subsidies in the output prices of NPEs (or in the prices paid for factor and material inputs) that are resulting in lower rates of return to capital invested in public enterprises. No exactly comparable rates are readily available for comparing the rates of return of public enterprises with returns to capital in the private sector. However, some simple estimates indicate that based on asset valuation the internal rate of return on the fairly broadly based portfolio of the Investment corporation of Papua New Guinea was approximately 20 per cent after taxes over the period 1972–77. This rate is higher than the return to private capital in many developed countries and is higher than the cost of borrowing in international markets. To a considerable extent the difference probably

16. The Government’s control over NPE’s investments must realistically be limited by the technical and commercial competence of bureaucrats to evaluate investment proposals, and the control procedures should also be designed to avoid stifling managerial incentives. 17. Papua New Guinea Horbours Board, Annual Report, 1975/76, p. 17. 18. Papua New Guinea Electricity Commission, 13th Annual Report, 1975/76 p. 36. 19. Recent reports indicate that ELCOM is currently reviewing their rate structure and its cross-subsidy elements. 20. See Papua New Guinea Electricity Commission, Annual Report, 1975/76, Note 3 to the financial statements which compares actual financial outturns with those required by ELCOM’s loan agreements with the World Bank. 21. Operating income is generally defined to be gross operating revenue less operating, maintenance, and administration expenses, taxes, and depreciation. Interest and other debt charges are not deducted.

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represents a risk premium that is earned by equity capital in a developing country. Foreign loan capital is shielded from risk by government guarantees and does not seek to earn a risk premium. However, when the Government provides equity capital it assumes risks in the various enterprises and its actual return should include a premium for these risks. Thus, the return to the Investment Corporation’s portfolio is probably more representative of the opportunity cost of capital than is, for example, the cost of foreign borrowing.22 Even if it is assumed that the opportunity cost of capital in Papua New Guinea is only about 15 per cent, the considerably lower rates of return being earned by the statutory authorities suggest that there is a substantial and implicit. subsidy in their output prices. Assuming that the enterprises meet the prevailing prices of labour and other non-capital inputs in the market place, returns to capital that are below opportunity costs including risk would consequently be reflected in output prices that are lower than could be justified on the basis of opportunity costs. For illustrative purposes consider ELCOM. If the opportunity cost of capital were 15 per cent after tax and if the net assets of K 92.8 million were in service through the year 1976–77 an after-tax return to capital (including interest) of about K 13.9 million might have been expected, or about K 5.7 more than actual returns to capital. This suggests that revenues should have about 30 per cent higher than were in fact earned, or alternatively, that prices to consumers were at least 30 per cent lower than needed for capital to yield its opportunity cost. This represents, of course, a crude estimate of the subsidy implicit in the price structure for allocative or distributional purposes. Applying the same technique to the other enterprises suggests that subsidies could be of the magnitude of K 3. 0 million in the Harbours Board (76 per cent price subsidy), K 3.6 million in P and T (16 per cent price subsidy). Air Niugini, which is not subject to any agreement requirements, in 1976–77 appeared to earn the assumed opportunity cost.23 Both ELCOM and the Harbours Board currently employ uniform price structures across the nation. Since costs are almost certainly not uniform, a substantial degree of geographical cross subsidisation also occurs in these enterprises that apparently transfers real income from urban to rural areas. A similar subsidy may exist in the case of Air Niugini where international operations are believed to be subsidising at least some domestic operations. Feasible pricing practices in Papua New Guinea. In the absence of explicit reasons to the contrary, allocative efficiency requires that prices paid by

22. The opportunity cost of capital is thus defined to be the value of, or return to, capital in its next best alternative use, whether foreign or domestic. If the cost of foreign borrowing were taken as the opportunity cost of capital by domestic authorities, they would run a risk of maximising international rather than domestic welfare. 23. These estimates do not take into account the possible implications of decreasing costs which, if present, might suggest that an ever larger im

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consumers for goods and services should cover the full opportunity costs at the margin of resources used as inputs to production, basically the land, labour, and capital employed either directly by the NPE or indirectly in the production of materials, fuels, and services used by the NPE. In competitive markets and in the absence of other variations discussed below, the market prices paid by the NPE for labour, materials, etc., represent their opportunity costs. However, the opportunity costs relevant to NPE pricing are the social opportunity costs, or the costs incurred by society as a whole, which in certain cases may differ from private costs as reflected by the market prices paid for resource inputs. For example, social costs of production may exceed private costs if a producing enterprise’s waste material pollutes its environment. Efficient resource allocation requires that all social opportunity costs, including the cost of the pollution, be reflected in the output’s price. Perhaps more commonly prices charged for goods and services by public enterprises differ from opportunity cost of resources and materials because of government efforts to subsidise the use of an input or consumption of the enterprise’s output for distributional reasons. The resource or material input and output prices that would result from marginal opportunity cost pricing, the constraints resulting from the particular market conditions faced by the selected NPEs in Papua New Guinea and the feasible alterations reflecting deliberate distributional or allocative considerations are shown in Table 8. Consider first the pricing of resource and material inputs. NPEs in Papua New Guinea compete with other purchasers and must therefore pay at least the going market prices. The only way in which the Government could influence an enterprise’s decision with regard to the hiring and mix of these inputs would be to impose an actual tax or charge on its payment for the input or to grant a budgetary subsidy related to the use of the input. However, it is not likely that a tax could be applied to only public enterprises’ purchases. Thus, it seems that for inputs the only feasible variation from the market price is a subsidy applying to either all or only publicly owned enterprises and a tax applying to all resource inputs. In the absence of such taxes or subsidies, the price paid by the enterprise will equal the inputs’ marginal opportunity costs (i.e., IP=MPI).24 As for output prices, Table 8 reflects the constraints implicit in the taxonomy in Table 2. Consider a public enterprise whose output markets are export oriented such as the palm oil joint ventures. The enterprise would not be able to impose a plicit subsidy would have been consistent with allocative efficiency. Furthermore, they assume that marginal and average costs are equal in the relevant range. 24. The input pricing relationships in the table do not reflect situations in which the NPE does not employ opportunity cost pricing. Suppose that an NPE chooses to pay workers a higher wage than they could earn in alternative private employment. In such case the relationship would be IP=MPI+SI where SI is a subsidy to workers. With mobile factors that are not fully employed it is possible the enterprises may pay less than the market price (IPMOC).

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Table 8. Papua New Guinea: Output and Input Prices

CP: Cartel Price DSO: Distributional subsidy to output DTO: Distributional tax on output IP: Input price paid by nonfinancial public enterprise MOC: Marginal opportunity cost MPI: Free market price on input MPO: Market price of output OP: Output price charged by nonfinancial public enterprise SB: Social benefit subsidy SC: Social cost tax WP: World price

social or distributional charge in excess of the competitive world price or the world cartel price, and there is no obvious reason that Papua New Guinea would want its enterprises to attempt to subsidise foreign buyers either because of distributional or social externality reasons. Therefore, neither subsidy nor tax elements are likely to enter into output pricing considerations when the markets are predominantly foreign, and the output price would equal the world competitive or cartel price. If an NPE’s output is oriented mainly toward domestic markets and if the enterprise faces either foreign or domestic competition, many of the same considerations apply. Social or distributional charges would be effective only when appropriate tax or tariff policies extend the policy to private as well as public enterprise. However, if the NPE has a domestic monopoly, as might be enjoyed by ELCOM, it is possible to implement social and distributional charges or subsidies merely by varying output prices from its opportunity cost level. However, even when tax and subsidy policies are feasible through the price mechanism alone owing to their potentially perverse effect on the NPEs profits, there is still a strong case for taking them explicitly into the budgetary and tax

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process. For example, it would make little sense for a social charge levied on an undesirable product of an enterprise to result in higher profits to the enterprise. The foregoing analysis indicates that the scope for implementing social and distributional policies though output pricing practices of NPEs in Papua New Guinea is limited to only five enterprises. In addition to the market constraints, there is also the difficulty of quantifying opportunity costs and social and distributional adjustments. Although this paper will not consider possible pricing techniques that might be employed, a practical approach would be to adopt a trial and error pricing process aimed at achieving over the medium or long term a rate of return to capital appropriate to the returns that might be expected in alternative uses adjusted for allocative and distributional charges or subsidies reflecting deliberate government policies. 7. Conclusions This paper has reviewed the non-financial public enterprise sector in Papua New Guinea, not with aim of analysing its performance in any quantitative sense but rather with the intention of reviewing the extent of the Government’s participation in enterprises, their role in the economy, the institutional and financial arrangements between the enterprises and the Government, and some of the implications of their current pricing practices. Although no particular conclusions were expected to emerge from this review, one particular characteristic seems to emerge in most of the various facets reviewed in the paper. Thus far, there appears to have been little uniformity in the concept or practices of the enterprises. More significantly, it appears that consistent objectives, policies, and practices remain to be developed. Within this context several other factors emerge. Since independence the extent of government ownership of productive facilities has grown without concurrent development of the institutional arrangements for review or control within the Government. Partly as a result of the absence of supervision, the growth of government ownership may have been further enhanced, particularly through the portfolio holdings of the Investment Corporation and the Investment Corporation Fund. Perhaps the most salient feature of this review has been the fact that the impact of NPEs operations and investment programmes has on resource allocation has not been fully taken into account. Finally, it appears that the NPEs in Papua New Guinea have not been used to pursue largely political objectives as often occurs in many countries. However, if government ownership continues to expand, the need for more clearly defined policies on the objectives and roles of the NPEs in the national economy will also grow.

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Table 9. Papua New Guinea: Statutory Authorities and Commercial Companies with Papua New Guinea Central Government Equity Participation

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1. For equity holdings of the ICPNG, the proportion held on behalf of the Investment Corporation Fund, an investment vehicle primarily designed for small scale Papua New Guinean investors, is shown in parentheses. 2. The Papua New Guinea Shipping Corporation (PNGSC) owns 43 per cent of the equity in Mainport Cargoes and the ICPNG owns 33 per cent.

Table 10. Papua New Guinea: Estimates of Value Added in Four Selected Nonfinancial Public Enterprises, 1973/74±1976/77

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12 Public Enterprise and the Government in Singapore TAN CHWEE-HUAT

In economic terms, the island republic of Singapore has performed remarkably well among the newly industrialised countries. Despite of its lack of natural resources, it achieved double digit economic growth rates during the 1960s and 1970s. Its economy remained resilient during the oil crisis and the general world depression. The tiny island republic has attracted world attention with its successful public housing programmes which have provided accommodation for two-thirds of its population of 2.3 million. Within a decade, massive unemployment became a phenomenon of the past and the republic now relies on foreign workers from neighbouring countries to restructure its economy. Singapore is fast developing as an international financial centre and has been acknowledged as the birthplace of the Asian Dollar Market which was started in 1968. The Port of Singapore has surpassed London and Yokohama to become the second busiest port in the world. These economic achievements have been brought about by an efficient public enterprise system which has been created since Singapore became a selfgoverning state in 1959 and further expanded when it became an independent republic in 1965. This paper seeks to bring out the fairly precise role that the government has set for public enterprises, both in policy and in practice, for facilitating their maximum contribution to progress in the national economy. It will also discuss the rationale and policy for active government participation in the economy and will examine the linkage between the civil service structure and the private sector. When the first locally elected government took office in 1959, it identified the two most urgent economic problems: the lack of decent housing for low income families and the presence of mass un employment. To ensure the success of its political strategy, the People’s Action Party was determined to solve these two economic problems, the solution of which would deter the electorate from seeking the leftist alternative;1 and public enterprises were formed, which, over the years, have been playing an increasingly important role in the national development of Singapore.

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1. Public Housing by Public Enterprise Let us start with the role of public enterprise in the housing sector. The Housing and Development Board (HDD) was set up in 1961 to solve the problem of housing shortage. With heavy government subsidies, this statutory board immediately embarked on a massive building programme to provide low-cost flats for low-income families. The flats were standard design to minimise building cost and to facilitate speedy construction. When the first five-year building programme was completed, more than 50,000 units had been built to accommodate a quarter of a million residents. By the end of the second five-year building programme, more than 600,000 persons were comfortably housed in 120,000 units. By then, the urgent need of housing for low income families had basically been fulfilled. Nonetheless, the HDB continued in its mission by improving the design of the flats and locating them in better land-scaped environment. By the end of the seventies, about two-thirds of the population of 2. 3 million have been accommodated in public housing.2 2. Industrialisation by Public Enterprises Now we turn to public enterprise activities aimed at industrial development. The Economic Development Board (EDB) was set up to implement Singapore’s industrialisation programme with the object of solving the mass unemployment problem. With assistance from the United Nations, the EDB developed industrial sites and provided the infrastructure and facilities necessary for immediate commencement of manufacturing operations. The EDB also provided financial and fiscal incentives to attract both local and foreign investors. In 1963, there were only two factories operating in the Jurong Industrial Estate which was transformed from 7,000 acres of hills and swamps. By 1968, there were 230. In 1975, 820 factories occupying 3,880 hectares of land were providing employment for 68,000 workers. By 1978, Jurong became a self-sufficient industrial town

1. The People’s Action Party has been in office since 1959. Its political strategy has been so successful that for the last three elections, no opposition party has been able to get a seat in the Parliament. For a discussion of the political development in Singapore, refer: Alex Josey, Lee Kuan Yew: The Struggle for Singapore, Angus & Robertson, Sydney, 1974; Chan Heng Chee, The Dynamics of one Party Dominance, Singapore University Press, 1976. 2. For detailed discussions on public housing and the HDB, refer: Singapore, Housing and Development Board Annual Reports, Singapore, First Decade on Public Housing, 1960– 1969, HDB, 1970; Stephen Yeh (ed.) Public Housing in Singapore, Singapore University Press, 1975; Jon S.T.Quah, “Singapore’s Experience in Public Housing. Some Lessons for Other New States”, in Wu Teh-Yao (ed.) Political and Social Change in Singapore, Institute of South-east Asia Studies, Singapore, 1975, pp. 113–154.

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complete with housing facilities and social and recreational amenities for its residents. As of 31st March 1979, its 902 factories, were providing 82,000 jobs for the Singapore working population.3 Besides the preparation of industrial infrastructures and the provision of factories, the EDB was also responsible for investment promotion, development financing, project evaluation and industrial research. By 1968, this statutory board had become so complex that it was necessary for new organisations to be formed to take over some of the functions in order to maintain operational efficiency. The Jurong Town Corporation (JTC) was set up to manage and further develop Jurong Industrial Estate and other minor industrial estates located throughout the Republic. The industrial financing function of the EDB was transferred to the Development Bank of Singapore which was newly incorporated as a public limited liability company in which the government subscribed to 49% of the equity capital. The International Trading Company Limited was formed to absorb the EDB’s Export Promotion Centre, develop export markets for locally manufactured products and obtain cheaper raw materials for Singapore’s industries through bulk purchasing from the world markets. The industrialisation programme proved successful and unemployment in Singapore became a phenomenon of the past. By the 1970s, the economy began to experience a shortage of labour. It became necessary for the Republic to shift the emphasis in its development strategy. To increase productivity and to upgrade technology became the objectives in the next phase of industrialisation. Again, public enterprises played a major role. As a response to the new situation, there was further decentralisation within the EDB. In 1972, the National Productivity Board (NPB) branched out to become a separate entity with the objective of assisting industries to increase their productivity. In 1973, the Industrial Research Unit within the EDB became another statutory board, the Singapore Institute of Standards and Industrial Research (SISIR). Its aim was to upgrade technology through the provision of technical expertise and facilities to industries and to serve as an agency for technology transfer. Another division, the Engineering Industries Development Agency, was incorporated as a wholly-owned government company. The EDB proper consolidated its resources to specialise in investment promotion, with overseas offices in Europe, United States and other industrial countries.

3. For detailed discussions on industrial development in Singapore and the EDB, refer: Singapore, Economic Development Board Annual Reports, Jurong Town Corporation Annual Reports; Lee Soo Ann, Industrialisation in Singapore, Longman, Australia, 1973; Helen Hughes and You Poh Seng, (eds.), Foreign Investment and Industrialisation in Singapore, University of Wisconsin Press, 1969.

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3. The Statutory Board As an organisational form, the autonomous statutory board was effective for implementing development programmes, as evidenced by the achievements of the HDB, EDB and JTC. Their success has stimulated the formation of other statutory boards which were set up or spun off to provide the supporting services and facilities for economic development. The supply of electricity, gas and water is now provided by the Public Utilities Board (PUB) which was formed in 1963 to take over the functions from the former City Council. The PUB has ensured that industrial growth would not be curbed by supply shortfalls. The Port of Singapore Authority (PSA) was transformed from the former Singapore Harbour Board in 1964. Since then, it has greatly expanded and modernised port facilities and now caters for container shipping. In 1970, Singapore surpassed the Port of London to become the fourth busiest port in the world. In 1981, it became the second busiest port in terms of tonnage. Telecommunication facilities have also been expanded by the Telecommunication Authority of Singapore (TAS) which was formed to merge the Singapore Telephone Board and the Telecommunications Department in order to streamline operations and to reduce redundancy. To develop Singapore as a financial centre, the Monetary Authority of Singapore (MAS) was established in 1971 to centralise all agencies and departments dealing with monetary matters in the Republic. Many international financial institutions have responded to the incentives provided by the MAS, and have set up operations in the Republic. These include most of the top banks in the world, the merchant banks, discount houses, money brokers, insurance and reinsurance companies. Singapore now ranks fourth in the world in terms of the number of banks represented, next only to London, New York and Hong Kong.4 In 1972, the Post Office Savings Bank (POSB) became a statutory board independent of the Postal Services Department. Since then, its new board of management has adopted an aggressive strategy in marketing and a multidimensional approach in its investment policy. Its wide network of branches collects more saving deposits than all the saving accounts of commercial banks in Singapore. With its huge deposit base, the POSB has provided loans to other statutory boards and government companies. More recently, it has diversified into international financial activities by going into joint ventures with other financial institutions.5 4. Equity Participation by Government Industrial development in Singapore was further stimulated by the government participating in equity capital in many companies. Through the holding companies, the most important of which is Temasek Holdings, the government

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has equity investment in more than fifty companies, with a total paid up capital of S$ 426 million.6 Besides, the EDB went into joint ventures with investors, both local and foreign, in setting up the industries. After the DBS was incorporated in 1968, it took over the development financing functions of the EDB and continued to participate actively in the equity capital of companies as well as providing loans and guarantee. The Development Bank of Singapore (DBS) is a joint venture in which the government holds 49% of the equity capital through Temasek Holdings. The other shareholders are mainly commercial banks and other financial institutions. The company is listed on the Singapore Stock Exchange and its shares are open to public trading. Since 1968, the DBS has been expanding and diversifying its activities. By December 1979, it incorporated 18 wholly-owned subsidiary companies which are mainly engaged in real estate and financial development operations. It has also gone into joint ventures with the private sector in more than 60 other companies, engaged in a wide range of business activities. The total investment as at 31 December 1979 amounted to S$ 128 million.7 The DBS has been very active in the Asian Dollar and Asian Bond Markets and has played a major role in developing Singapore as an international financial centre. Another partially-owned holding company of the government is the Intraco (International Trading Company) which was incorporated in 1968. The Government holds 26% through the Temasek Holdings while the DBS owns another 15%. The other shareholders are mainly manufacturers, trading companies and institutions in the private sector. The Intraco is also listed and traded on the Singapore Stock Exchange. The Intraco has also gone into joint ventures with the private sector in more than 20 other subsidiary companies, most of which are engaged in a diversified range of manufacturing and trading operations. The extent to which the government is financially committed, through equity contributions, is illustrated in Table 1 by industry groups. The enterprises are free to tap other sources of funds but many prefer to deal with the DBS, which is itself partly owned by the government.

4. Tan Chwee-Huat, Financial Institutions in Singapore, Singapore University Press, 1978, pp. 2–5. 5. For example, the POSB has gone into joint venture with the Banque Nationale de Paris to form a merchant bank. 6. Other government holding companies are Sheng Li Investments, MND Holdings, and more recently, Helicon Holdings. See also, Quek Peck Lim, “Temasek: More Than Meets the Eye”, Business Times, 7. Development Bank of Singapore Annual Report, 1979.

Table 1. Equity Participation by the Government in Public Enterprises by Major Industry Group, 1977

Source: Compiled from reports of individual companies.

5. Ramu Sugar Ltd. had not yet commenced operations as of 1979. However, it was the intention of the Government at that time for Ramu Sugar to have a monopoly in domestic markets for most raw and processed sugar. Protective tariffs were to be used as necessary to ensure the monopoly. Although the Government owned all of Ramu Sugar, it planned to encourage private sector participation.

5. Public Enterprises and the Government The public enterprise system in Singapore consists of business and economic enterprises directly or indirectly owned by the gov eminent. The system comprises: (a) statutory boards, (b) wholly or partially-owned holding companies, (c) wholly-owned and partially-owned subsidiary and associate companies. Statutory boards are autonomous semi-government organisations established to perform specific functions laid down by special legislation passed by Parliament. They are organisations separate from the civil service or government bureaucratic system but still remain within the portfolio of the relevant ministries. For instance, the HDB was formed by virtue of the Housing and Development Board Act in 1960 and is responsible for low-cost public housing. It is within the portfolio of the Minister for National Development. The specific Acts governing the statutory boards stipulate their functions, duties and powers, composition of the management team, relationship with the relevant ministry, provisions relating to the appointment of staff, financial resources allocation, accounting procedures and audit control. Statutory boards enjoy a great degree of autonomy and this enables them to respond more effectively to changing economic conditions and to solve problems quickly without bureaucratic red tape. However, the relevant ministers provide the policy guidelines and approve major financial decisions and corporate plans. Government companies are enterprises incorporated under the Companies Act, just like any private commercial enterprise. Most of these companies are owned or controlled by the government through holding companies which may be wholly or partially owned by the government. Among the four wholly-owned government holding companies, Temasek Holdings is responsible for equity investments of the Ministry of Finance and MND Holdings for those of the Ministry of National Development; Sheng Li Investments is vested with those of the Ministry of Defence while the recently-formed Helicon Holdings is associated with the Ministry of Education.8 As holding companies, their main function is to exercise overall control on the subsidiary companies which may be wholly owned or joint ventures. Statutory boards may also form subsidiary companies. While most statutory boards have been formed to provide developmental infrastructures and services, government companies have been incorporated for direct gvernment participation at the corporate level. In these companies, the government, by virtue of its status as a shareholder nominates some high ranking civil servants to on the board of directors. The importance of the companies to the government is usually reflected in the prominence and influence base of 8. At the time of writing, the government was in the process of incorporating another major company to be responsible for its investment operations.

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these nominees. It is common for some of these prominent nominees, especially the permanent secretaries (the highest rank in the Singapore civil service) to sit on the boards of several companies. Some of them may be concurrently members of statutory boards. This type of interface or overlapping provides an important linkage between government ministries, statutory boards, government companies and the private sector. Through such overlocking directorships and interface with the private sector also, the government has managed to influence and co-ordinate the pattern and pace of economic growth.9 A typical example of the interlocking relationships between the government and the private sector may be illustrated by the Port of Singapore Authority’s Board of Management which comprises a chairman and eight members. In 1975, it was chaired by a senior civil servant who had held responsible positions in other statutory boards before. (For example, he was formerly the chairman of the Housing Development Board). He was also, concurrently, the chairman of the Development Bank of Singapore and a director of several other government companies and mixed enterprises. Among the eight members were three representatives from government ministries: from Communications, from National Development (who was also on the board of the HDB) and from Finance. These are the three ministries directly concerned with their planning, construction and financing of port development. Among the other members is a nominee from the National Trades Union Congress to which the Portworkers’ Union is affiliated. The leaders in the Congress are closely associated with the leaders in the ruling People’s Action Party and several of them are also Members of Parliament. The other members in the Port of Singapore Authority board were from the government-owned Neptune Orient Lines and from Intraco, the state trading company. There were two representatives from the private sector: from Shell Petroleum and from Interocean EAC Agencies. This group represents the major users of the port. Active participation by the relevant government ministries and strong representation by end-user government companies and private sector enterprises at the highest level of management of the Port of Singapore have facilitated cross-fertilisation of ideas from varied view-points and enhanced the efficiency of the Port. A typical composition of the board of directors in a mixed enterprise may be illustrated by that of the Development Bank of Singapore. Being the most important single mixed enterprise in which the government owns 49% of the capital, the Bank’s board of directors includes the most prominent civil servants. For example, in 1978 there were six government nominees, among whom were the Accountant General, the Attorney General, three permanent

9. Lee Soo Ann, “Role of Government in the Economy” in You Poh Seng and Lim Chong Yah (eds.), The Singapore Economy, Eastern Universities Press, 1971.

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Source: Development Bank of Singapore, Annual Report 1979. Notes: 1. He was also chairman of the government-owned Singapore Airlines. 2. He was also a director in the Economic Development Board. 3. He was formerly chairman of the state trading company, Intraco. 4. Post Office Savings Bank is a government-owned statutory board. All the permanent secretaries listed above are also directors in several other public enterprises.

secretaries, and the chairman of the government-owned Post Office Savings Bank. One of these was also chairman of the state-owned Singapore Airlines. Both he and the Accountant General were directors of the government holding company Temasek Holdings. Another of the permanent secretaries was also in the Economic Development Board and yet another was the former chairman of the state trading company, Intraco. Shareholders from the private sector were represented by leading local and foreign bankers. The composition of the board

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of directors of the Development Bank of Singapore as of 31 December 1979 is shown above. From the illustrations above, we can observe several important relational features in the public enterprise system in Singapore. Top civil servants have been appointed to hold many directorships in statutory boards, government companies and mixed enterprises; and in this way government policies are implemented and co-ordinated. Secondly, top civil servants who have proven themselves in this system are rewarded by invitation to join the political machinery through which they can ascend to ministerial posts. It is not that they rose to ministerial positions because they, had served on the boards; but in this process some of the ministers dealing with public enterprises tend to have some experience of their decisionmaking and managerial behaviour—an advantage in evolving healthy relationships between the government and public enterprises. Representatives from the private sector are also brought in to serve on the Board of directors so that they are aware of government policies and problems of government administration. Through these interlocking directorships, the government hopes to achieve the desired control, influence and co-ordination over the pattern and pace of economic growth. The main control the government has in the public enterprises is through the appointed directors in the board. The board makes its decisions in a business-like manner with regards to control of investments, prices, long-term contracts, revenue and capital budgets. 6. Necessity For Government Participation Through the statutory boards, the government has provided the necessary developmental infrastructures such as industrial estates, factory buildings, transportation network, utilities and telecommunications. However, in order to guide industrial development in line with the national economic plan in terms of emphasis and prio rity, it has been necessary for the government to be directly involved. This policy also provides feedback to the government on some of the practical problems of industrialisation. For this reason, the Singapore Government has gone into joint ventures with investors in setting up industries. This was especially important in the early years of industrialisation in order to instil confidence in the programme. During the mid 1960s, there were some doubts about the political viability of Singapore as a sovereign nation in the wake of internal political differences among the various parties in Singapore. Examples of companies set up to instil confidence during the early stage of industrialisation were heavy industries such as the National Iron and Steel Jurong Shipyard, National Grain Elevator and the Sugar Industry of Singapore. More recently, emphasis has been placed on the petroleum industry. The government has actively participated in new mixed enterprises such as the Singapore Petroleum Company, the Singapore Refining Company and the

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Source: Computed from individual company sources and data from the Department of Statistics.

Petroleum Corporation of Singapore. All these are multi-million dollar joint ventures with multinational petroleum companies. Similar new joint ventures have also been undertaken in the financial sector. Through the Development Bank of Singapore, the government participates in new financial institutions such as merchant banks, discount houses, leasing and factoring companies. Similarly, the new concept of export credit insurance was initiated by the government through the formation of the mixed enterprise with insurance companies and banks. The relative importance of industrial public enterprise in Singapore may be inferred from Table 2, which shows its contribution in terms of gross output as well as of value added, sector by sector. The most prominent sectors are shipbuilding/ repairing and iron-and-steel based industries. 7. Government Policy on Public Enterprises In terms of political ideology, the ruling People’s Action Party is a democratic socialist party. However, for economic development, it does not pursue a nationalisation programme. The rationale for such a policy was spelt out by the Prime Minister in 1965 when Singapore became an independent republic: “…The socialist has got to be realistic and practical in his approach, If you are going to have a planned economy, take over everything, plan your

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economy before you have got your technicians and your technocrats, how do you do it unless you have a really big power who says ‘Look, let me help you and train these men for you’? Whereas, if you take a more pragmatic approach and say, ‘Well, all right, let us build up these skills and this capacity for industrial production, half-socialist, half-capitalist, and let the future be decided by the next generation,’ I think you will make better progress…”10 The Singapore Government’s policy on public enterprises has been reiterated in recent years by the Deputy Prime Minister Dr. Goh Keng Swee who has been acknowledged as the economic architect behind Singapore’s economic achievement during the 1960s and the 1970s. The government does not advocate nationalisation. The rationale against such a policy is that it is only a transfer of ownership and control and does not create new wealth or increase employment or income. The government has owned industries not by taking over existing privately owned business but mostly by creating new ones. This has been done by setting up its own companies or in partnership with the private sector. The reason for such ventures in most instances was to encourage investors to take the plunge. This was especially important in the early years of industrialisation when private investors needed encouragement from the government. The early projects in the Jurong Industrial Estate belonged to this category. National Iron and Steel Mills, Jurong Shipyard, National Grain Elevator, and Sugar Industry of Singapore are examples. Later government ventures into business came about not so much from the reluctance of the private sector, which had already become increasingly confident, as to fulfil new needs which became apparent as the economy grew. The establishment of the DBS and the Intraco illustrates this.11 The guiding principle of these government enterprises is that they must operate on business lines and compete with other firms on equal terms. They are expected to make profits and if they do not come up to expectations, they are allowed to go bankrupt. Management personnel in government enterprises are recruited in the open market, both in Singapore and abroad. Terms of employment are competitive in order to attract talent. Unlike in the civil service, these employees do not enjoy the security of tenure and are dismissed the same way as those in private firms. Government enterprises in Singapore have been so successful in their competition with the private firms that in recent years there has been some public debate about the proper role of the government in industry and commerce. Sections of the business community have complained that the government is competing unfairly in business and economic activities. For example, the

10. This statement was made by the Prime Minister Mr. Lee Kuan Yew at a television interview with the Associated Press in 1965. See also, Tan Chwee-Huat, “Socialist or Capitalist?” New Directions, April 1974, pp. 24–27.

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Chinese Chamber of Commerce and Industry has submitted a memorandum to the government seeking clarification of the respective roles of the public sector and the private sector in national development.12 Although it is unlikely that the government will make an official announcement in reply to the memorandum, yet much of its policy on government participation in business has already been disclosed in ministerial speeches. Perhaps, the most explicit statement has been expressed by the Deputy Prime Minister Dr. Goh Keng Swee: “…Concern has been expressed from time to time in business circles about the threatening encroachment of government enterprises. I have explained that the purpose of government entering into business is to promote economic growth and not, except in special cases, to replace private businessmen. These special cases occur, like Singapore Food Industries, when the private sector has clearly failed to provide proper services.13 The dismal failure of private business companies is another example in which government intervention by providing a new management team became unavoidable.14 Government does not go into business merely for the fun of doing so. Businessmen who are concerned with the widening scope of government enterprises, instead of grumbling about general principles, should draw attention to specific cases where mismanagement or privileged treatment and unfair competition has occurred. Where their complaints are well grounded, remedial action will be taken. It is idle to discuss general principles because there is no book of rules which demarcates the respective spheres of private and public enterprises and it is fruitless to argue about where the limit should lie. So long as the government can substantiate its claim that these enterprises are run on business lines, receive no special privileges and are fully competitive with the private sector, that is sufficient justification for the existence and the expansion of these enterprises.”15 The policy that has been discussed so far pertains to government companies and joint ventures which compete with other companies in the market. In the case of statutory boards, the situation is different. Some of them do enjoy monopolistic rights due to the nature of their operations, especially those which provide economic infrastructures and services. Examples are the Public Utilities Board, the Telecommunication Authority of Singapore and the Port of Singapore Authority. However, this is not unique to Singapore as such monopolies are

11. Goh Keng Swee, “Government-owned Enterprises”. Speech by the Deputy Prime Minister at the INCOME Annual General Meeting on 20 June 1977. 12. Anthony Rowley, “Dynamic State Role Queried”, Far Eastern Economic Review, 28 October 1977, pp. 36–40. See also, Business Times, 20 June 1979, “Talks with Hon on Unfair Competition”.

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common in many countries due to economies of scale. Some of the statutory boards may be accorded some kind of preferential treatment such as priority in obtaining fuel and other supplies essential to their operations. Others receive concessionary loans, subsidies or other forms of financial assistance from the national budget. For example, the Housing and Development Board is subsidised in its operations of providing housing for low income families. Contributors to the Central Provident Fund may use their accumulated funds and current contributions to purchase government flats.16 Another example of preferential treatment for a statutory board is the Post Office Savings Bank where despositors are exempt from paying personal income tax on the interest they derive from these saving accounts. In recent years, there have been some public opinions expressed by the business community on some of these privileges. For example, the commercial banks have pointed out that the tax exemption privilege has made the Post Office Savings Bank more attractive than their saving accounts since the effective interest rate is much higher than what they can offer to their customers. As a compromise to this complaint, the Post Office Savings Bank has adopted a two-tier interest rate system whereby deposits of more than S$ 100,000 will receive lower interest than that offered by the commercial banks, thus discouraging large depositors from taking advantage of the tax exemption.17 So far, there have been no adverse comments regarding the subsidies given to the Housing Development Board and the privilege of allowing HDB flat purchasers to use Central Provident Fund (CPF) money to pay for their flats. However, the controversy still remains unresolved over the HUDC (Housing and Urban Development Company), a joint venture subsidiary of the HDB and the Urban Redevelopment Authority, which builds flats for middle-income families. Purchasers may use their CPF money for HUDC flats, but they are not entitled to use such funds to purchase similar flats built by private developers.18

13. The Singapore Food Industries Private Limited was set up as a result of some private caterers not being able to provide food supplies efficiently to the Ministry of Defence. 14. Dr. Goh was referring to the Singapore Bus Services Limited, in which a Government Team of Officials took over management of the bus company after the company failed to improve its services. It is now a public company listed on the Singapore Stock Exchange. 15. Goh Keng Swee, “Trade Protection and Economic Efficiency”. Speech by the Deputy Prime Minister at the First International Metalworkers’ Federation Asian Shipbuilding Seminar, 28 May 1975, Reprinted in the The Mirror, 16 June 1975. 16. The Central Provident Fund is a social security fund to which both employers and their employees contribute monthly sums. (The rates of contribution are 20% and respectively of the employee’s salary respectively.) Under normal circumstances, the accumulated funds may only be withdrawn on retirement. 17. John Tan, “POSB will reach S$ 2 Billion Deposit Base” Business Times, 13 November 1978, p. 12. 18. This problem has partially been solved when the government recently announced that with effect from 1982, CPF money may be used to purchase flats and houses built by private developers. However, the conditions for such withdrawals from the CPF have not been disclosed.

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13 Parliament and Public Enterprise in India LAXMI NARAIN

1. The Background The sovereignty of the people in India is exercised through Parliament, elected on adult franchise with a Cabinet responsible to it as its executive instrument. The Indian Parliament is constituted basically on the British model. It comprises two houses: the Lok Sabha (the house of people or the lower house) and the Rajya Sabha (the council of states or the upper house). The former with 544 members, each elected directly by about 1.25 million persons, has a five year term. The latter, which has about 250 representatives from 22 states, union territories, and a few nominated members, is a permanent house, with one-third of the members retiring every two years. As in Britain, the majority party in the Lok Sabha forms the government, which since independence (except for a brief spell of two years) has been the Congress Party. The declared objective of this Party is to ensure a “socialist pattern of society”, through rapid and progressive extension of state activity in various social and economic fields. Public enterprise (PE) dominates the Indian economic scene today, in terms of investment, persons employed, and strategic significance. Almost the whole of the energy sector—oil, electricity and coal—is controlled by PE. Similar is the case with term-finance, commercial banking, ship-building, aircraft building, life and general insurance, rail transport, locomotives and rail coaches, air transport, production of copper, zinc concentrates, lead, gold, newsprint, photographic and x-ray films, hydro and steam turbines, telephones, and teleprinters. A large part of steel, heavy engineering, machine tools, and import trade is also in the public sector. Nationalisation of industry, except for banking and insurance (both life and general), has been almost wholly the result of the government being forced to take over mismanaged and derelict units in order to avoid unemployment and loss of “valuable” production capacity; and in a few cases it has been occasioned by strategic or public policy reasons.

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The pre-eminence of PE in India is due to the government policy to expand and strengthen it, as contained in the Industrial Policy Resolutions of 1948 and 1956. The latest Industrial Policy Statement of 1980, has affirmed the direction and approach of the 1956 Resolution. PE has received support from the political parties of all shades and hues except the extreme rightist which has hardly any representation in Parliament. A significant factor of the Indian scene is a consistently stable government at the Central or Federal level, without any significant controversy about the place and role of PE. The Central government has taken a conscious policy decision not to appoint members of Parliament (MPs) on the boards of PEs1, and this has been observed almost fully. However, various state governments accommodate members of their legislatures not only on the boards of PEs but also as chairmen—as in Andhra Pradesh in 1980–81. PE has grown remarkably since independence (1947) and will continue to grow not only via massive investments in oil, coal, electricity, steel, heavy industry and other infrastructure, but also due to the transfer of mismanaged and economically unviable units to public ownership. With a heavy investment of over Rs. 240,000 million in Central autonomous corporations and companies in 1982, Parliament is naturally concerned about their efficient and result-oriented operations. Ambitious programmes of growth through PE, a weak and soft administrative system with which PEs are organically linked, inadequate managerial and technical competence within PEs, the people’s high hopes and expectations from PEs, and the idealism of democracy have all rendered an intrinsically difficult situation extremely complex. Much of the anticipated success has not been possible, considering the totality of the situation. Parliament, which is jealously assertive of its sovereignty and rights, found a lot to probe in a situation of inadequate performance of PEs all round. 2. The Restrictive Approach of Parliament Immediately after independence, Parliament decided to establish PEs in the form of statutory corporations (vide, the Industrial Policy Resolution of 1948). But it had perhaps not fully appreciated the implications of the decision. The public corporation meant a lot of self-denial by Parliament except in matters involving policy decisions, for which it was not prepared. The Damodar Valley Corporation (DVC), the first statutory corporation set up after independence in 1948 became a matter of intense controversy.2 Its autonomy was commented

1. Government Policy for Management of Public Enterprises, Standing Conference of Public Enterprises, New Delhi, 1979, Vol. I, p. M-199.

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upon adversely by the Estimates Committee.3 The other corporation set up in the same year—the Industrial Finance Corporation of India (IFC), was, at the instance of Parliament, subject to the scrutiny of a committee headed by a member of Parliament.4 Parliament’s attitude to the autonomous corporation has not been very positive and satisfactory. As early as in 1952, Prime Minister Nehru reminded Parliament that the IFC “was an autonomous body, (and) normally speaking in regard to an autonomous organisation Parliament does not interfere in its day-to-day activities”.5 In a report prepared at the instance of the Government of India, Paul Appleby observed that “there is among members of Parliament too much general and vague fear that its responsibilities are not being preserved”. In a forthright analysis of the situation be added, “Parliament is a chief citadel of opposition to delegation of powers…. Unless this Parliament accommodates itself to the needs for large action and elevates its own approach to affairs to appropriate high level of general direction, India’s future will be precarious. Parliament needs to become sensitive to the necessity of operating on a high level”.6 A.H.Hanson’s comments also support this view: “the Lok Sabha is not as yet a mature legislature, it is intensely suspicious of administrative officials and reluctant to grant them more than the minimum of discretionary powers”.7 Parliament has, by and large, not clearly distinguished the needs of the law and order administration and economic administration. Meticulous and detailed control by Parliament as regards the former is as essential as it is harmful in the latter case. The government could have pleaded with and convinced Parliament

2. In a report entitled, “The Efficient Conduct of State Enterprise”, published in 1951 by the Planning Commission, Government of India, it was stated that “all in all, if an example was needed of how not to treat an autonomous corporation, this instance (DVC) furnishes it…the corporation’s time should not be wasted in continuously having to defend it existence”, (p. 34.) 3. The Committee said: “The autonomous character of the DVC has been taken to extreme limits. The DVC has developed strange conceptions of its autonomy and tried to bypass the authority or advice of the Government”. (Fifth Report, March 1952, p. 58). See also 8th Report (May 1954) of the Estimates Committee on the DVC. 4. Estimates Committee, Third Lok Sabha, 36th Report, April 1963, pp. 1–2. The report submitted was: Report of the Industrial Finance Corporation Enquiry Committee, Ministry of Finance, New Delhi, 1954. 5. Lok Sabha Debates, 27th November, 1952. Commenting on the attitude of Parliament, H.Venkatsubbiah observed over two decades back that “when Parliament critised, it showed eagerness to discredit the agency of autonomous corporations itself and betrayed jealousy that its creature should be sharing power with itself, in howsoever restricted a sense and manner. This feeling on its part of having been cheated into parting with power has been with it in relation to all such institutions but was most intense over the DVC because of the wide field of the latter’s economic activities.” (Indian Economy Since Independence, Asia Publishing House, London, 1958, pp. 131–2.)

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of the need for a different treatment to state business enterprises, but this has not been done. The government has hardly stressed the plea of autonomy from parliamentary inquisitions, and when rarely it made such an attempt, it was not acceptable to Parliament. For example, on 15th December 1957, the then Finance Minister told the Lok Sabha, “the Finance Ministry did not run the Life Insurance Corporation. The set-up of the Corporation was such that it was neither proper nor feasible for the Finance Minister to look into its day-to-day operations”. This plea was rejected by the House and the Speaker was cheered when he said: “Whatever may be the nature of the institution—let it be an autonomous corporation, it is public money that has been invested. It will be better if some of the suspicions are cleared once and for all”. The ideal line of distinction between matters of policy and day-to-day working has not been drawn satisfactorily anywhere. Policy matters do have routine contents and day-to-day matters may have serious policy implications in some cases. Much would also depend upon the way a situation is viewed and the meaning one may read into it. The distinction cannot be emphasised except as an ideal or in a general way. Eventually, the wisdom of the Speaker and the House as a whole would be the decisive factor. As PEs have not, in general, been able to fare well, the government did not consider it wise to press for their insulation from parliamentary inquisitions, lest it give rise to public suspicion. 3. Methods of Ensuring Accountability (i) Statutory Feedback. Parliament’s statutory right to receive the annual reports along with audited accounts of PEs8 and also reports from the Comptroller and Auditor-General of India9 (C & AG) provides it with useful and valuable material for appreciating their performance and understanding their major problems. Unfortunately the annual reports are in general not adequately informative and their timely presentation also needs attention.10 The reports of the C & AG contain an in-depth analysis of a few! PEs and also an overall review of their working every year. There is scope for improvement in their coverage and analysis, so as to make them more useful for the members of Parliament. Both the annual reports of PEs and the reports of the C & AG stand referred to the Parliament’s Committee on Public Undertakings, and are not discussed as such. (ii) Approval of Investment. All investments in PEs by the government form part of the main or supplementary demands for grant approved by Parliament, as

6. Re-examination of India’s Administrative System, With Special Reference to Administration of Government’s Industrial and Commercial Enterprises, Cabinet Secretariat, New Delhi, 1956, pp. 43–6. 7. A.H.Hanson, Public Enterprise & Economic Development, Routledge & Kegan Paul, London, 1960, p. 355.

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a part of the budget of various ministries. Where the investment is Rs. 1,000 million or more, a white paper is presented to Parliament covering all its significant aspects.11 For other investments also, information on the objective, scope, capital cost, foreign participation, if any, profitability, etc., are incorporated in the budget papers. But often the days allotted to budget discussions are inadequate for discussing the demands for grant of the various ministries, and on the last of the days so allotted, all outstanding demands are voted en bloc, without any discussion. Thus, important investments can be approved without any discussion. However, much depends upon the vigilance of the MPs. (iii) Questions and Debates, (a) Questions. The first hour of every sitting of both the Houses is available for asking and answering the questions. Arising out of a question, “half-an-hour discussion” is also allowed for matters of sufficient public importance.12 This is in the nature of an extended version of the question device, though it is but few questions that get extended into this kind of a discussion. In accordance with the parliamentary procedures,13 questions relating to policy, to an act on the part of the minister, or to a matter of public interest, are ordinarily admitted, and questions which clearly relate to day-to-day administration are normally disallowed. The admissibility of questions is a matter for the Speaker to decide. The government is liberal in answering questions relating to PEs. One reason for this is that most of the PEs in India are in the form of joint stock companies created through executive rather than legislative actions. In their case, Parliament is not bound to exercise such self-abnegation as it feels morally bound to in respect of the corporations, which have been created as autonomous bodies through an Act by the legislature. V.V.Ramanadham refers to a note of the Speaker dated March 1, 1958 stating that a distinction is generally drawn between the public corporations and the government companies. While the admissibility of a question on the former may be determined by the provisions of the Act concerned, a wider latitude is allowed in the case of questions on companies.14 However, there is no study to prove

8. Section 619A, Companies Act, 1956, and provisions in various public corporation Acts. 9. Article 151 of the Constitution of India. 10. For details, see the author’s Public Enterprise in India—a Study of Public Relations and Annual Reports, S.Chand & Co., New Delhi, 1975. 11. Government Policy for the Management of Public Enterprises, Standing Conference of Public Enterprise, New Delhi, 1979, Vol. 1, p. F-128. 12. Rules of Procedure & Conduct of Business in Lok Sabha, Lok Sabha Secretariat. New Delhi, 1977, Rule 55.

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whether the distinction between the company and the corporation is reflected in the questions answered on the floor of the House. The nature of the questions asked. The ideal of parliamentary questions is that they should be restricted to an act or omission by the ministers with reference to the responsibilities and duties which vest in them. Inquisitional, detailed and too frequent questions will make PE managers measure their success in terms of not being the subject matter of parliamentary questions. Further, a PE exposed to frequent and too detailed questions is most likely to seek advice from the ministry even on minor matters so that the responsibility to explain them automatically shifts to the ministry.15 Questions have been asked to obtain information on a wide range of matters, general as well as specific. Two studies16 of the questions asked in the budget sessions of 1969 and 1974 show that the subjects most frequently covered were the same, though their order of importance varied. The subjects were: reports, enquiries and complaints; production; staff matters; policy matters; profit, loss, waste and irregularities; and proposed projects. Some of the areas which attracted less attention were: production costs; idle capacity; delays in projects; agreement for projects; and investment in PEs. General questions. A sample of questions covering all PEs from the two studies shows that they covered a wide range of subjects, e.g., (i) losses suffered project-wise, the extent of such losses, and when those projects would become self-sufficient, (ii) overstaffing, and if any survey was attempted on this issue, (iii) the total number of enterprises and their production capacity, profits and losses, (iv) losses due to subversive activities for the past three years and action taken or proposed, (v) policy of having deputationists and the number of those that got absorbed, (vi) appointment of social workers and political leaders as chairmen, and (vii) steps taken to professionalise PE managements. Specific questions. These cover a wide range and refer to matters of policy or to topics of current interest, e.g., (i) how 30,000 persons were employed in Bhilai Steel Plant as compared to 4,800 in a similar plant in Rumania, (ii) action taken to repair the blast furnace at Bokaro, (iii) investment policy of the Life Insurance Corporation (LIC) and proposed changes in it, (iv) loss suffered by the LIC due to a lockout and the number of employees affected by it, (v) amount of unclaimed money lying with the LIC, with a break-up for zones and years, (vi) overtime paid to the LIC employees, (vii) proposal to retrench staff of Indian Airlines, with break-up of staff and reasons for retrenchment, (viii) profit made

13. Ibid., Rules 32 to 54. 14. Control of Public Enterprise in India, Asia, New York, 1964, p. 111. 15. Ibid., p. 115. 16. N.N.Mallya, Public Enterprises in India—their control and accountability, National, Delhi, 1971, pp. 126–33 and Jagadish Prakash, Public Enterprise in India—a study in controls, Thinkers’ Library, Allahabad, 1980, pp. 206–18.

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by the State Trading Corporation on a particular item of export, (ix) results of drilling by the Oil and Natural Gas Commission in a particular district, (x) whether the Harvard study for profit maximisation which helped West American steel plants would be followed, (xi) the stay of a general manager in the guest house paying Rs. 2.50 per day instead of in the bungalow allotted to him. The questions seem to serve more as spot checks than as an instrument of control. Though there is always scope for improving the quality, the questions cannot be considered at trivial or relating to day-to-day working only. True, most of them do not reflect an in-depth study of PE problems and policies and are more in the nature of seeking information, but that is true even of the House of Commons.17 The questions as at present do serve the purposes of (a) ensuring some degree of ministerial responsibility to Parliament, (b) having a moral influence on the PE managers in that their actions can be questioned on the floor of the House, (c) enabling MPs to ventilate grievances against the working of PEs; and (d) giving an opportunity to raise matters of policy without raising a full debate on the subject. The content of the questions can be improved through efforts at the level of PEs and the members themselves. PE annual reports could be made much more exhaustive and informative. The government reviews presented along with the reports can also be made more detailed and relevant. MPs should be encouraged to write direct to PE chief executives to obtain a lot of information which is now asked on the floor of the House. This does not in any way affect their right to ask questions,18 but would raise the level of the questions. At present “too many inquiries are converted into questions on the floor of Parliament and often in a form not too useful”.19 Unfortunately, the practice of MPs seeking information from the PE chiefs has not picked up. Perhaps, the MPs who are more concerned about publicity prefer the floor of the House to correspondence with the enterprises. (b) Debates and discussions. Debates concerning PEs are held on many occasions. On specific issues, the procedure as laid down in the rules of Parliament has to be followed, for example, “Discussion on Matters of Urgent Public Importance”. PEs do come up for discussion during the debate on the President’s address, which reviews the activities and achievements of the government. Discussions on the budget also provide a good opportunity to the MPs to speak on the policies and performance of PEs. Debates are generally diffused and do not often contain constructive criticism, except on the part of a few MPs who take pains to study the problem. It is doubtful if the existing material available to the MPs is being put to adequate use by them. As the time allotted to each speaker is limited, unless a few specific

17. Hugh Molson described the question as “casual, capricious, superficial and inconclusive”, and Baird called it “completely ineffective”, A.H.Hanson, Parliament and Public Ownership, Cassel, London, 1961, p. 51.

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issues are taken up by a member, the contribution would continue to remain general and rambling. Debates on public corporation statutes and amendments thereto also provide an opportunity for a discussion on PEs. But such occasions are few and far between, as the number of statutory corporations is small (most PEs in India are incorporated as limited liability companies under the Companies Act) and amendments to the statutes are very few. As an instrument of accountability and control, the debates have not served much useful purpose, though the members’ observations do provide a feed back to the government and to the PEs on many matters of policy and operations. (iv) Parliamentary Committees. On the pattern of the House of Commons, the Indian Parliament has, inter alia, two standing committees, namely, the Public Accounts Committee and the Estimates Committee. The former examines the reports of the C & AG in order to ascertain that the money granted by Parliament has been spent by the government ‘within the scope of the demand’, and the latter works as a continuous economy committee and suggests alternative policies in order to bring about efficiency and economy in administration.20 For the government’s autonomous business enterprises, the functions of these two committees were combined in a new committee called the Committee on Public Undertakings (CPU), with effect from 1st May, 1964. This committee is at present the most important, meaningful and substantial instrument of public accountability of PEs in India. The inspiration for setting up this body came from Britain, where the setting up of a select committee on nationalised industries was recommended in a report after an illuminating and interesting discussion of the pros and cons of such a proposal.21 About five months after the British report, favouring the setting up of a separate committee of the House of Commons for “informing Parliament about the aims, objectives and problems of the Corporations” and not for “controlling their work”, a resolution was moved in the Lok Sabha to have a parliamentary committee “to sit all the year round specifically charged with the task of looking into the affairs” of PEs. This was followed by a decade of intermittent debates and discussions, and the setting up of a committee of the members of the Congress Party in Parliament to consider this matter.22 18. Once the Speaker told the members of the Lok Sabha: “This is not the only place where information can be obtained…. They can write to the minister. If still they are not satisfied they shall certainly come to the House. It is not as if the jurisdiction of the House is not there. The Supreme Court has jurisdiction over every case. But it comes up at a particular stage”. (Lok Sabha Debates, 23rd May 1957, Col. 1608). 19. Paul Appleby, op. cit., p. 47. 20. Asok Chanda, Indian Administration, Allen & Unwin, London, 1958, pp. 171–94. The book contains a good discussion of the evolution and working of the two committees. 21. Report from the Select Committee on Nationalised Industries, HMSO, London, July 1953. 22. For details, see N.N.Mallaya, Public Enterprise in India, National Delhi, pp. 80–89, and The Question of a Parliamentary Committee for Public Enterprises, Indian Institute of Public Administration, New Delhi, October, 1960.

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Throughout the discussions on the subject, it was emphasized that the committee should not in any way encroach upon or curtail the autonomy of PEs, and should undertake “a positive achievement audit”. The committee was not expected to be “a fault-finding body” or “a super board of management”.23 The emphasis is on efficiency and autonomy and on making PEs operate as business and commercial enterprises. Parliament wanted PEs to have flexibility and initiative, instead of being tied up in procedures, and wanted its enquiries not to become inquisitional. This ideal has not been achieved largely because Parliament did not trust the executive fully and also failed to bring adequate pressure on the government to implement the recommendations of its committees. If, for example, the repeated and basic recommendations of the committee against the appointment of secretaries of the ministries on the boards of PEs, for providing adequate tenure to board members, and in favour of laying down PE objectives clearly, had been implemented, many of the problems which PEs continue to face today might have been tackled satisfactorily. The problem lies not so much in the gap between the ideas and approach of the committee and those of the government, as in the non-implementation even of the decisions accepted by the government. Weak administration, short-term expediencies, and personal and narrow considerations are mainly responsible for this state of affairs. Constitution and functioning of the CPU. The committee is comprised of 22 members—15 from the Lok Sabha and 7 from the Rajya Sabha who are elected every year on the basis of the single transferable vote. The chairman of the committee is nominated by the Speaker from amongst the members and has always been a member of the ruling party or its ally in the House. The term of the committee is one year, though many members do get elected for another year, and a few could continue for more than two years. 24 The terms of reference, as given to the committee, do not allow it to look into matters of major government policy and of day-to-day administration. The committee is to examine PEs in “the context of autonomy and efficiency” and see “whether the affairs of the public undertakings are being managed in accordance with sound business principles and prudent commercial practices”.25 The committee has no expert assistance, except when it examines an enterprise based on a review of the C & AG. In such cases (not more than two or three in a

23. Parliamentary Supervision over State Undertakings, Report of the subcommittee of the Congress Party in Parliament (Krishna Menon Committee) New Delhi, 1959, p. 38. 24. For a list of the members of the committee and the years in which they served it, see the author’s Parliament and Public Enterprise in India, S. Chand, New Delhi, 1979, pp. 221–4.

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year) the C & AG assists the committee in its investigations as he does for the Public Accounts Committee. The committee often invites memoranda from organisations and individuals who have an interest in the subject or have expert knowledge in the area of the investigation. But there is no general invitation to the public.26 Sometimes, private individuals, or representatives of non-official organisations, or MPs, but not ministers, are invited for evidence regarding subjects under consideration by the committee.27 The committee divides itself into three or four study groups (not subcommittees) covering various sectors of PEs, with a convenor who acts as leader of each group. Its only sub-committee is the “Action-Taken Sub-Committee” which is presided over by the chairman of the committee. This sub-committee scrutinises the replies received from the government and prepares the draft report which is circulated to the whole committee. Immediately after its appointment, the committee decides on the enterprises to be covered and the subject (s) for horizontal studies. The committee can send for persons, papers and records required in connection with examination undertaken by it. With a view to making an on-the-spot study, the committee or the concerned study group, undertakes study tours of PEs under examination. No evidence is recorded during these visits, but only informal discussions are held. These tours provide the members of the committee first hand knowledge and feel of PEs under examination. All evidence is recorded in the Parliament House Committee rooms, and the representatives of the enterprise and the ministry are called at different times, to provide freedom to PEs to put before the committee their frank opinion on various issues. Though a verbatim record of the proceedings of the sittings of the committee is kept, this is treated as secret. Unlike in the U.K., it is not published. The reports. Since its inception till the end of April 1981, the committee produced 275 reports. Of these, 138 are “action-taken” reports. 119 reports deal with individual PEs, of which 8 reports by the CPU of the third Lok Sabha deal

25. Rules of Procedure & Conduct of Business in Lok Sabha, New Delhi, sixth edition, 1977, Rule 312 A, pp. 148–50. 26. Only the committee of the sixth Lok Sabha had given a public notice that it would specifically go into the grievances of those connected with or affected by the enterprise under its study. The chairman of the committee —a Marxist MP—asked persons or bodies having knowledge of the functioning of the enterprise to send him factual notes about the malpractices and irregularities relating to the enterprises under the examination of the committee. (The Hindu, Madras, 20th August, 1977). 27. For the list of persons who gave evidence before the committee during 1965–66 to 1972–73, see D.N.Gadhok, Accountability of Public Enterprises to Parliament, Sterling, New Delhi, 1981, pp. 38–9.

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with Kerala state government enterprises (the state having been under President’s rule for sometime). The remaining 111 reports cover about 60 individual enterprises, 23 being covered more than once.28 On the whole, not even one-third of the present number of PEs have been covered by the committee during 17 years of its existence. The need for a more frequent coverage deserves close consideration. One way is to increase the strength of the committee and to allow it to divide itself into sub-committees. The other approach is that instead of aiming to go into the working of individual PEs, the committee may concentrate on major issues of government policies. Broadly, the reports are of three categories: (a) Review reports, (b) Horizontal or across-the-board reports, (c) Action-taken reports. (a) Review reports. The committee chooses about 7–8 enterprises and one subject for across-the-board study every year. The choice is based on the members’ decision to review an enterprise after examining whether it was already covered by the earlier committees and how important it is to the nation and to the members personally.29 Sometimes, the Speaker may ask the committee to take up a particular subject.30 The review reports are, inter alia, based on the data supplied by the enterprise, study tour notes of the members, evidence given by the top executives and the ministry officials, and relevant reports of the C & AG. The reports have an almost standard form: historical background of the enterprise, an analysis of its organisation, management, finances, personnel and industrial relations, production and inven tory, performance and so on. Some variations exist depending upon the nature of the enterprise. (b) Horizontal or across-the-board reports. These cover a particular subject relating to a large number of PEs, e.g., financial management, personnel management and industrial relations, public relations and publicity, materials management, and foreign collaborations. These provide a fairly comprehensive picture relating to a particular subject. (c) Action-taken reports. These contain the government’s replies to the recommendations of the committee under four heads, namely, (i) those accepted by the government, (ii) those which the committee does not desire to pursue as the government’s reply is considered satisfactory, (iii) those not accepted by the government, (iv) those for which replies are awaited. Part I of the report contains comments on replies which are not considered satisfactory and where the

28. Some enterprises which attracted many reports are Hindustan Steel (7), Jute Corporation of India (7), Indian Oil Corporation (5), and Central Inland Water Transport Corporation (5). 29. For example, for the sixth Lok Sabha, the Chairman from Calcutta, presented over a dozen reports on enterprises located in his region. 30. For example, the 5th Report of the fourth Lok Sabha on import of sulphur by the State Trading Corporation.

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committee reiterates its point of view. There is no specific follow-up of this until the committee takes up the matter again. The ministries are allowed six months’ time to submit their replies. But by the time the replies are vetted, further information sought, draft report prepared, approved, sent for factual verification to the ministry, and finally presented to Parliament, it would be easily an year and could go upto 4 to 5 years, depending, among others, on the speed and attention of the parties and the subject involved. The CPU was “unhappy” over these delays and felt that they “defeat the very purpose of the reports of the committee”.31 The role played by the committee. The committee operates on a wide front and covers matters big or small, routine or fundamental, day-to-day or policy, general or specific. It does not feel itself restricted in any way. Nowhere has it said that the matter is beyond its terms of reference and cannot be considered by it. Its is a total review, evaluation, and appraisal with comments on the policies, systems and methods, whether of the enterprise, or the government or any other body. The recommendations help both PEs and the government to expedite action in various areas of policy and operation. The proverbially slow and circuitous government machinery does get a push because of the authority and status of the committee. The committee has a business-like and pragmatic approach and does not involve itself in theoretical or academic discussion. The expertise with the committee is limited, but it has the great advantage of its superior position. It can call experts to give evidence and submit memoranda and can have the help of government agencies, if necessary. The knowledge and experience of the parliamentary secretariat and of the C & AG to which it has access are also valuable. The more important aspects of the committee’s role can be considered under the following categories. (a) Counsel or advice to the government. PEs which are subsystems of the government system often have to suffer the inefficiencies, weaknesses and sloth of the system. A body like the CPU can be of great help here. For instance, it recommended against the appointment of secretaries to the government on the boards,32 for providing a minimum tenure of five years to full-time board members,33 for a successor for the top posts being designated well in advance34 and for avoiding frequent changes in the board membership,35 all of which are critical for efficient PE operations. But these recommendations, even after being “accepted” by the government are either ignored or implemented only partially. The committee would reiterate its view and emphasise its importance but the government does make serious deviations for one “reason” or another.

31. Fourth Lok Sabha, 48th Report, April 1969, p. 1.

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Another critical recommendation consistently side-tracked by the government relates to the laying down of PE objectives with clarity. The recommendation of the committee to lay down “broad principles regarding the financial and economic obligations” of PEs and present them to Parliament on the pattern of the British White Paper on Nationalised Industries, was not accepted.36 Later, after much persuasion, the government agreed to “take steps to present the paper as early as possible to Parliament”, but it has yet to see the light of the day, though about a decade has elapsed.37 The advice of the committee covers a wide range of subjects. For example, it recommended: workers’ participation in manage ment and equity;38 a study of the cost structure and cost efficiency;39 cost analysis to form part of periodical performance reviews at the ministry level, associating experts with it;40 guidelines being issued for regulating the payment of sitting fee to non-officials directors;41 action on deficiencies pointed out by the government to be followed up in review meetings held by sponsor ministries;42 an effective monitoring and appraisal system for non-production enterprises being evolved;43 MIS being made more meaningful;44 and qualifications for the directors being laid down.45 Some of the suggestions are rather vague and not specific. The committee, for instance recommended that part-time directors of PEs should, inter alia, be “conscious of the role of the public sector and possess a missionary zeal to improve the standard of management”.46 Similarly, the committee wanted the government to evolve “a system of incentives and disincentives so that all concerned, specially the management of public enterprises, would acquire a stake in the success of the public sector”.47 (b) Counsel or advice to PEs. It is provided on hundreds of matters, big or small, and on policies, programmes, and day-to-day operations. A sample from a recent report is illustrative: “develop an efficient commercial culture…the proposed incentive scheme should be introduced without further delay…aim at complete customer satisfaction…norms be evolved for inventory holding and strictly enforced…adopt a system of prompt payment of dues by customers and disincentive for delayed payment…get over the losses by an imaginative market survey and sales promotion, altering the product mix and cutting down on costs…

32. Third Lok Sabha, 3rd Report, April 1965, p. 29, 23rd Report, March 1966, p. 59 and 37th Report, March 1967, p. 51. 33. Third Lok Sabha, 23rd Report, March 1966, p. 60. 34. Seventh Lok Sabha, 8th Report, Feb. 1981, p. 2. 35. Third Lok Sabha, 28th Report, April 1966, p. 4 & Fourth Lok Sabha, 63 Report, April 1970, p. 46. 36. Third Lok Sabha, 7th Report, April 1965, pp. 4–5 & 58. 37. Ibid., 13th Report, Dec. 1965, pp. 3–4, Fourth Lok Sabha 48th Report, April 1969, pp. 2–3, Fifth Lok Sabha, 40th Report, Sept. 1973, p. 16–19, and 72nd Report, July 1975, pp. 6–7.

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analyse manpower utilisation, and deployment of labour…the board of directors should meet more frequently…the working capital is disproportionately large… avoid building up of inventory, stagger production programme…charge interest at the market rate on outstandings”.48 Horizontal reports covering major areas like finance, personnel, materials, production, industrial relations and minor matters like appointment of auditors, expenditure on hiring storage space, and expenditure on entertainment, cover a number of PEs and contain recommendations of operational and policy significance as well of a minor and routine nature. After the recommendations are accepted by the government, circular letters are sent by it to PEs for information and necessary action at their end. PEs benefit by the advice, suggestions, views and comments of the committee. This may also strengthen their hands for appropriate action within the enterprise or with reference to the government. In a developing country with a serious shortage of managerial expertise, many obvious and important areas do not get adequate attention from those in charge of an enterprise, and a constant reminder on the right course of action is needed. The strengthening of the management at the unit level is the right answer for PE problems, yet it seems necessary for an external agency to point out areas which need special attention. To the extent the committee avoids going into routine and minor matters and concentrates on significant issues, it can make a valuable contribution. (c) Comment on policy and systems. The committee provides an independent and impartial opinion on many important matters. For example, the important experiment of the holding company for improving government-PE relationships, which was not given a fair trial, was supported by the committee when it said that a holding company is an “institutionalised buffer” between the government and the management of the individual operating enterprises that is necessary to produce, inter alia, the “insulation from outside pressure on the operating companies”.49

38. Seventh Lok Sabha, 8th Report, February 1981, p. 6. 39. Ibid., 19th Report, April 1981, p. 39. 40. Ibid., 7th Report, Feb. 1981, p. 5. 41. Ibid., 8th Report, Feb., 1981, p. 6. 42. Ibid., 10th Report, Feb., 1981, p. 2. 43. Ibid., p. 5. 44. Ibid., 17th Report, April 1981, p. 66. 45. Ibid., 8th Report, Feb., 1981, p. 3. 46. Fifth Lok Sabha, 72nd Report, July 1975, p. 74. 47. Seventh Lok Sabha, 10th Report, Feb., 1981, pp. 6–7. 48. These excerpts are taken from different sections of the 19th Report of the Seventh Lok Sabha, on the Electronics Corporation of India.

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The committee questioned the advantages of a separate Pipeline Division,50 and on its recommendation the Division was merged with the Refineries Division of the Indian Oil Corporation Ltd. More recently, the committee recommended the merger of the National Dairy Development Board with the Indian Dairy Corporation “without further delay”.51 Similarly, the committee was convinced of the advantages of coal washeries’ ownership vesting with the Coal India Ltd., and it recommended their transfer from the Steel Authority of India Ltd.52 It also considered it better if the Electronics Corporation of India were to be under the Department of Electronics instead of the Department of Atomic Energy.53 It wanted a joint machinery to be set up of the Railways and coal authorities to sort out wagon availability problems. 54

Whether the suggested institutional changes are brought about or not, the recommendations attract every one’s attention to important matters, which were likely to have gone unattended. (d) Disciplinarian role. Sometimes the committee has strong views on a lapse and wants the enterprises to be specially careful in dealing with their faults, shortcomings and deficiencies. For example, commenting on poor manpower utilisation it wanted that the ratio of value added to wages be improved.55 It considered the practice of accepting post-dated cheques as undesirable.56 It deprecated the non-submission of the quarterly financial reports to the ministry, and took a ‘serious note’ of leaving large sums in the current account, which did not earn interest.57 It felt that the planning of Khetri Project “typified the way that projects should not be planned”,58 and got disturbed because the organisational structure of the enterprise “was admittedly unsuitable”.59 (e) Control and monitoring role. It is exercised through influencing decisionmaking in important areas, and suggesting new channels of control and monitoring, or improving the existing ones. It was on the committee’s recommendation that the Bureau of Public Enterprises, which is at present an important, though somewhat controversial, agency of control and co-ordination for all Central PEs, was established.60 Recently, the committee recommended “a periodical stock-taking through white papers presented to Parliament on the lines of the practice in the UK”.61 The committee has consistently felt the need to make the annual reports and accounts of PEs more informative and comprehensive and also about their presentation to Parliament in time.62 It is at the instance of the committee that a report on the working of PEs, which is a valuable reference document, is

49. Seventh Lok Sabha, 17th Report, April, 1981, p. 11. 50. Third Lok Sabha, 36th Report, March 1967, p. 10. 51. Seventh Lok Sabha, 14th Report, March 1981, p. 5. 52. Ibid., p. 38.

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presented to Parliament every year. The coverage and the contents of the report have been modified and improved on the committee’s recommendations.63 (f) Censorship and investigative role. The committee does not hesitate to censure the “offenders”, in the hope and belief that such action would streamline the administration of PEs and the government. This is of significance wherever PEs have an inadequate enforcement of discipline and have a soft approach towards delinquent and defaulting individuals. But it may adversely affect the morale of the staff if the fear of investigation and censure becomes overbearing. At least in two cases, the committee’s recommendations have led to the appointment of commissions of inquiry headed by High Court judges,64 but nothing substantial was discovered consequently. In two other cases, where the committee wanted an investigation with a view to imposing proper punishment, the services of four persons were terminated and one person resigned, in one case;65 and the matter was referred to the Central Bureau of Investigation in the other.66 However, not many investigations and prosecutions recommended by the committee resulted in enquiries and punishments. (g) Protectorship role. Autonomous PEs need protection of their corporate personality, paradoxically, against those who have envisaged and granted them the autonomous character. The danger of their being persuaded to compromise their autonomy in such a way as to forfeit their professed purpose, is serious and constant. The enterprise too often gets equated to a department of the government. A superior body like the CPU, which carries much weight, can rescue the autonomy of PEs. Though the CPU, unlike its counterpart in the UK, has not shown much regard for the autonomy of PEs,67 it has at a few places stressed that PEs should be “guided solely by commercial considerations unless there is a

53. Ibid., 19th Report, April 1981, p. 58. 54. Ibid., 17th Report, April 1981, p. 42. 55. Seventh Lok Sabha, 19th Report, April 1981, p. 39. 56. Sixth Lok Sabha, 25th Report, March, 1979, p. 35. 57. Ibid., pp. 37–9. 58. Seventh Lok Sabha, 18th Report, April 1981, p. 8. 59. Ibid., p. 18. 60. Estimates Committee, Third Lok Sabha, 52nd Report, March 1964, p. 30. 61. Seventh Lok Sabha, 10th Report, Feb. 1981, p. 4. 62. For reference see the author’s Public Enterprise in India; a study of public relations and annual reports, S.Chand, New Delhi, 1975, pp. 169–197.

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policy directive by the government to the contrary”,68 and has also emphasized this aspect with reference to specific decisions of the government and PEs.69 Impact on decision-making. It is difficult to say how far the committee keeps the PE managements on their toes or prevents inefficiency, and whether the PE behaviour pattern is distinctively influenced by the existence of the committee. In their day-to-day operations PEs do not feel so agonised about the committee as they are of government audit. The role of the committee is clearly far more positive. It emphasises an overall review rather than the “audit-objection” type of analysis. With the exception of the short-lived sixth Lok Sabha CPU,70 the committee has acted rather as a friend and guide to PEs. Further, many PEs have only a distant possibility of coverage, and, in most situations, they can plead that their current difficulties are relatable to the past and to government policy decisions. As the turnover of the top management team is heavy, the probability of those taking decisions facing the committee are remote. The committee is naturally anxious to promote effective control and purposive accountability of PEs. But the committee has not been realistic when it wanted the government directors to be “personally responsible” for any serious lapse and malfunctioning of an enterprise unless they drew “pointed attention of the Secretary and the Minister concerned without any lapse of time.”71 State Legislatures and PE. This paper is devoted to Central PEs. But 22 state governments all over the country own and operate a very large public sector— about 800 autonomous PEs with over Rs. 200,000 million of investment. A brief reference may be made here to state governments enterprises vis-à-vis state legislatures. In terms of investment, the major share is that of the Electricity Boards and the Road Transport Corporations. Most of the state-level PEs are promotional, developmental and service-oriented, the most common being finance corporations, industrial development corporations, warehousing corporations, agro-industries corporations and small scale industries development corporations. In addition, many PEs have been established for the development of the weaker sections of society and for area development. No doubt some PEs are in the field of trading, mining, manufacturing and construction.

63. Fifth Lok Sabha, 46th Report, December 1973, pp. 1–9. 64. Fifth Lok Sabha, 33rd & 35th Report, April 1973, pp. 70 & 107, respectively. 65. Seventh Lok Sabha, 1st Report, Nov. 1980, p. 10. 66. Ibid., p. 13. 67. The committee has more than once emphasized the fact that PEs have been operating as adjuncts to the ministries but the point has not been adequately stressed. In contrast to this, we have the famous report Ministerial Control of Nationalised Industries (HMSO, 1968) from the Select Committee on Nationalised Industries, where the House of Commons Committee has discussed at great length the changes in the institutional arrangements needed to preserve PE autonomy.

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Most state legislatures have a committee on public undertakings on the pattern of the Central Parliament. But these committees are far less active than the CPU, and for preparing their reports they largely rely on the reports and assistance of the Accountant General of the state rather than on their own independent indepth studies. This is mostly due to lack of expert assistance available to the committee and inadequate involvement of the legislators in the work of the committee. The reports of these committees, however, provide much useful insight into the working and problems of the state level PEs.72 4. Conclusion The need for autonomy of PEs has been neither adequately stressed by the government nor accepted by Parliament. Having created autonomous commercial enterprises, Parliament owes it to itself that the system works the way it is desired to work. Considering the great paucity of time available, Parliament should not focus attention on minor matters and on incidents of transitory interest. Nor should vague objectives which favour employees and sometimes the consumers overlook the economic and commercial objectives of PEs.73 PE-Parliament relationships definitely need much greater clarity and appreciation of the each other’s point of view than have so far prevailed. Though the existing institutional arrangements do not call for much basic change, it will be useful for both sides, the PEs and the CPU, to have a clear understanding of their respective responsibilities. Parliament and its committee should confine themselves to the areas and functions already agreed upon, and PEs should appreciate the requirements and compulsions of parliamentary control in a democratic set-up. On the whole Parliament seems to have been disenchanted with PEs as their actual performance lagged far behind the promised and the expected levels. Parliament and its committees have repeatedly expressed not only their concern, anxiety and apprehension but also their resentment and indignation at the dismal performance, improper planning, maladministration and rickety systems of several PEs. But Parliament’s indignation is meaningful to the extent it helps in improving the situation. A more positive role would lie in help ing to fortify PE

68. Seventh Lok Sabha, 1st Report, Nov. 1980, p. 4. 69. Ibid., p. 5, and Seventh Lok Sabha, 16th Report, March 1981, p. 67, and 17th Report, April 1981, pp. 12 and 57. 70. For a detailed review of the CPU of the sixth Lok Sabha, see, the author’s Parliament and Public Enterprise India, op. cit. 71. Seventh Lok Sabha, 10th Report, Feb. 1981, p. 7.

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management, and to monitor, guide, and control PE performance through effective and purposeful institutional arrangements. Parliament should concentrate on the fundamental improvements suggested by its committees and accepted by the government, for example, the professionalisation of management at the top level, top-succession planning, the laying down of economic and social objectives and effective institutional arrangements for government control and information. The CPU may consolidate its efforts undertaken over many years and have a dialogue with the executive wing of government outside and inside Parliament through the established channels. Further, it may usefully adopt the suggestion of the Administrative Reforms Commìssion74 to take up for review a group of similar enterprises together, like fertilizers, oil companies, or engineering units, so as to have a comparative view and a larger coverage. It is difficult to establish to what extent individual PE managements have improved or suffered because of parliamentary control. The latter is a part of the democratic process, and constant efforts are needed to streamline the system and improve its impacts.

72. For some examples, see Laxmi Narain (Ed.) Autonomy of Public Enterprise, Standing Conference on Public Enterprises, New Delhi, 1982, pp. 144–7. 73. V.V.Ramanadham, Organization, Management and Supervision of Public Enterprises in Developing Countries. United Nations, New York, 1974, pp. 98–109. 74. Report of the Study Team of Administrative Reforms Commission, New Delhi, 1967, p. 53.

PART III

14 A Final Reckoning MAURICE R.GARNER

“After the feast comes the reckoning!” Reader, you have been regaled with the learning and reflections of experts in public enterprise from many parts of the globe. Now the moment is approaching when it will be appropriate for you to make up your mind about the state of public enterprise today and about the issues, assumptions, and generalisations posited in the precursory essay. Certainly, it would be unbecoming in the author of that first essay to use this final essay to re-appraise the original theses, item by item in the light of the essays between, vaingloriously claiming here to have scored a bull, modestly admitting there to having registered only an “outer”, and diffidently confessing in an isolated instance—for there are limits to human contrition—to having missed the target altogether; but, for the reader who is now seeking to assimilate the intellectual fare provided, some distillation of the ideas in the preceding essays may be welcome. This, then, is that distillation, a “digestif”, as it were, to the preceding feast. Of the central importance of the enterprises’ relationships with their governments, there seems no room for doubt. Latin America testifies to it; Africa even more forcefully. In Oceania (in the guise of Papua New Guinea), the relationship admittedly seems so far to be of only nascent significance, yet it is plain from Robert Floyd’s conclusions that the seeds of the customary problems with this relationship—inadequate institutions, confused objectives, defective techniques—are already close to germination. Only in Asia, were it possible to regard Singapore as representative, would the relationship appear not to be a problem; sadly, however, in this regard Singapore cannot be taken as representative. (Though, in comparison with India and some other countries, Singapore may seem too small to point to any conclusion of general significance, the maxim of the great biologist, T.H.Huxley, “treasure your exceptions”, counsels reflection and it will be necessary to return to Singapore’s exceptional experience later in this essay.) Drawing, however, on the general experience of the less-developed countries, Leroy Jones and Gustav Papanek are able to propound a crisp summation of the issue of the relationship between enterprises and governments which, it can be asserted with confidence, is equally true for most of the developed countries: “The fundamental problem is thus to provide

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sufficient governmental control to insure achievement of intended deviations from private behaviour, whilst insuring sufficient managerial discretion to minimize unintended deviations”.1 This issue of the reconciliation of governmental control and managerial autonomy is characterised by Horacio Boneo as “the eternal problem of public enterprise”. The Issue of Efficiency What is the reason for the importance of this relationship? It is important because of its implications for efficiency—efficiency in the enterprises’ use of resources as well as efficiency in the national allocation of resources. It is again to Leroy Jones and Gustav Papanek that one turns for a pointed formulation: “are there any reasons why a public enterprise could not perform as well as a private enterprise? In theory, the answer is ‘no’, at least for large enterprises where management will in any event be divorced from control. A professional manager ought to be able to organise production so as to achieve government’s goals as effectively as those of any other stockholder. Regrettably, it does not work out this way in practice”. The preceding essays bear witness to the almost ubiquitous truth of that remark. But why should governments be content with the nonattainment of their presumed goals? Is there not in this anomaly—the anomaly of powerful governments seemingly unable to control their own creatures—a likeness to the phenomenon of sin? Thousands of years ago, prophets and holy men denounced sin in Palestine. In the United States in the twentieth century, the reverend minister preaching on sin before President Coolidge conveyed indelibly that “he was against it”. Sin is thus endlessly and universally condemned, yet, despite the certainty of eventual exposure (“Be sure your sin will find you out”, Numbers 32, 23) and the severest penalties (“The wages of sin is death”, Romans 6, 23), it survives and flourishes. So with governments in their relations with public enterprises. Sooner or later, governments must expect to have to face the consequences of their misdirection of public enterprises—in extreme instances, the consequences may even imperil their hold on power; yet conscious, seemingly, that the consequences will only emerge with the passage of time and that there may then be opportunities for imputing the responsibility to others, like sinners in the face of private temptations the people in control of governments too often prefer the present political advantage to be gained from bending public enterprises to their temporary purposes to the deferred—and, it must be admitted, often contingent—benefits to their country from adherence to a principled public policy in relation to the enterprises. Yash Ghai shows where, at the extreme, this may lead to: “Public enterprises are frequently used as a means of patronage and a source of wealth and power for political and administrative

1. The exact sense of the term, “deviations from private behaviour”, will be found in the Jones/Papanek essay.

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leaders. The managements are either too weak to be able to expose the corruption of the government or too involved in it to want to”. Where venality does not dominate, power may; as Horacio Boneo observes about a country that he regards as an exemplar of others, “there does appear to have been some bureaucratic resistance to privatization in ministries which viewed the public firms of their respective jurisdictions as important sources of political power”. Leroy Jones and Gustav Papanek are characteristically blunt: “Public enterprise is in practice perhaps the ultimate tool for providing such hidden subsidies. Political reluctance to forego discretionary use of this powerful lever explains much of the difficulty in effective reform of the public enterprise sector”. That it is not only in the less-developed countries that public enterprises may become instruments for the conferment of sectional advantage is suggested by Anicet Le Pors’ study relating to France and other European countries.2 Where public enterprises are inefficient, it is thus necessary to look on the governments themselves as one probable cause. The Need for Publicity It has long been considered an advantage of the non-departmental form of organisation that it provides some insulation for management from these malign governmental influences and so frees management to pursue commercial efficiency. The record shows that this notion, generally speaking, is illusory; governments have little difficulty in piercing the dividing veil and making their presence felt. What then is required to keep governments in check and to turn managements in the direction of efficiency? One answer seems to ibe: publicity— publicity, that is to say, for the objectives each enterprise is supposedly mandated to pursue, publicity for the interventions by governments that impinge on management’s pursuit of its objectives (not excluding those interventions that it may be proper for governments to make, such as a refusal to approve an investment programme or to sanction the raising of external finance), and publicity for management’s decision-taking and the enterprise’s eventual performance without excessive deference to the claims to commercial confidentiality. Publicity is, of course, not a universally available panacea. Whers a free press and a free parliament are absent, statutory provisions for publicity, whatever their scope, will be futile. The mere issue of press releases and reports will put neither government nor enterprises on their metal so long as the media are not free to investigate and comment upon policies and performance and so long as parliament will not criticise the responsible persons. Were the government ever to allow it, publicity would be of little practical advantage to a

2. Les Transferts Etat-Industrie en France et dans les Pays Occidentaux, by Anicet Le Pors (Notes et Etudes Documentaires, Nos. 4303–4305, 12 juillet, 1976, La Documentation Francaise, Paris, France.)

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country with an illiberal, autocratic regime. However, in countries with a free press and a free parliament, publicity can be effective in diminishing government’s propensity to intervene for selfish or unworthy motives and in counteracting any managerial tendency to complacency or irresponsibility—but there will still have to be arrangements to ensure that information is made public promptly and comprehensively and that its availability will not be left too much to the discretion of government and management. Publicity is thus an essential safeguard and discipline; but, clearly, it is insufficient by itself to ensure efficiency, as is shown by the record of countries where there is no doubt about the existence of a free press and a free parliament. Parliament, as Laxmi Narain’s essay shows, may dissipate its energies and influence by harrying the enterprises on matters of detail, trenching upon the legitimate and necessary areas of managerial autonomy, and neglecting the economic and social objectives and institutional structures that are proper to governmental control and parliamentary criticism. And there are, as the essays show, important questions of technique and, perhaps, also of form to be resolved. The issue of form relates closely to one aspect of the foregoing discussion and can be disposed of briefly, so it will be taken next. Form of Organisation “The eternal problem of public enterprise”—the reconciliation of control and autonomy—arises brusquely because of the now pretty general practice of separating public enterprises from the normal organs of government and endowing them with a non-departmental form, either as a company with share capital or as some kind of public corporation. Implied in the creation of a legally separate organisation is the assumption that its directing body will have some measure of autonomy from government and it is the automatic consequence of this autonomy that questions are posed as to its precise extent, as to the specific issues subject to governmental control, and as to the mode of resolution of differences of opinion. The fact that the enterprises are public enterprises implies that they will normally be impressed with some purpose or function of public concern and therefore be of concern to government; indeed, merely being public enterprises quite properly makes them of some concern to government. So, by separating the enterprises from the ordinary machinery of state and alienating the power of direction, governments set themselves the problem of ensuring the enterprises’ due regard for the government’s view of the public interest. As Horacio Boneo observes, “autonomy is not a value in and of itself; rather it is important to the extent that it is a precondition for efficiency in production”. This suggests that, in cases where the concerns of public policy are likely to predominate over the concern for ordinary commercial efficiency (essentially, financial performance), it may be preferable that the enterprises be organised departmentally or quasi-departmentally, rather than as companies or corporations; the government can then settle the balance between the different

270 GOVERNMENT AND PUBLIC ENTERPRISE

concerns without conflict with an external agency, will itself have immediately to provide for the financial and other consequences of the balance decided, and will be wholly accountable. Relations with government are thus not independent of the form of organisation of public enterprises, so that the form should be chosen, and revised from time to time, for each enterprise in the light of its particular circumstances. It is worthy of note that in West Germany, where relationships between government and public enterprise are, for the most part, relaxed and uneventful—a circumstance to which it is proposed to advert shortly—the railways and posts and telecommunications, activities where concerns of public policy are obviously strong, are organised in the form of departmental agencies, all other Federal public enterprises being organised non-departmentally, as is the case, for example, with Lufthansa.3 Improving Technique As for technique, the preceding essays show how much there is for study and application. A.Premchand’s essay is a reminder of the deficiencies that can persist even in a field in which it would be reasonable to expect that satisfactory techniques would most certainly have been evolved and applied—namely, in relation to budgetary control—given that, for thousands of years, mobilising funds to defray the expenditures of the state has been the perennial and, often, the most intractable problem of government and that nowadays the financial requirements of the enterprises are frequently a heavy aggravation of that problem. The deficiencies of the control are in part due to the inherent difference of approach as between governments and enterprises—the fact, as Premchand explains, that “Enterprises formulate their budgets on a need-based approach, and governments often work on a resource-based approach”; but there is more to the matter than this difference of approach. According to Premchand, governments are responsible for “institutional dualism”—i.e., the separation of the planning and budgeting functions; frequently they have inhibited their own planning and policy-making processes by failing to align the enterprises’ budgets and accounts with the national accounts; and, in the interests of giving themselves more freedom and escaping responsibility, they have often failed to provide “an indication of resource ceilings” and to be specific about the likely rate of inflation, thereby vitiating their own budgetary programmes and impairing the management of the enterprises. Premchand’s categorisation of the financial control exercised by government in the budgetary process as “tactical rather than strategic, short term in its orientation and narrow in its focus” is a crisp, 3. Generally similar arrangements apply in Austria. In France, posts and telecommunications are organised departmentally. In Sweden, whose administrative structure is somewhat sui generis, the organisational form of the railways, posts, and telecommunications (and certain other public enterprises, such as electricity and forestry) can best be described as

MAURICE R.GARNER 271

condemnatory summation of pretty general applicability. No doubt, the enterprises are not entirely averse to the control system’s deficiencies and anfractuosities (as Dr. Johnson would say); but the prime responsibility for the system lies with the governments, making it appropriate to repeat the observation already made once in this essay that “Where public enterprises are inefficient, it is thus necessary to look on the governments themselves as one probable cause”. A second area requiring urgent attention is the establishment of meaningful measures of performance. Once again, it might have been expected that the efficiency of public enterprises would have been the object of the keen and constant interest of Ministers and government departments, given the depth of popular feeling on the matter and the frequency with which Ministers align themselves publicly with that feeling; but, in practice, even the pre-condition to efficiency has not been tackled, for how is the efficiency and all-round performance of a public enterprise to be appraised and usefully criticised if no agreed standards exist against which they can be measured? Generally speaking, for public enterprises there are no common standards applicable and even the levels of performance actually achieved in other countries or other areas by enterprises in the same line of business are likely to be no more than indicative of what may be possible in parallel circumstances. More studies aimed at establishing the inter-action between circumstances and performance are certainly desirable; generally, however, the effort to establish measures of performance and objectives for a public enterprise should begin with the current condition of the particular enterprise, should aim at a reasonable degree of improvement in a stated time, and should be compatible with the resources the enterprise will have available and with the circumambient conditions to which it will be expected to conform. Readers of these essays do not need reminding of the interdependence of prices, markets, volume, costs, investment, and, therefore, of productivity, employment, borrowing, and profitability; that this interdependence is inexorable is a fact that governments, however, recognise rarely and reluctantly; whether it is the control of prices or wages, or the maintenance of employment, or the reduction of the rate of interest, whatever aspect of public policy is uppermost in its mind at a given time is likely to become a matter for intervention by government into the policies of its public enterprises, with no systematic evaluation of the consequences for the enterprises’ performance and therefore with no means for subsequently holding the enterprise properly accountable. (The essays show how the governments of Argentina and Britain, so hostile to each other in relation to offshore territories, are brothers under the skin when it comes, as Horacio Boneo puts it, to the “manipulation of

departmental agencies. Admittedly, in Britain, Canada, and the United States, posts (and railways to the extent that they are in public hands) are organised non-departmentally; in the case of the posts, in particular, it is an open question whether they will find this form satisfactory.

272 GOVERNMENT AND PUBLIC ENTERPRISE

public enterprise prices as an anti-inflationary measure”.) To provide a barrier of sorts to these impromptu interventions (by the establishment of a model clearly revealing all the inescapable interdependences) and to provide criteria by which the efficiency and performance of each enterprise can be, first, stimulated and, later, fairly assessed, a form of corporate planning seems essential. If this is accepted, the essay by David Chambers will require especially close study as it shows what the author rightly calls “the fairly severe supporting conditions for corporate planning to function” in the desired way. It seems right to stress one of these supporting conditions. Leroy Jones and Gustav Papanek declare: “A performance standard coupled with an ex-post performance audit is the first step”. Given that corporate planning is to become the means for the establishment of the enterprises’ performance standards, there must—to follow David Chambers’ formulation—be “trust between Nationalised Industries and external evaluators of their performance, notably sponsoring Ministries”. (Martin Boodhoo’s examination of the utility of a management information and control system supports the importance of this trust.) Trust, as Chambers explains, in a sine qua non because, in the determination of objectives and, therefore, of performance standards, assumptions will be incorporated, as often implied as expressed, which the event will falsify and for which the evaluating group will have to allow. If this group is not accepted by the enterprise as competent and fair, its evaluations will be disputed and, instead of promoting harmony between the enterprises and government, corporate planning will constitute a further occasion for discord.4 Competence and fairness on the part of the governmental personnel participating in the corporate planning process should not be assumed, therefore, as a matter of course but made an object of policy and attention; and this should apply, too, in the case of any institution established for the purpose of auditing the enterprises’ efficiency and effectiveness. Now, a caveat. Just as the most gargantuan banquet does not exhaust all the dishes in the cookery book, so the foregoing essays do not allude to all techniques of possible importance. Readers have, no doubt, already recognised this for themselves but, as this collection of essays is, fortuitously, “anglophone” and not “francophone”, it may be helpful to point out that no mention has been made of two notable French concepts, namely, contrats de programme and productivite globale des facteurs. (For readers temporarily forgetful of these concepts a brief memorial has been included in the essay’s Notes.5)

4. The need for trust is not confined to corporate planning. Vide, for example, Martin Boodhoo (in his essay in this book on management information systems) and John Heath in his article, “Management in Nationalised Industries” (Nationalised Industries’ Chairmen’s Group, Occasional Paper No. 2, 1980) who have both stressed the importance of mutual trust in the relationships between governments and public enterprises.

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Management Audit If the reader will permit the intrusion of a personal note, this appears the appropriate point to express regret that, with the exception of David Chambers, none of the essayists has thought it right to stress the contribution of management auditing to improving efficiency, still less to dilate upon the considerations relevant to it. Certainly, John Heath has commented on some emerging practices in Britain in the field of efficiency auditing, notably those involving members of the boards of the nationalised industries; and there is the exposition by Ivan Turk of the Yugoslav Social Accountancy Service with its extensive, interlocking system of business ratios; nevertheless, that system is essentially financial and, as the author explains, the resulting financial indicators “are not a complete model”. In a concluding essay, it would be neither seemly nor appropriate to attempt to fill an apparent lacuna in the preceding essays; but it is right to draw it to the reader’s attention. Perhaps the reader will think the small notice given to management auditing in the preceding essays is the proper measure of its importance; he should, however, first ask himself (or herself) whether those on the governmental side who have joined with the public enterprise managements in fixing objectives and settling the corporate plans are the proper persons to assess the enterprises’ performance and, more particularly,

5. Contrats de programme are a form of corporate planning. A negotiated set of quantified objectives for the enterprise are embodied in a non-justiciable agreement (a contrat) between the enterprise and the French Government in which the enterprise undertakes to achieve the objectives by a specified date and the Government gives guarantees as to its action on relevant matters such as the enterprise’s access to the capital and other financial markets for necessary funds and the scope it will be allowed for price increases. First tried out at the end of the Sixties, the concept fell into desuetude in the mid-Seventies following the difficulties caused to the French economy by the large and sudden rise of oil prices and the world recession of the time; but it was revived at the end of the Seventies. Though it is thus too early at present to make an appreciation of its success, that the French have revived the concept is indicative of confidence in its usefulness and thus of the desirability of keeping the progress of the second phase under observation with a view to profiting from the experience. Productivite globale des facteurs (P.G.F.) constitutes an attempt to establish a comprehensive measure of an enterprise’s performance and to avoid the misleading impressions about the true efficiency of an enterprise conveyed by the many conventional indicators of performance, such as output per man shift (in the case of coal-mining), thermal efficiency or rate of utilisation of capacity (in the case of the generation of electricity), or even the highly respected ratio, the return on capital employed. P.G.F. is a carefully considered scheme for a comprehensive real input/output ratio (as opposed to a monetary ratio) which compares performance in one accounting period with another (normally one year with the next) in order to show the rate of improvement or deterioration in overall efficiency. The scheme is not free from all conceptual difficulties and it makes heavy demands on the accounting services but, as with contrats de programme, its progress deserves being kept under observation, given the particular need for a valid measure of the performance of public enterprises.

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whether, even given the general policies of the government, they are the proper persons to say whether the objectives and related performance criteria were as appropriate and competently determined as the public interest demanded (for it is not only the performance of the enterprises that needs scrutiny but also the performance of the government). The Role of Competition Earlier in this essay, reference was made to the (comparatively speaking) exceptional case of Singapore as presented by Tan Chwee Huat. His essay, having described the economic successes of the island republic, asserts: “These economic achievements have been brought about by an efficient public enterprise system”; and, later on, it observes that “Government enterprises in Singapore have been so successful in their competition with the private firms that in recent years there has been some public debate about the proper role of the government in industry and commerce”. Perhaps not surprisingly given such circumstances, there is no indication in the essay of any of the tension between enterprises and governments that has justified making the relationships between them a theme of this book. The reader will wish to ponder Tan Chwee Huat’s essay to arrive at his (or her) own judgment on the situation presented and the reasons for it. One factor, however, seems to merit notice in this concluding essay. Public enterprises in Singapore are shown as falling into two classes— those essentially concerned with the infrastructure which have been, given the form of statutory boards, operating monopolistically or quasi-monopolistically, on which the influence of government is strong and direct (witness the constitution of the board of the Port of Singapore Authority) and those concerned with the second phase of industrial development which have been given the company form and where the “guiding principle of these government enterprises is that they must operate on business lines and compete with other firms on equal terms. They are expected to make profits and, if they do not come up to expectations, they are allowed to go bankrupt”, (Leroy Jones and Gustav Papanek, who, in their essay, call for the re-imposition of “capital punishment” for public enterprises, will have read this with approval.) Thus, in the case of this second class of public enterprises in Singapore, the essential discipline and stimulus to efficiency is not governmental control but competition. In such circumstances, an absence of tension between government and public enterprises is not surprising. In his essay John Heath discusses the “problems of simulating market disciplines”; but these problems, as he recognises and experience proves, can be sidestepped altogether in those instances in which full play can be allowed to the forces of competition. Where appropriate political structures and managerial and administrative psychologies exist, such as are found, for example, in their different forms in France and Sweden, a competitive environment cannot be said to be essential to a low level of friction between government and public enterprise; but the establishment of such an environment, coupled with a

MAURICE R.GARNER 275

determination to sustain it and abide by the consequences in individual instances, does seem to be accompanied by generally good relations, as the experience of West Germany shows. Competition may thus be neither a necessary nor a universal solution to the problem of relations between government and public enterprise; but its possible benefits nonetheless require periodic review. The Final Solution Privatisation—the application to public enterprise of the principle of competition in extreme form—is no novelty. In Britain, steel and long-distance road haulage were privatised in the Fifties. At about the same time, shares in Volkswagen and certain other public enterprises in West Germany were sold off to private interests. In Canada at the end of the Seventies, the British Columbia Government offered free to eligible citizens of the Province eighty per cent of its holding of shares in the British Columbia Resources Investment Corporation.6 Nevertheless, the tide of privatisation seems currently to be running in many parts of the world with unusual power, gaining strength from the way in which, at least for the present, intellectual conviction behind collectivist and welfare policies appears to have ebbed. The turn in the tide has naturally been saluted by politicians on the right—in Britain, for example, the Rt. Hon. David Howell writes: “For the first time in years, opponents of the collectivist philosophy have begun to shed some of the moral inferiority, the almost apologetic quality which has so characterised post-war non-socialist politics”.7 And the turn has been recognised also by theorists more to the left. Discussing the shortcomings, as he sees them, of post-war “neo-classical Keynesian” economics (in his view, a perversion of the essence of Keynes’ thinking) and observing that “The neoclassical Keynesian failure made opportunity for the neo-classical-monetarist revival”, Lord Balogh concludes that the deficiencies in economic understanding . of the European Social Democrats and American Democrats “gave a tremendous impetus politically to the new Conservatives who became champions of liberty, interpreted as economic laissez-faire. They were helped by economists returning all the way to the primitive, pre-Keynesian arguments for laissez-faire.8 Thus for a proper understanding, privatisation needs to be seen in the context of a fairly widespread9 shift in general political forces, as William Glade explains at the outset of his essay; but, in the same way as a tide making its way along a coast gives rise to eddies and sets complicating the task of the navigator, so, he explains, in relation to privatisation, “The assortment of contextual variations is in fact such as to suggest that no single explanation is likely to be adequate for understanding the social dynamics of every situation”. For students of public

6. Public Corporations and Public Policy in Canada, edited by A.Tupper and G.B.Doern (published by the Institute for Research on Public Policy, Montreal, 1981) at pp. 42/3. 7. Freedom and Capital, by David Howell (Basil Blackwell, Oxford, 1981) at p. 2.

276 GOVERNMENT AND PUBLIC ENTERPRISE

enterprise, therefore, there is a need to understand the particular combinations of political and economic factors that accelerate, retard, narrow, or enlarge the current of privatisation. Towards this understanding, despite William Glade’s reservations about the evidentiary base, there appears to be much in Latin American experience of wide relevance. Particularly telling is his summary: “Privatisation, then, becomes one means, though not the only alternative, for dealing with the fiscal crisis that draws together a variety of contributing factors and undermines the central process of capital formation. Its success, therefore, depends on the likelihood that private management can turn round enterprise operating efficiency sooner, or more completely, than can public management with its rather different set of constraints. Privatisation may also be viewed as a means of transferring to the private sector the onus for unpopular decisions— price increases, the sacking of employees —and hence may be resorted to on the ground of political palatability or expediency.” In view, however, of what has been said in the immediately preceding section of this essay about the possible contribution of the competitive principle to the easing of relationships between enterprises and governments, there is a special significance in William Glade’s observation: “Even where privatisation does not enter the picture, it seems almost certain that, with the growing professionalisation of their management, and in response to the circumstances discussed above, parastatal companies will generally move in the direction of, rather than away from, market guided investment and operating decisions. Increasingly, public authorities will be devising more effective and sophisticated control systems for the monitoring and concentration of their industrial, commercial, and financial concerns. Indeed, there is in principle no little similarity between the functional task confronting the corporate centre of a large conglomerate and that in which a governmental entity overseeing a complex of public enterprises must engage. Their optimizing frameworks are different and the latter may have to incorporate somewhat more complicated performance criteria into their objective functions, but the logic, and even the design, of the managerial process is essentially the same in either instance”. In the search for a solution to the problems of the efficiency of public enterprises and their relationships with government, this is a telling observation and thus a fitting envoi with which the author of this essay may take leave of his fellow-students of public enterprise.

8. The Irrelevance of Conventional Economics, by T.Balogh (Weidenfeld & Nicolson, London, 1982), pp. 52/3. That the turn in the tide may have gone beyond economics and have affected social values is suggested by the essays and discussions included in “The Welfare State in Crisis” (O.E.C.D., Paris, 1981). 9. France is an outstanding current exception to this shift.

INDEX

277

Index

Accountability of government, 19 Accountability of PEs, 168 Africa—Public Enterprises in African countries, 165 emergence of public enterprise in, 166 features of public enterprises in, 167 Committees of enquiry functioning in African countries, 192 Joint ventures with foreign transnational corporations in, 197 Boards of PEs in, 180 Appointment to the Board of PEs, 5 Argentina, Size of public sector in, 64 Public enterprise as a means of channelling subsidies in, 82 Autonomy of PEs, 24, 166, 169 Reasons for, 11 Meaning of managerial autonomy, 12

informal discussions in, 174 British Gas, corporate planning in, 54 British Rail, resource management in, 46 corporate planning in, 54 British electricity supply industry, planning and budgeting in, 44 Budgetary relationship between government and public enterprise, 21 structural aspects of, 23 three types of, 23, 24 diagrammatic representation of, 25 Budgeting issues, 31, 32 five major areas for objective, 38, 39 Budgetary control, 270 Budgeting process, 27–31 different weaknesses of, 28, 29 institutional weaknesses of, 30 Budgetary process of PEs in Bangladesh, Pakistan, Portugal, Tanzania, 27, 28

Boards of PEs, Composition of, 55 Boards of Govt. Companies, 177 Boards of public enterprises in Africa and Reasons for inefficiency, 180 Boneo, Horacio, 141 Boodhoo, Martin, J., 101 Borrowing by PEs, two schools of thought, 36, 36 Borrowing of PEs in U.K. and France, 36– 37 Brazil, privatisation in, 66 British public enterprises, 115, financing of, 117 external financing of, 117 purpose of state ownership, 118 market discipline in, 119

Capital budgeting in PEs in U.K., 44 Caribbean countries, privatisation in, 66, 67 Central Electricity generating board, 47, 48 Chambers, David, 41 Chile, privatisation in, 62, 63 Commissions of enquiry, functions of, in Africa, 191, 192 Control of public enterprises, concept of, 166, 167 distinction between control and management, 167, 168 separation of control from management, 168, 169

278

INDEX 279

forms of, 170 types of, 171 policy directives for, 172, 173, 173 control through appointments, 175 government control, 181 Control, reconciliation of control and autonomy, 268, 269 Control over employment of staff, 182 Control, financial, 183, through budget, 184 Control, deficiencies in, 270 Corporate planning in PEs, attributes of, 43 for external performance appraisal, 56 Corporate planning in PEs, 18, 19, 53 advantages of, 54 Co-ordination of government policy towards parastatal sector in Africa, 192, 193 CPRS study in U.K., 121–123

control of public enterprises in, 194– 195 Ghana, State enterprise secretariat, functions of, 181, 183 Ghana, Powers of President of Republic in, 181 Glade, William, 59 Government and public enterprise relationship, psychological factor, 5, 6 political factor, 7–11 institutional factor, 11–15 technical factor, 15 in budgetary area, 20 Government budgeting, objectives of, 21, important aspects of, 22 suggested modifications in, 26, 27

Departmental forms of organisation, 4 budget structures in, 26 Denationalisation, 61, 62

India, the extent of public sector in, 245 growth of public sector in, 246 establishment of autonomous corporations, 247, 248 methods of ensuring accountability, 249–252 parliamentary committees, 253 constitution and functioning of Committee on Public Undertakings (CPU), 254, 254 coverage of CPU reports, 255, 256 role of CPU, 257–261 International Monetary Fund, stabilisation efforts of, 70, 71 International finance corporation, private sector financing by, 73, 74

Efficiency, principles of, 9, 10, 15, 16 index for efficiency, 17 Efficiency of public enterprises, 270, 271 Egypt, functions of the Board of PEs in, 176 Equity capital, 35 Europe, workers participation in, 13 Consumerism in, 14 Financial objective, establishment of, in Britain, 16 Financial objectives, 56 Financial targets in PEs, 43 Floyd, Robert H., 200 Forms of organisation, 269 Garner Maurice, K., xvii, 42, 43, 57, 266 Ghai, Yash, 165 Ghana, directives to PEs in, 173, 173 powers of public enterprise boards in, 178

Heath John, B., 115 Holding corporation for co-ordination, 193

Japan, small scale enterprises in, 75 Jones P.Leroy, 87 Kenya, formulation of budgets in, 24 Budgeting in, 24 composition of boards in, 179 Korea South, extent of public sector in, 90 share of public sector in industrial sector in Korea and India, 91

280 INDEX

Latin America, Regulation of public enterprises in, 145 congruence between government policy and regulatory system, 145–148 different types of regulation, 149–151 principal characteristics of regulations, 152 inherent difficulties in regulations, 152 impact of regulations, 153, 154 mechanism to co-ordinate regulations, 154, 155 Laxmi Narain, 245 Less developed countries, causes for growth of public enterprises in, 87–92 circumstantial causes, 89 ideological, 90, market failure, 92 scope for intervention of government in, 92, 93 consequences of public operation in, 93 Loan capital, 35 Managerial incentives in PEs, 98, 99 Management information systems in public enterprise, 104 objectives of, 107, advantages of, 108 Management audit, 273 Marx, Karl, 2 Mexico, budgets of public enterprises in, 24 privatisation in, 65 Megawatt commitment process, 48 specific attributes of, 49 Ministerial supervision, 103 Morrison, Herbert, 2 National Economic Development office (NEDO), 115–116 National income accounts, enterprise budgets for compilation of, 27 National loan fund, external source of finance in U.K., 117 National monopolies, creation of, 10 Nationalised industries, British white paper (1978) on, 7

Nationalised industries in U.K., electricity, gas, rail, coal, 41 powers and duties of boards in, 121, 122 crises in relationship with government, 116, 117 Nationalised Industries Chairmen’s Group (NICG), 115, 116, 121 NEDO study in U.K., 124 Nigeria, composition of Boards in, 179 Non-financial public enterprises, definition of, 201 Non-financial Public Enterprises (NPE) in Papua New Guinea, 201–223 Papanek, Gustav F., 87 Papua New Guinea, 200 non-financial public enterprises in (NPE), 200 definition of NPE, 201 government ownership of selected nonfinancial public enterprises, 203 taxonomy of selected non-financial public enterprises in, 203 size and importance of non-financial public enterprises in, 203 financial performance of NPEs in, 206– 211 composition of the board of NPE in, 211, 213 capital structure of NPEs in, 214–217 economic role of NPEs in, 221–223 Performance of public enterprise, profitability, criterion,, 5 evaluation standards in 96, performance assessment, two approaches, 45 Performance appraisal, problem of, 50 characteristics of, 51, 52, 55 external appraisal, 55, 56 Performance budgeting in PEs, 26, review of, 28, 28 Peru, public enterprise in, 67, 68, 68 privatisation in, 69, 70, 83 mixed enterprises in, 73 public utility concerns, partial privatisation, 73

INDEX 281

policy of economic development in, 74 reasons for conversion to mixed enterprises, 75 agricultural sector in, 75 reforms in agricultural sector, 75 small scale enterprise in, 75 reasons for denationalisation in, 75, 75 joint ventures with multinationals in, 76, 77 rolling privatisation process in, 78–80 decentralisation of decision taking authority to PE managers in, 82 privatisation as a means for dealing with fiscal crisis, 83 Premchand, A., 20 Privatisation, 275 Publicity, 269 Public enterprise, role of, 21 role as a tool for stabilisation of economy, 21 reasons for importance of, 59 characteristics of, 166 Public enterprise, causes for growth in less developed countries, 88–93 Public enterprise, objectives in budgeting, 32 magnitude of contribution to government budget in Sri Lanka, Korea, Somalia, 32 Public enterprise pricing, 17 marginal cost pricing, 15, 16 principles for pricing and efficiency, 9, 10, 15, 16 Ramanadham, V.V., 154, 250 Relations between government and public enterprises principal problems in, 143 optimal relations in ideal regulatory system, 143, 144 Resource transfers to PEs from government, 33 three major issues in, 34 S-curve, concept of, 2 Singapore, economy of, 225 public enterprise in, 273

public housing by PEs in, 231 industrialisation by PEs in, 232 statutory boards in, 233 Public Utilities Board (PUB), 233 Monetary Authority of Singapore (MAS), 233 equity participation of government in, 234, 235 development bank of, 234 forms of organisation of PEs in, 237 composition of boards in PEs, 238 composition of the board of Development Bank of Singapore, 238 Joint ventures in, 240 table for share of PEs in the total gross output, 240 government policy on PEs, 241–244 Small scale enterprises, in third world countries, role of, 75 Subsidies, purpose of, 36 Sudan, preparation of budgets in, 26 Tan Chwee-Huat, 225 Tanzania, formulation of budgets in, 24, autonomy, 24 directives to PEs in, 173 appointments in PEs, 175, functioning of boards in, 178 budgetary control in, 184 financial autonomy of public corporations in, 184–188 annual planning in, 185 information flow for accountability in, 188–191 Turk, Ivan, 126 West Germany, public enterprise in, 8 institutional factor of public enterprises in, 12, 13, 15 relationship between government and public enterprise in, 269 White Paper on nationalised industries, 53 Workers participation in public enterprise, 13 World War II, 21

282 INDEX

X-efficiency, requirements for improving, 97–99 Yugoslavia, 13 characteristics of social enterprises in, 127 basic organisations of associated labour (BOAL) in, 127, 128 social accountancy service in, 129 indicators of efficiency with accounting statements, 132, 133 new system of interrelated indicators, 134–139 Zambia appointments in PEs in, 175 board of Zambia Industrial and Manufacturing Corporation (ZIMCO), 177 composition of Boards in, 180 control through licensing, 181 industrial development corporation (INDECO) in, 195 control of public enterprises in, 195

NOTES

NOTES