CHAPTER ONE

1. MEANING, CHARACTERISTICS AND RATIONALES OF PUBLIC

ENTERPRISES
1.1. INTRODUCTION

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

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

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

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

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

The second period refers to those post-war years (equally known as the period of independence)
that range to the mid of the 1980s. Following the attainment of the independence of most colonized
countries, national governments have tried to adopt rational development administration to redress
previous situations and ensure rapid economic growth. Consequently, the newly independent states
determined themselves to intervene in major industry, mining and other expansive and profitable
ventures. One of the strategies adopted by governments of developing countries, notably Africa,
in the development effort is the use of public enterprises. They incorporated the establishment,
expansion, and operation of public enterprises in their medium and long-term development plans
assigned with diverse objectives. As a result, there has been a proliferation of public enterprises in
all African countries in terms of number, scope, variety and complexity of operation as well as in
terms of the amount of resources allocated to them. Indeed the economic development through
the process of industrialization and commercialization had been of tremendous appeal to many
developing countries during this period.

The third period was marked as the period of "economic stabilization" or "economic recovery"
measures, a proposition made developed countries and multilateral donor agencies to developing
countries that took place since the mid1980s. Notwithstanding the vigorous measures of many
developing countries in terms of nationalizing foreign and private-owned enterprises, establishing
new ones, and expanding nationalized and newly created public enterprises, most of them didn't
secure the level of development they aspired. They rather got even worse than the pre-
independence situations. In other words, the realities after independence exhibited not only highly
vulnerable and dependent economies but also increased financial indebtedness and persistence of
mass poverty, which gave rise to political instability, social unrest and civil wars in a number of
developing, notably African, countries.

Donor countries and agencies associated the developmental problems and exacerbating poverty
situations envisaged in most developing countries to wrong policies and strategic myopias
employed by governments of developing countries. With such belief, donors propose the economic
stabilization and recovery programs notably the "Structural Adjustment Program-SAP" to be
implemented. Donors set these propositions as a prerequisite or precondition for developing
countries to fulfill in order to obtain loan or any form of assistance. Part of the SAP is privatization
and reforming of public enterprises. As a result, many developing countries have been
implementing massive privatization and various reform measures regarding public enterprises
since the 1980s.

1.2. The Meaning of Public Enterprise

1.2.1. Reasons that justify the need for a Definition of PE

Before attempting to define the term "public enterprise" or "state-owned enterprise", it would be
worthwhile to start with explaining why there is the need for a definition. There are at least three
reasons that justify the need obtaining a definition. First, we do require a definition for statistical
purposes. Researchers engaged in studying the public enterprise sector have had difficulties to
delimit the boundaries or the frontiers of the public enterprise sector, because the scope of
institutions termed as "public enterprises" are not demarcated along a "universal" definition. For
example, a study made by "African Association For Public Administration and Management -
AAPAM" (1987:5) indicated that exact and up-to-date figures of public enterprises in Africa are
hard to come by, as there is no consensus among African countries as to what constitutes a public
enterprise. Indeed, what may be considered as public enterprise in one country may not be so
regarded in another country.

Secondly, definition is becoming important for client or stake identification purposes. Institutions
such as that of a separate division of the World Bank, and the International Center for Public
Enterprises in Developing Countries, which are involved in providing training, consultancy,
information, loans and technical assistance to public enterprises as well as in conducting researches
on public enterprise need to identify clearly who their clients are before they get into actual
operations. Thirdly, we do require a definition for conceptual purposes. That is, we need a
definition to understand the rationale for and the objectives and goals of the public enterprise to
be able to analyze, the ramifications and implications of the concept - its organization, style,
strategy, and interface or relationship.

1.2.2. The Definition of Public Enterprise

All those points that justify the need for defining the term "public enterprise" would lead us to
overview the following lists of working/purposive and conceptual definitions provided by different
authors or institutions. There is no internationally accepted definition of a public enterprise. Each
country is thus able to establish its own definition of the term. Public enterprise may be held to
include a wide spectrum of institutions ranging from semi-government or purely regulatory
agencies to industrial and commercial undertakings. A variety of terminologies are used when
referring public enterprises. The use of a number of terminologies to describe these institutions
has been the sources of confusion. The terms that are used interchangeably may include public
corporations, public enterprises, public undertakings, public industries, state-owned enterprises,
state enterprises, government enterprises, government companies, nationalized industries (used in
UK), parastatal organizations (used in African countries), and so forth.

George Gant (1979:104) described public enterprises as "government organizations established

for the purpose of engaging in defined commercial or business types of economic activities,
although they are occasionally established for non-business purposes (such as scientific research
foundations or technological institutions), to escape the shackles of the existing bureaucracy".
The definition given by the expert group and used on the training systems and curriculum
development for public enterprise management, (Common Wealth Secretariat, 1981:vi), could be
reads as:

"Any commercial, financial, industrial, agricultural, infrastructural, or promotional

undertaking owned by a public authority either wholly or through majority share-
holding, which is engaged in the sale of goods and services and whose affairs are
capable of being recorded in balance sheets and profit and loss accounts. Such
undertakings may have diverse legal and corporate forms, such as departmental
undertakings, public corporation, statutory agencies established by acts of
Parliament, or joint-stock companies registered under the company law"

This definition excludes government administrative or regulatory agencies, and obviously those
NGOs, civic society organizations, religious institutions and private enterprises. However, there
are different views, which define public enterprise as "a bureaucratic institution with corporate
form that is created or brought into existence by a general purpose government to perform a
specific or specialized public function". Mathur (1999:17) acknowledges the definition given by
Friedman as the most practical one and quoted him as saying:

"Public enterprise is an institution operating a service of economic or social

character on behalf of the government but as an independent legal entity, largely
autonomous in its management, though responsible to the public through government
and parliament and subject to some direction by the government, equipped on the
other hand with independent and separate fund of its own..."
The definition emphasizes the fact that public enterprises are engaged in an activity of commercial
nature on behalf of the government. It is this engagement of the government in activities of
commercial nature that gives public enterprises special characteristics as distinguished from the
traditional conception of governmental functions. In some literatures, the term public enterprise is
taken to comprise corporations, parastatals, councils, commissions or other government agencies
set up by specific acts of legislature, and companies over which government has controlling
interest. President Roosevelt described a public enterprise in the most precise manner, as it is "an
institution clothed with the power of the government but possessed of the initiative and flexibility
of private enterprise".

1.3 THE CHARACTERISTICS OF PUBLIC ENTERPRISES

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

The characteristics of public enterprises are highly influenced by several factors like ideology,
politics, history, level of economic development etc. For instance, in countries that operate socialist
type economies, the general characteristic of public enterprises is to stand against the private sector
and the trend appears to elimination or substantial reduction of the private sector. In some of these
countries, governments have embarked on nationalization or public ownership of vital areas of
production. On the other hand, in countries, which operate a mixed economy, public enterprises
appear to be concentrated in the traditional and well-established fields of public utilities as well as
the so-called "commanding heights" of the economy, leaving a substantial proportion of activities
in other fields to private entrepreneurs.

The core of the concept "public enterprise" suggests an organization, which has two dimensions
or characteristics: the enterprise dimension and the public dimension. If one of these dimensions
is missing, the body cannot be described as a "public enterprise". The implications of each
dimension will be examined in the following manner.
 I. The Public Dimension

There are four basic elements in this dimension; i.e. public ownership, public purpose, public
control, and public accountability.

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

The enterprise dimension implies the notion of a business firm. The following determine the
enterprise character in general:

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

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

These being the general characteristics that describe the enterprise dimension.

1.4 REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES

As Gant (1979) pointed out, the principal reason for the emergence of the public enterprise sector
in a country is the government's decision to intervene directly and actively in the economy in order
to achieve the objectives of its development plan. Most frequently, decision on the creation of
public enterprises is based on the analysis and findings that show the institutional needs for
development, which the government believes the private sector will not meet, at least by itself. In
other words, the rationale for setting up public enterprises is that they are better instruments for
promoting developmental goals.

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

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

(i) The inability or unwillingness of the private enterprise to be involved in the production of
certain goods and service that are not rewarding in view of financial profitability, but which
are considered socially desirable in view of the state; or the inability of the private enterprise
to engage in ventures with long term gestation periods, expecting long-term benefits over
investment,
(ii) Strong need of the government to intervene in those sectors that have decisive influence on
the structure of the economy, and are considered to be basic and strategic to national
development. In view of the fact that there is a need to guide economic development in the
light of national priorities, the private sector alone should not be allowed to venture in sectors
that are found to be crucial to over-all development.
(iii) The pressure of international competition in the home or external market that would
inevitably yield negative consequences like closure of infant private industries, monopolistic
trends by big companies or industries, and the resultant prices escalation upon consumers.

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

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

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

(A) Economic:

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

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

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

So, whatever the reasons and motivations are, government intervention in the economy is a general
practice today allover the world, with in fact varying degrees.

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

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

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

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

1.5 OBJECTIVES AND ROLES OF PUBLIC ENTERPRISESS

There are immense objectives, which lead governments to engage actively in the economy through
the means of public enterprises such as; to gain control of the economic monopoly, to ensure
equitable distribution of wealth, to capture profits for investments or development programs, to
manage foreign trade, to create yardstick of performance for the private sector and so on. Some of
the explicit objectives of public enterprises assigned by the government as a means of achieving
macro-level objectives may fall under those three major reasons for public ownership (economic,
social, and political) mentioned in section 2.3 above, and may include among others, the following:

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

These are, inter alia, the national/macro level objectives that the government intends to achieve
through the means of public enterprises, which fall under the economic, social and political
motives. In addition to macro/national objectives, public enterprises do have also corporate/micro
objectives that would contribute for the accomplishment of such macro-level objectives. Hence,
we need to examine the specific identification and articulation of the corporate goals of each public
enterprise. Corporate objectives may be classified into as many as at least four types, namely;
financial and commercial objectives, production and productivity objectives, marketing and
service objectives, and developmental objectives. A brief discussion of these objectives is
presented as follows.

(A) Financial and commercial objectives

As Fernandez (1986:52) noted, the early history of public enterprises in developing countries
reveals a cloud of uncertainty and ambiguity about their financial goals. The idea of "profit" was
associated with private enterprises. The goals of public enterprises were mainly seen in terms of
the nation-building posture or attitude. Profitability in purely financial accounting terms seemed
an irrelevant thing. Public enterprises were considered to be pioneers of social and economic
changes and the engines of growth. Although this has been the initial intent behind the
establishment of public enterprises, financial and commercial soundness became an important
consideration eventually. The case for financial stability, commercial viability and adequate return
on investment rests on the following compulsions.

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

Therefore, the creation of public enterprises should be associated with the declaration of intent that
they are expected to be financially viable, appraised in terms of their capacity to yield a reasonable
rate of return on total capital employed. What is the reasonable rate of return then? In terms of
pure financial logic, the answer is simple and clear in that, the rate of return should not be less than
the opportunity cost of capital.

(B) Production and productivity objectives

Production planning is an integrated managerial discipline, which takes into account productive
capability or installed capacity, availability of inputs and market situations. What is suggested in
line with this is that the determination of production goals and strategies of production should be
essentially an integral managerial exercise. The focus should be on productivity goals rather than
production targets, a shift from a static concept of absolute levels of production to a more dynamic
concept of productive use of assets and resources.

This in turn implies "capacity utilization", to mean, the major productivity goal should be to step
up the utilization of capacity (for example machine) until it reaches the optimum level. Another
and equally important aspect of productivity is "consumption coefficients"- the ratio of usage of
raw materials to outputs. "Labor productivity" is a far more sensitive area of setting productivity
goals, which will depend on many other factors such as training, work norm, and so on. "Total
factor productivity" is the most rational and sensible measure of productivity. The productivity of
machines, materials, workforce, and money is a highly integrated network-each of which
influencing the other. Because of this, sophisticated methodologies have been designed to calculate
"total factor productivity". Multiple inputs and outputs can be weighed at factor costs so as to
determine whether a public enterprise has met its productivity objectives or not.

(C) Marketing and service objectives

The real effectiveness of the enterprise can also be assessed in light of its performance vis-à-vis
its main constituency- customers, consumers or clients. Designing marketing and service goals can
be better understood by determining the marketing position of each enterprise.

(D) Developmental and social objectives

Achievement of financial viability and generation of surplus and thereby contributing to resource
mobilization is by itself a major developmental responsibility. Besides, the productive use of assets
and the optimized use of resources is a matter of both economic and social concern of public
enterprises. However, the accomplishment of social objectives is an obscure (unclear) and often
misunderstood subject. Public enterprises are expected to be, for example, model employers, to
take long-term developmental views of research by investing in such areas, to support the
environment, and so on. Consumer satisfaction is also considered as the discharge of an important
social obligation. The conclusion one might arrive at could be that public enterprises, which are
financially successful, are good performers in terms of achieving development and social
objectives.