Reflecting on issues facing public enterprise management

Mar 20, 2010 Letters

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Dear Editor,
It is my considered view that the primary reason for establishing public enterprises as separate agencies outside the regular bureaucracy of government is so that they can be provided with the management capacity suited to the efficient and effective performance of their distinctive tasks.
Thus the chief characteristic of public enterprise is their authority to make independent financial, personnel, and administrative decisions in discharging their responsibilities.
There have always been both negative and positive comments on the capacity of the public sector, vis-à-vis the private sector, to deliver goods and services in Guyana, and it is in that context that I would like to reflect on some issues facing public enterprise management; issues that are not peculiar to Guyana.
The success or failure of any particular public enterprise must be judged in terms of the purpose(s) it was created to serve, and the special privileges and/or obligations stipulated by the authorised governing authority.
The legitimate question to be asked is whether a public enterprise is making a profit or operating at a loss, especially when a comparison is being made with private enterprises in the delivery of goods and services.
This aspect is of signal importance in a free and competitive market economy where public enterprises face no advantages or constraints that are not experienced by the private sector.
The question of accountability is raised even though the public enterprise enjoys relative autonomy so as to achieve a public purpose. The public enterprise must be accountable and subject to some kind of monitoring and some degree of control, established – as it were – as an instrument to execute government policies and programmes.
In many instances, elsewhere, public enterprises have been given stipulations of purpose and method of operation which make evaluation on the basis of overall profit and loss difficult, misleading – sometimes even irrelevant. A typical example may be the utility or transport service provider conceived as a public service first and a money-making operation second.
A public bus company may be required to operate routes on schedules to serve some special social or development purpose even though it is anticipated that the company will lose money. I have heard the argument that public road transport did not rematerialise as a public enterprise in Guyana, not because of any serious consideration of concomitant losses which would have had to be borne by government, but from considerations of prospective private profit by influential public figures using contrived arguments. Among the consequences are the daily horrors and frequent carnage the traveling public face for what passes as public road transport.
Development authorities and some banks are other kinds of public enterprises where the purposes are not necessarily the making of the highest possible profit or even a good profit when compared with private enterprise.
A development authority may be created to address the needs of a depressed area where the opportunities for large economic return are low, but where the need to alleviate poverty is high.
Development banks may give lower interest rates for longer periods and often for higher risk investments than commercial banks and it is mainly for those reasons that they are created.
Such enterprises are sometimes required to serve a particular sector of the economy e.g. agriculture or a selected segment of the population which is important to the national good, but may not be the best investment of money from the limited view of profit and loss. It therefore means that sometimes in the delivery of uneconomic services which are provided in the public interest, or the selling of services or products below their cost price, public enterprises operate at a loss.
These are policy issues of purpose which must (or at least should) be decided by government for each of its public enterprises and which then become the basis of evaluation. Policy issues include conditions and methods of operation which influence performance and modify standards by which they can be judged.
Special privileges may be granted which are not received by comparable enterprises in the private sector, grants or loans on terms more favourable than those available on the market, lower than customary depreciation rates, exemption from payment of the taxes which burden the private enterprise all contribute towards determining the relative success of an enterprise.
Major policy issues are usually reflected either in the desire for new funds or the disposition of generous profits through dividends or reinvestments.
Of concern is the frequent bureaucratic and political involvement in the affairs of public enterprises which extends beyond the major issues to intervention in the conduct of authorised programme activities under already sanctioned policy in the area of management.
A fundamental need of the public enterprise is access to funds and relative freedom to expend them as they are required in operations and maintenance, and to a lesser extent for expansion and investment. Because traditional bureaucracy makes it virtually incapable of performing effectively in the business world due to tight financial controls and annual appropriation procedures, it is important that public enterprises be authorised to use their revenues, and to borrow money from the government, or from the market, or both.
Governments are not unknown to put limits on borrowing; the use of revenue; size of debt; or even on profit so long as the financial capability to discharge the enterprise’s basic responsibility is preserved.
This can be achieved through representation in shareholders meetings of companies where decisions are made regarding the distribution of revenues; reinvestment of reserves; and the adjustment of prices and rates.
Limits can be placed on public corporations in terms of length of amortization and rate of new investment as distinct from normal operations.
Having said that, formal approval is still required from the monitoring administrative ministry for certain kinds of financial decisions involving new investments representing expansion and the relationship among rate/price, profit and dividend. However, it is not considered appropriate for the minister to be involved in the use of funds or the borrowing needed for regular continuing operations and maintenance.
In certain loss-making circumstances, governments make periodic appropriations or grants to sustain the enterprise which is in effect a subsidy to the enterprise.
The larger and more frequent the subsidy, the more detailed and tighter the bureaucratic controls are expected to be imposed by the finance and administrative ministries which are consulted on financial policy matters even when a subsidy is not involved.
It is assumed that the enterprise will use money effectively and efficiently to achieve stated purposes. In this regard, complete reports are required to provide information to the parliament and the public to use in their political judgment about the success and relative value of the enterprise.
Full reports serve to avoid suspicion and speculation aroused by mystery and silence and further provides for adequate planning which enable the enterprise to be properly related to the developmental programme.
Complete reports also show the costs of peripheral and uneconomic functions and conditions which make for a fair assessment of the values and justification of a subsidy, and serve as a primary source for the evaluation of the relative success of public enterprises’ work in terms of their effectiveness and efficiency.
Patrick E. Mentore

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