Chapter Seven
Issues in the Performance
of Public Enterprises
• The efficiency and effectiveness of the public enterprise
sector will determine the efficiency and effectiveness of
the national economy.
• Political leaders, policy-makers and planners began to view
with disappointment that they have created an
"unmanageable" monster and observed huge
underutilized capacities, low levels of productivity, inflated
inventories, non-optimum input-output ratios,
overstaffing- all resulting in heavy losses and deficits.
• On the other hand, quite a number of public enterprises
have shown excellent performances and entrepreneurial
skills and have thus proved that, given the right attitude,
systems, and people, they can do even better.
• Therefore, there is a strong awareness that
there is a genuine desire to do something
away to correct their shortcomings.
• The traditional view is that government has
entrusted certain responsibilities to the
enterprises.
• The enterprise, therefore, should be held
accountable for the discharge of these
responsibilities.
Approaches of performance evaluation
a. Traditional approach
• This view is essentially judgmental in character.
• A judgment of performance will reveal how well
or how poorly the enterprise has done, which in
turn can be used for a variety of purposes such
as for reward and punishment systems.
• It can signal whether an enterprise deserves
additional investment and additional
responsibilities.
b. Managerial approach
• Another functionally positive approach to
the need for undertaking performance
evaluation is the view as an ongoing
diagnostic instrument of performance
improvement.
• The important implication resulting from
this approach is that the most effective
evaluation is not by outside agency, but is
an internal matter of self-evaluation.
7.1 Criteria of Performance Evaluation and the
Competence Debates
• In general there is what is known as the
"evaluation dilemma".
• Public enterprises are hemmed by a multiplicity
of judgments.
• If they are profitable, they may be questioned
about their social relevance and may even be
asked at whose cost they made their profits.
• If they make losses, they may be condemned as
parasites on the nations.
• The trouble is that everybody sits in
judgment on the performance of
enterprises and each interest group has its
own expectations, and consequently its
own criteria of what good performance
means.
• This is where public enterprises pay the
price for the multidimensionality of their
responsibilities.
• Such privileges and constraints or obligations
may appear also in the process.
• Therefore, consideration of these implicitly or
explicitly stated situations should be the general
and governing criteria upon which particular
tools of performance measurement could safely
be based.
• It is not, therefore, easy to measure
the success or failure of enterprises
simply by referring to their financial
contributions alone.
• A straightforward proposition in this
regard is that evaluation criteria should
be related with the predetermined
corporate objectives.
• The yardsticks for assessing
performance should be necessarily
derived from the goals, which have
been set for the enterprise.
• It is indefensible position to ask an
enterprise to achieve one set of
objectives and then at a later stage to
judge its performance by a different
set of considerations.
• The success or failure of any particular
public enterprise must be judged in
terms of the purposes for, which it was
created to serve.
• The corporate objectives of public
enterprises are used as criteria for
performance measurement;
A) Measuring Financial and Commercial Performance:
• A generally accepted proposal to measure
the financial performance of the enterprise
is "pre-tax returns on total capital
employed".
• Examine some intermediate financial ratios
such as: gross profits to sales, sales to
capital employed, stocks to sales, and
debtors to sales.
• The ratio of sales to capital employed reveals the
turnover of capital and its "productivity".
• These ratios are "intermediary" in the
sense that they provide an explanation for
the final result, the returns on capital
employed.
• They are of importance particularly as an
internal managerial tool for locating weak
spots, diagnosing the causes of profitability
or loss and taking corrective actions.
B) Measuring Production and Productivity Performance:
• Productivity performance, as a measure of
efficiency, is unaffected by market
imperfections or artificial pricing policies
and other factors, which make profitability
unreliable measure.
• The criterion is physical in nature and
measure the efficiency with which
resources are used, the productivity of the
operations and the efficiency of the input-
output ratios.
• A starting point of this exercise is the
assessment of performance-based on the levels
of production achieved.
• These can be compared to targets and to
previous years' production.
• The optimization of the operation is reflected in
the efficient use of all resource inputs,
machines, materials, human resources and
money, and the ratio between these inputs and
the outputs.
C) Measuring Market and Service Performance:
• If a public enterprise operates in a truly competitive
environment, the assessment of its market
performance is not difficult to make.
• It is related to the enterprise's share of the market
and whether this share has remained steady, has
increased or has declined.
• Market share is a reflection of consumer satisfaction
where the consumer has a range of choices or
preferences.
• The problem of evaluating the market performance
of public enterprises in developing countries arises
because they generally do not operate in such a
competitive environment.
• The great majority of them are in monopoly or semi-
monopoly positions and even where there is a
semblance (appearance) of domestic competition,
there is likely to be protection from foreign
competition.
• Public enterprises are required to use a commercial
type of accounting system known as "cost" or
"management" accounting, that will adequately
show not only cash expenditures and position, but
also other elements of cost assignable to each
function of an enterprise.
• Therefore, management accounting is largely used
as a major tool to evaluate and measure the
performance of public enterprises.
• The excellence of management accounting is of
great importance to determine the success or failure
of a public enterprise.
• In the first place, it is a tool of good internal
management because by any analysis of costs, it
shows the efficiency or inefficiency in the
organization and the success or failure of a program.
• In the second place, management accounting is the
basis for accurate analysis and reporting on actual
costs, so that the components of uneconomic
programs, services or methods or standards
imposed by the government can be shown and
separated from the financial success or failure of the
central operation.
• This would help not only to show the financial status of
the enterprise, but also provides reliable and informative
reports to the government for further decisions it will
make in the future.
• Now, the question that follows will be that, "who
evaluates the performance of a public enterprise and how
competent is the evaluator?"
• Many countries assign to the government comptroller the
function of overseeing the performance of the
commercial audits.
• In other case, a separate government agency is created to
conduct such audits, as exemplified by Ghana's State
Enterprise Audit Organization, Tanzania's Audit
Corporation, and Ethiopia's Audit Service Corporation.
• In still other cases, the comptroller's office may assign a
private firm to undertake the audit.
7.2 Factors Affecting the Performance of Public
Enterprises
• All over Sub-Saharan Africa, the public
enterprises have not lived up to
expectations of governments or the public.
• Public enterprises have not generated the
anticipated rates of return on equity
invested, nor have they attained their non-
commercial objectives with regard to
employment generation, technology
transfers or regional development.
• The question that arises is why has this
been so?
• This legitimate question leads to an
examination of the problems the public
enterprises are facing.
• The following could be considered as the
main factors that affect the performance of
public enterprises, particularly with
reference to the poor conditions envisaged
in Sub-Saharan African Countries.
a. Distorted Price Regime (Policy)
• In almost all African Countries, public
enterprises operate under regimes of
price control.
• The pricing policies of public
enterprises were not guided solely by
the principle of profit maximization,
but under the regulation and control of
governments.
• Most of the public enterprises
produced products, which served as
inputs for other sectors of the
economy.
• It is important to remember that the
prices were kept low even below costs.
• Such a faulty pricing regime exerted a
negative effect on their performance.
b. Past Mistakes (Inappropriate Investment Decision)
• This was perhaps one of the main causes of
the current problems faced by the public
enterprise sector in Africa.
• African countries are known for their over-
investment, planning too far ahead of the
reality or the demand, wrong technical
decisions or inadequate feasibility studies
by experts.
• The feasibility repots of public
enterprises are often defective.
• Thus many Sub-Saharan African
public enterprises were established
without sufficient reflection, with
unclear objectives and few linkages
to the rest of the economy.
• Consequently a good number of Sub-
Saharan African public enterprises are
engaged in projects or activities not
sufficiently appraised in terms of technical,
economic and financial viability due to the
absence of rigorous pre-investment studies.
• A good illustrative example is the case of
Ethiopian States Farms.
• The Ethiopian Socialist Government was
notorious for making important decisions
without sound economic and technical feasibility
studies.
• Accordingly, there were many state farms, for
example, Bebeka, Shekena, Wajiro and Wama
State Farms, which were created without prior
proper economic and technical analysis.
• These defective investment decisions led to
wastage of scarce resources, without any
commensurate economic and social returns.
c. Heavy Burden of Social Overheads
• Heavy expenditures were incurred on
social overheads, such as building of
townships, schools, hospitals and
theatres.
• The prevalence of social objectives
greatly complicated the operation of
the public enterprise in Sub-Saharan
Africa by making commercial criteria
almost inapplicable.
• In Ethiopia for example, public enterprises were
expected to provide many social infrastructure
services.
• For instance, State Farms were expected to
provide clinics, health centers, transportation,
in-farm and off-farm roads, community centers,
schools, sport facilities etc.
• Obviously, provision of social benefits created
other financial burden, which in two Ethiopian
State Farms (Bebeka and Limmu) alone the cost
exceeded Birr 20 million and Birr 7 million
respectively (Itana, 1993).
d. Under Capitalization
• In present time, many Sub-Saharan African
public enterprises are found to be under-
capitalized in terms of insufficient equity
capital, either because of erosion of the
capital base by chronic losses or inflation.
• To sustain their operation, public enterprises
have had to resort to heavy short and long
term borrowing and thereby boosting up
interest expenses.
• This was especially true for farms in Ethiopia that
devoted 60% of their financial resources to cover
overhead and administrative costs.
• A drastic cut in government transfers to the public
enterprises as part of fulfilling the requirements of
the Structural Adjustment Programs and increasing
accounts receivable worsened the problems of
under-capitalization.
• The attendant under capitalization led public
enterprises to rely increasingly on commercial
borrowing to finance new investments and current
operations, and thereby building up huge arrears.
e. Political Interference
• Notwithstanding other external factors, it is the
political pitfalls that played a central role in
aggravating the economic crises for public
enterprises in Sub-Saharan Africa.
• The argument is that it is the overarching role or
the self-interest of politically powerful leaders
that created a situation where the whole
economy and the public enterprises in particular
were run as if they were personal properties of
the leaders and their immediate circles.
• The tradition is still persisting.
• In many instance, it has been found that
political interference had influenced the
decisions concerning location of projects.
• In many African Countries, the appetite for
political intervention is particularly high in
crucial areas.
• Therefore, the negative economic effects of
undue political intervention on the
performances of PEs should be treated as one of
the important problems.
f. Excessive Control and Insufficient Autonomy
• Excessive control (formal and in-
formal) over public enterprises also
thwarted the initiative of
management and it affected their
efficiency adversely.
• There are a large number of agencies
wielding control over them.
• There is the ministry concerned, the secretariat
officials, the parliament, the committee on public
enterprise supervising agency, the audit board,
the consumer council; and other committees,
appointed to look into the affairs of some of
these enterprises.
• Besides, there are local politicians who also
interfere in the day to day works of these
enterprises.
• The point is that all such controls stifle the
initiative and make the autonomy of the
management of public enterprises
nonsense in relation to performance and
efficiency considerably.
• On the other hand, the organizational
structures of public enterprises are highly
centralized and prone to excessive control.
• Consequently, important decisions influencing
the performances of public enterprises such as
new investment, pricing, employment, wages
and location are made at top levels, leaving little
or no room for micro level managers.
• Such low leverage by the management in dealing
with important issues like redundant workers,
stifling bureaucracy, cumbersome labor laws,
wage determination, placement, promotion and
transfer of workers, only result in increased cost,
low morale and low productivity.
g. World Economic Pressures
• Extra national economic forces prevailing
outside Africa usually affect public enterprises
in Sub-Saharan Africa.
• The increasing volatility of the international
economy and commodity prices that make the
management of African economies
particularly difficult in the 1980s have severely
affected the performance of public enterprises
in Sub-Saharan Africa.
• Prices of inputs, such as spare parts, oil and
capital equipment on do fluctuate from time
to time.
• Oscillations in foreign exchange affect the price
of capital equipment and raw materials.
• Therefore, since public enterprises in Sub-
Saharan Africa are highly dependent on foreign
imported inputs, such heavy dependency
poses considerable implications on their
performance.
h. Absence of Clear Objectives
• Another important problem of public
enterprises in Africa and perhaps all
developing countries is the fact that the
political leadership in these countries is
unclear as to what their publicly run
enterprises should accomplish.
• Thus in case of public enterprises their
objectives are quite ambiguous.
• This problem becomes complicated due to the
multiplicity of objectives, which are quite
conflicting in nature.
• Moreover, fulfillment of social objectives or
safeguarding 'public interest' is a vague term
that is difficult to measure its attainment.
• Under such disarray, the public enterprises of a
country fail to capture neither the economic nor
the non-economic objectives.