6 - Making Public Enterprises More Efficient

Summary

No country, developed or developing, has devised a perfect way lo manage public industrial enterprises. Even if one were found, social and cultural differences would make its blind replication almost meaningless. But there are clearly better and worse ways of managing public enterprises. (Ayub and Hegstad 1986)

…Market positions are a source of political power and government choices shape the operations of the market. Thus any analysis must begin from the understanding that there are no markets apart from politics, that markets were in fact, political creations and that political life is entangled with the workings of markets and institutions. (Zysman [1983], quoted in Aharoni [1986])

Performances of public enterprises, in both developed as well as less developed countries, have in general been disappointing. Many lose money and many are inefficient. However, profit measures do not by themselves provide an accurate picture of public enterprise performance. Not all public enterprises lose money. Some are profitable because they are managed well; others because they have monopoly positions or enjoy favourable government protective policies. The second case of efficiency is more complex and includes such issues as “whether the resources invested in a firm are being used well or optimally (productive efficiency) or whether the economy benefits as a result of the investments in the enterprises (allocative efficiency)”.

However, this article will not discuss the problems of measuring efficiency of public enterprises, important as they are. Neither will it discuss the often contentious comparisons between the efficiency ol private sector companies and public enterprises.’ Privatization and its implications for allocative efficiency have been discussed extensively elsewhere.’ The focus will instead be on commonly held measures necessary to improve public enterprise performance (productive efficiency) and on the constraints faced by many governments in implementing them.

The first section outlines those generally agreed upon determinants for efficient public enterprise performance, and the constraints. The second section links those determinants in a useful framework which illustrates the dynamics involved in environmental as well as enterprise level factors that affect the behaviour of public enterprises.