REPUBLIC OF THE PHILIPPINES

PROVINCE OF NORTH COTABATO

MUNICIPALITY OF MAKILALA
MAKILALA INSTITUTE OF SCIENCE & TECHNOLOGY
CONCEPCION, MAKILALA, COTABATO

Program: Bachelor of Public Administration

Course
FREE ELECT – Public Enterprise
Number/Title:
Credit: 3 Week #: 9 – 10 (May 3 – 14)
Instructor: Mr. John Martin P. Alvero

Contact Email: [email protected]

Information: Messenger: JOHN MARTIN P. ALVERO

General instruction: Read the content of the module carefully. This will help you
understand the topic for each module and will greatly help you answer the
exercises or activities at the end of each module. Each module is assigned within
a specific time period. You are expected to finish the module within the period
allotted. Should you have any queries and clarification regarding the module,
use the contact information available above. Kindly reach the instructor during
working hours from Monday to Friday. Do not forget to be courteous when
addressing your questions.

MODULE IV. THE INTERFACE OF GOVERNMENT AND PUBLIC ENTERPRISES

Overview:
Once the government created a public enterprise, there is a pressing need to
specify its relationship and define the interface. Nevertheless, the government
often has a problem in determining such relationship in definite terms. One of the
most difficult questions in the field of public enterprise is, therefore, to determine
the degree and character of its relationship with the government. In developing
countries in particular, the relationship is not formal and definite. Actually, public
enterprises in these countries are not treated very differently from government
departments and they are tightly controlled. On the other end, one may find
some instances in developing countries where public enterprises are enjoying
almost total independence and where government monitoring and control is not
effective enough. Neither of the two extremes is justifiable or consistent with the
rationale of creating public enterprises.

Too much or total control denies the corporate status of the enterprise, defeating
the very purpose for which they were created. To the contrary, too little control
will place public enterprises outside the democratic regime; hence the demand
for complete autonomy of enterprises is not fully acceptable. Whatever the
government is willing to provide autonomy of public enterprises, it still holds, and
should do so, certain prerogative and power over enterprises. What is required is
therefore to maintain the right balance between the level of interventions and
control of the government in the affairs of public enterprises and the operational

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autonomy or freedom of such enterprises. Although fixing the extent and aspects
of the relationship is the problem that lies at the heart of public enterprises'
management, optimization of the linkage can provide a sound foundation for the
success of an enterprise.

I. LEARNING OUTCOMES
At the end of this Chapter, you are expected to:
1. identify public enterprise-regulatory agencies structure and
relationships;
2. examine the role of the supervisory ministry; and
3. determine and identify the areas of government intervention.

II. TOPICS
Lesson 1: The Public Enterprise-Regulatory Agencies Structure and
Relationships
Lesson 2: Role of Supervisory Ministry
Lesson 3: Areas of Intervention

III. REFERENCES

 Ali, Jamal, “Meaning, Characteristics and Rationales of Public Enterprises”, Jigliga University,
July 2016.

IV. COURSE CONTENT

We can use an elementary model of governmental structure to depict the various

points of contacts between the public enterprise and different government
constituents as indicated in figure-1 that follows.

Figure 1. An Elementary Model of Government Structure and Public Enterprises

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Unlike the traditional hierarchical model, the government and the enterprise are
not placed only in a vertical juxtaposition (arrangement), but also in a more
constructive horizontal relationship. Public enterprises do have relations with one
or more constituents of the government in different aspects. Some of the
relationships between each government organization represented in the chart
and the public enterprise could simply be expressed in the following exemplary
stakes:

SUPERVISORY (TECHNICAL AND SECTORAL MINISTRY)

The increasing complexity of modern governments has led to the creation of a
number of ministries, which are industry-specific, technology specific, sectorial in
character and specialized in certain areas. These technical ministries make
policies for the sector, design sectorial plans, study markets and prices and guide
public enterprises functioning in the sector. The involvement of public enterprises
with the technical ministries is quite simple. It is these ministries, which perform
supervisory function over public enterprises.

MINISTRY OF FINANCE
Behaviorally, the attitude of the Ministry of Finance flows out of its national
responsibilities. Since it is vitally responsible for national financial stability and
solvency, it is natural that its prime concern is that public enterprises should be
financially viable, should provide returns from invested capital, should pay
dividends to government, and should be a major means of resource mobilization.
The voice of the ministry of finance is that of government as a shareholder. So far
as public enterprises are concerned, the ministry of finance exercises
interventionist power in areas such as:

 It has a major say in public enterprises' investment decisions

 It provides capital funds and long-term loans
 It determines the expected rate of return on investments
 It may intervene in pricing, wage and salary policies with the view of
monitoring their national impacts

MINISTRY OF PLANNING
The Ministry of planning, sometimes organized as "Planning Commission" or
"National Planning Board", has the overall responsibility of designing the national
development plan; preparing a gigantic national input-output table, and a
national matrix of economic activity. Therefore, the role and performance of
public enterprises is a matter of great concern to the ministry of planning as they
are the major, perhaps the dominant, sources and instruments for the successful
execution of the national plan. In practical terms, the influence of the ministry of
planning over public enterprises would be the following:

 Inclusion of public sector projects in the national plan

 Resource allocations for this purpose (in collaboration with the ministry of
finance)
 Monitoring of project implementation/production to ensure successful
implementation of the plan and the validity of the national input-output
table

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Behaviorally, the ministry of planning wouldn't see public enterprises as
autonomous business firms. Rather, it views them as the building blocks of the
national plan, and looks at their investments with frame of reference of social or
economic profitability at the national level, instead of a single enterprise level.

MINISTRY OF INDUSTRY
The responsibility of this ministry is to promote industrialization in the country. Since
the substantive numbers of public enterprises are in the industrial sector, the
ministry is deeply concerned about them as factors of industrialization. It affects
public enterprises in the following areas:

 Determines areas suitable for public sector investment

 It encourages or opposes new investments on public enterprises on the
basis of its assessment of domestic and international demand-supply
conditions
 It approves foreign technical collaboration and importation of technology
 It protects public enterprises against the encroachments of large-scale
foreign industries

Behaviorally, the ministry of industry may not differentiate between the public and
domestic private enterprises, rather threats both of them as instruments of
industrialization.

MINISTRY OF LABOR
The main concern of the ministry of labor is the welfare of workers. Hence it
promotes legislation for the protection of workers' rights covering issues like job
protection, working hours, hazardous employment conditions, labor disputes and
labor unions. While this ministry has no direct control over public enterprises, its
policies have major impacts on enterprises in matters such as:

 Wage negotiations and determinations

 Welfare measures, bonuses and incentives
 Disciplinary procedures and industrial disputes

Behaviorally, as champion of workers' rights, the ministry doesn't differentiate

between public and private enterprises, rather threats both as employers. But it
has a legitimate expectation that public enterprises should be a good example
by being "model employers".

MINISTRY OF COMMERCE
This ministry, sometimes called "Ministry of Foreign Trade", is responsible to preside
over the country's foreign commercial transactions, to stabilize the balance of
payments position by promoting exports and controlling imports. Although
policies of the ministry of commerce do not distinguish between the public and
private sectors, public enterprises are generally affected by the ministry's control
over:

 Import licensing
 Foreign exchange releases

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  Export promotion and quotas
 Tariff protection

In general, Figure-1 simply portrays the various points of contact between the
public enterprises and the government represented by its ministries, and implies
the multiplicity of signals coming to the enterprise from the government agencies
in various issues. In other words, a public enterprise could have relations with one
or more of the ministries in addition to the supervising agency. Each organ has its
own stake with public enterprises and demands certain requirements from its own
perspectives. Now, one can be able to see the complex situations that public
enterprises are facing with in terms of responding to this multiplicity of demands,
in terms of interpreting what the government really wants, and in terms of striving
to survive in this maze (confusion). Although relations with such agencies could
have their own effects on the success or failure of public enterprise, the most
decisive influence comes from supervising agencies. Therefore, it would be more
important to explain the roles and functions of the supervising agencies and the
aspects of interventions in the affairs of public enterprises.

TOPIC II. THE ROLE OF THE SUPERVISORY MINISTRY (AGENCY)

What are supervisory ministries or agencies, and why do we need them vis-à-vis
the activities of public enterprises in the first place? What are the fundamental
functions of these agencies? What are the major areas of supervision? These
questions need genuine answers free from any unfair bias, but with reference to
the effectiveness of public enterprises. A supervisory ministry or agency is a
controlling body or as it is sometimes described, a parent ministry. Decisions
involving government interest over public enterprises such as those of financial,
personnel, operational, and procedural policies are expressed through the
supervisory agency. This ministry or agency is commonly called upon to give
formal approval to certain kinds of decisions such as new investments or
expansion projects, prices, dividends, personnel recruitments, wages and salaries,
labor relations, and so on.

The administrative or supervisory ministry has the responsibility for monitoring and
coordinating the public enterprise attached to it. A supervisory ministry or agency
is expected to make decisions, not only to express the government's supervisory
responsibility but also to assure the consonance and harmony of the public
enterprise's activities with those of the development plans and the overall public
purpose for which it is created. Two models of the supervisory ministry have
emerged in the developing world (Praxy Fernandes 1986:41). Some countries
have attempted to establish one or a single ministry to supervise the functions of
all public enterprises like The Ministry of Production in Pakistan, The Ministry of
Public Enterprises in Malaysia, The Ministry of Industry in Egypt, and Public
Enterprises' Controlling Authority in Ethiopia. However, this model is criticized as
being impractical or ineffective to place all public enterprise under the control of
a single agency.

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The other model, which is more commonly found, is to entrust the affairs of public
enterprises to different technical or sectoral ministries. This pattern has three major
advantages:

(i) First, it is managerially containable. The number of enterprises to be

supervised is small enough to satisfy the management concept of "span of
control"
(ii) Since the ministries are "technical", they are familiar with the
technological, production, marketing and management problems of the
enterprises they control.
(iii) Since the ministry sets government policy for the sector, it is in a position
to guide far more effectively the corporate strategies of the enterprises
under its control.

The effectiveness of the system will of course depend on the nature of the
relationship between the supervisory ministry and the enterprise, the demarcation
of the roles of the two parties, the nature and content of the inter-linkage, and
above all, the ability of the supervisory ministry to function as the enterprises'
intermediary with the rest of the system. The following are generally
recommended as the guiding principles for ministerial powers in relation to public
enterprises (Mathur, 1999:83-85):

(i) The authority of the minister or officer of the government who exercises
power over public enterprises should be clearly defined. It is generally
agreed that day-to-day operations should be protected against political
interrogations and interferences.
(ii) Ministers should be concerned with securing that enterprises operate in
the public interest.
(iii) Ministers should seek to ensure the efficiency of enterprises by exercising
a board oversight of them, but should not involve in management.
(iv) The methods of ministerial control or supervision should be mainly
strategic rather than tactical; the industries can have clear idea of what
the government requires of them if they are not subject to frequent tactical
control. In other words, the supervisory ministry should be responsible for the
formulation of policy and the management should be for the
implementation of that policy, and the interaction between them should
be to facilitate the overall governmental supervision without impairing the
efficiency of the operations of an enterprise and promote decentralized
decision-making within the enterprise.
(v) The proper and fruitful supervisory control depends on the attitude and
ability of both ministers and members of the board.

These being the general guiding principles, a straightforward proposition

regarding the roles and functions of the supervisory ministry is the management
of government's reserved powers in decision-making. The range of duties or
principal functions, the scope of intervention and the points of contact of the
supervisory ministry with the public enterprise would, among others, normally
include:

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 (i) Sponsoring the creation of a public enterprise through new investment
proposals
(ii) Screening and piloting investment proposals for expansion and
diversification made by an existing public enterprise, foreign exchange
expenditure, borrowing, and distribution of profits
(iii) Approving major foreign technology contracts and joint venture
proposals
(iv) Appointing the board of directors and the chief executive
(v) Approving the salary and wage structure and the system of recruitment
(vi) Defining the corporate objectives, screening and approving corporate
plans of the enterprise, ratifying the deployment of surpluses
(vii) Conveying directives on matters of public policy or public interest
(viii) Approving, in sensitive cases and particularly in monopoly situations,
pricing policy
(ix) Monitoring periodically the progress of enterprises

The execution of some of these functions may be beyond the competence and
authority of the supervisory ministry and may involve the jurisdiction of other
ministries or government agencies.
In this case, the supervisory ministry is called upon to play an intermediary role.
Managers of public enterprises are well aware of the limitations and competence
problems of supervisory agencies. Unfortunately, even the theoretical concept of
the autonomy of public enterprises doesn't seem to have been followed in spirit
in developing countries. The supervising or controlling agency normally issues
numerous instructions on matters, which could be considered "unimportant" or
even "trivial" and should legitimately fall within the domain of the enterprise's
decision-making jurisdictions.

TOPIC III. AREAS OF GOVERNMENT INTERVENTION

Despite differences in the magnitude of the relationship between public

enterprises and the government from one environment to another, the hardcore
of government's involvement will be found in the following rightful areas or matters
(Fernandes, 1986:23-29).

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Figure 2. Basic Model of Government-Public Enterprise relations

The above model of relationship can be further explained as the government has
the right and prerogative to:

 Area-1: define the "mission" of the enterprise and to specify its goals and
objectives
 Area-2; determine and approve the enterprise's investment plans,
decisions, and major capital expenditures
 Area-3: approve, endorse and sanction the corporate plans of the
enterprise
 Area-4: nominate the board of directors of the enterprise
 Area-5: appoint the chief executive of the enterprise
 Area-6: issue directives to the enterprise on matters relating to the national
security
 Area-7: issue instructions to the enterprise on matters affecting the public
interest
 Area-8: being fully informed about the activities of the enterprise, monitor
and review its progress and audit its transactions and accounts
 Area-9: evaluate the performance of the enterprise.

Each area of government intervention is discussed separately as follows.

DEFINING CORPORATE OBJECTIVES

The starting point of the relationship between the government and the enterprise
lies in the formulation of goals. An agreement on objectives is multi-purpose in
character. For example:

 It indicates to the enterprise why it has been established and what it is

expected to achieve
 It provides a sense of direction and a base on which corporate strategies
and operational approaches can be designed
 It gives notice to the enterprise about the focus of public control
 It provides yardsticks for the evaluation of performances

APPROVAL OF INVESTMENT
Since part of the funds required for investments of public enterprises come from
the public exchequer (treasury), it is reasonable to assume that the government
will determine how and where the investment will be made. Indeed many of the
investment decisions are taken even before the enterprise comes into existence.
The prudence (carefulness) with which public investments are made has a
determining influence on the subsequent viability and performance of public
enterprises. The failure of many public enterprises is often traceable to a disastrous

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investment decisions, and the trouble with such mistakes is that they are not
remediable in most cases.

The existing practices of developing countries reveal that while some of them
tend to make public investment decisions unwisely without critically and
thoughtfully assessing the existing reality and the possible consequences, many
others do so such decisions astutely, practice high degree of sophistication in
investment planning, prioritization and analysis.

APPROVAL OF CORPORATE PLANS

The practice of corporate planning has been gaining ground among large public
enterprises in many countries. A corporate plan starts on the premise that it is
made for an organization, which has a corporate status and personality. It implies
that the enterprise, though linked to the state, has a life of its own. Generally, two
propositions can be made in this regard.

(i) Corporate planning provides an instrument for promoting the effectiveness

and efficiency of public enterprises and upgrading their performance levels
(ii) Corporate planning is the most pragmatic way of establishing a bridge
between the government and the enterprise

Corporate planning sometimes described as strategic planning, is viewed as a

prime instrument for the survival, growth and profitability of mainly large
enterprises. It has been designed previously for public enterprises in the business
environment of highly industrialized countries, not in developing countries and
expressly for the private sector. The fundamental approaches of corporate
planning can be effectively transferred to the public sector. Corporate strategies
constitute a bridge between enterprise goals and performance. The discipline of
corporate planning involves the following elements:

(i) Defining the mission: seeking for answers for the classical questions such
as "what business are we in?" and "what do we want to achieve in the long-
run?"

(ii) Designing long-term strategies: in developing a cohesive corporate

strategy, we need to determine first the life cycle of the activity and the
timeframe of our thinking. When we make investments and take decisions
with long-term implications, we make assumptions about prices, markets,
technology, world trade, and government policies. The timeframe of
corporate plans is related to the nature of the investments and their natural
life cycle. Within the timeframe, the enterprise has to develop the political
and economic scenarios.

(iii) Developing functional plans: for practical purposes corporate strategies

are designed on a functional basis with different perspectives in mind. A
series of plans are thus created in the main functional areas including
investment, finance, production, marketing, materials and human
resources, each of which is critical to the enterprise. For example,
investment planning is the heart of corporate planning that determines the

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 profile of the enterprise, while financial plan is a corporate goal to produce
financial surpluses and provide a return on invested capital. To achieve this
desirable result, the enterprise would need to look into the elements such
as capital structure, planned levels of profitability, pricing policy, cost-
effectiveness, and utilization of surplus when making financial planning.

(iv) Dealing with inter-linkages: the enterprise has relationships and inter-
linkages with external organizations, agencies and interests although
corporate plan is mainly internal to the enterprise. Indeed the health,
success, and image of the enterprise will largely depend on the
optimization of these external relationships, managing the inter-linkages.

(v) Articulating the performance evaluation criteria: perhaps one of the

unresolved questions in the organization and management of public
enterprises is how to fairly evaluate their performances. Therefore, the
widely acceptable proposition is that the designing of corporate plans is
the most effective way of resolving the question of performance evaluation
of public enterprises. Embodied in the plan are the needs to develop
evaluation criteria. However, performance evaluation is so complex, which
entails the need to analyze them in detail in a separate operational
exercise.

NOMINATION OF BOARD OF DIRECTORS

As it will be discussed in Chapter Four in detail, nomination or appointment of
board members of public enterprises is the prerogative of the government as one
of the intervention areas. Perhaps, the whole issue of public enterprises' success
will largely depend on the manner of the appointment of the board of directors.
Studies show that the composition of boards of public enterprises in developing
countries reflects that political compulsion outweighs managerial necessities. The
success or failure of a public enterprise may rest on the strengths or weaknesses
of the board of directors. In other words, the commitment and capacity of the
board of directors will determine principally the fate of public enterprises.

APPOINTMENT OF CHIEF EXECUTIVE

As important as, and perhaps even more critical than selection of board
members, is the appointment of the chief executive of the enterprise. For this
reason, the government is very curious designating individuals to the post of chief
executive. If the prerogative of the government in appointing the chief executive
is not exercised with due care and professional integrity, the sad state of affairs in
public enterprises will be imminent.

DIRECTIVES ON SECURITY MATTERS

Directives on security matters are one of the areas of reserved for government
decision-making; the right to issue directives on matters relating to national
security and the right to issue instructions on matters affecting public interest is
unquestionably left to the government. Government may instruct a public
enterprise, for example, to produce certain goods vital to the country's security.
Directives or instructions could take in both formal and informal or unofficial
manner. For example, directive to a public enterprise may come from the

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government not to retrench surplus staff, not to fire a particular individual, to
purchase machinery from a particular country, to make contract with a particular
company, and so on.

DIRECTIVES OF PUBLIC INTEREST

The most ambiguous area is the right to issue directives on matters of public
interest. The term "public interest" is so elastic that in practice it could mean
anything, enabling the government to intervene continuously and
comprehensively in the affairs of public enterprises. No matter, however, how
much directives in the name of public interest might be unnecessarily flexible;
government does it often and it still affects public enterprises significantly.

OBTAINING INFORMATION, MONITORING AND AUDIT

The persistent cry of public enterprises' managers that they are unable to function
because of constant inquisitions and interrogations by the government may
perhaps point to a situation of over-control and inadequate managerial
autonomy. Whatever managers of public enterprises might say, the government
needs to obtain adequate information from them, monitors their operations and
performance, and undertakes different types of audits upon them such as
statutory audit, transaction audit, propriety audit, and performance audit.

PERFORMANCE EVALUATION
Government always wants to make sure that public enterprises are doing right by
evaluating their performances, and this is in fact the ultimate concern that lies at
the very objectives and motives of creating them. As it will be discussed in the
next chapter, performance evaluation of public enterprises is another
problematic area of government's involvement. In other words, although
governments do have common practices in terms of evaluating the performance
of public enterprises, the problem of how to assess such performances seems to
defy solutions. There are very few countries, which set yardsticks by which
performance of public enterprises would be measured, develop criteria of
evaluation, and employ methodologies and mechanisms. Hence, public
enterprises are hemmed in by a multiplicity of judgments. Furthermore, regardless
of the universal interest and practice of the government in evaluating the
performance of public enterprises, there can be little hope of improving their
performances unless there is an agreement on what constitutes "good
performance".

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