CHAPTER THREE

3. THE INTERFACE OF GOVERNMENT AND PUBLIC ENTERPRISES

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 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.

3.1PUBLIC ENTERPRISE-REGULATORY AGENCIES RELATIONSHIPS

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-2 that
follows.
 Figure-2: An Elementary Model of Government Structure and Public Enterprises'
Relationship

President
or
Prime Minister

Cabinet

Agriculture Commerce Labor Supervisory Finance Planning Industry

Ministry Ministry Ministry Ministry Ministry Ministry Ministry

Auditor Public Enterprise Parliament or

General Parliament Committee

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:

A) 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, sectoral in character, and specialized
in certain areas. These technical ministries make policies for the sector, design sectoral 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.

B) 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, 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

C) 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
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 at single enterprise level.

D) 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.

E) 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".

F) 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
 Export promotion and quotas
 Tariff protection

In general, Figure-2 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.

3.2 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.

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:

(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.

3.3 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).

Figure-3 Basic Model of Government-Public Enterprise relations

AREA
Defining Corporate Objectives

Approval of Investments
Approval of corporate Plans
Nomination of Board of directors
Appointment of Chief Executive
Directives on Security Matters
GOVERNMENT
Directives on Public Interest PUBLIC
Obtaining Information, monitoring and Audit ENTERPRISE
Performance evaluation
Wages and Salary Policies
Pricing and Marketing Policies
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.

(i) 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

(ii) Approval of Investments

Since 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 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. Figure-4 depicts the sequences
of processes, which the investment cycle demands. In general, government approval of
investments on public enterprises follows rigorous application of the normative investment cycle
portrayed in Fuger-4.

Figure-4: The Investment Cycle

National Development
Feedback and Development Strategies
Review Goals

Choice of
Project Instruments
Implementation

Screening and Investment

Approval Criteria
Feasibility Mobilization
Studies and of Resources
Project Reports

(iii) Approval of corporate Plans

The practice of corporate planning has been gaining ground among large public enterprises 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 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 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.

(iv) Nomination of Board of Directors

As it will be discussed in Chapter Five in detail, nomination or appointment of board members of

public enterprises is the prerogative of the government as one of the nine 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.

(v) 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.

(vi) Directives on Security Matters

Directives on security matters are one of the nine 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 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. As a whole,

(vii) Directives on 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.

(viii) 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.

(ix) 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 Chapter Seven latter, 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".

3.4 MAJOR ISSUES IN GOVERNMENT AND PUBLIC

ENTERPRISE RELATIONSHIPS
The core issues, which concern the government and a public enterprise may include policy,
financial and personnel management issues. These issues are determinant in many respects for
which reasons require government decisions and complete understanding on the public enterprise's
side.

A) Policy Issues

There are, for example, policy issues of "purpose", which should be decided by the government
for each of its enterprise and which then become the basis for evaluation. There are also other
important policy issues with respect to the conditions and methods of the operations of public
enterprises, which influence their performances as well as issues of setting standards by which it
should be judged. Policy determinations about privileges or advantages not available to
comparable private enterprises affect the operation of a public enterprise and are factors in judging
its relative success.

Moreover, a typical policy issue is that, governments impose special obligations upon public
enterprises to prescribe standards of operation, which have implications on their efficiency and
effectiveness measured in terms of profitability as practiced by the private sector, although those
standards are perhaps well justified in public purpose. The enterprise might be expected for
example to serve as a model employer by providing comparatively high standard housing,
healthcare, educational facilities and services to its employees. It might be also required to give
priority of employment for selected groups, to establish worker's unions having weights in
management and program decisions, to follow ponderous procedures in the termination of
employment, to operate plants and branches at sites not feasible from the production and
distribution points of views, etc.

Often, these policy issues do affect the productivity and efficiency of public enterprises, but need
to be clearly indicated in government decisions and communicated to the respective enterprises. It
is important that these major policy issues of public enterprise purpose and operating method be
resolved because they are crucial to the efficiency and effectiveness of each enterprise and are
basic to the judgment of relative success. It is imperative that the establishing instrument (charter)
be clear as to the purposes and operating conditions of enterprises. However, any founding charter
must necessarily be relatively general in its terms so as to allow desirable flexibility in the conduct
of designated activities, which permit adjustment to changing circumstances as time goes on.
Unfortunately, it has been evidently seen that the bureaucratic and political involvement in the
affairs of public enterprises is not limited to the major policy issues but extends to authorized
program activities of management. For the successful conduct of public enterprises, therefore, the
sound resolution of major management issues (financial and personnel management) are in the
same category of importance as the solution of major program policy issues.

B) Financial Management Issues

One of the fundamental needs of public enterprises is the issue of financial management, access to
funds and freedom to expend, as they are required in operation, maintenance, expansion and
investment. The annual appropriation procedures and the tight financial controls of the traditional
bureaucracy make it virtually incapable of performing effectively in the business world. It is,
therefore, important that public enterprises be authorized to use their revenues and to borrow
money from different sources, which is a major decision issue on the part of the government.
Nevertheless, public enterprises cannot be left out of government sight and control in absolute
terms. Even for those enterprises, which earn profit it would be reasonable for the government to
put a limit on both borrowing and the use of revenues and on the size of the debt, either by amount
or by purpose or both as long as financial capability to discharge the enterprise's basic
responsibility is preserves. Limits can also be placed on public corporations in terms of length of
amortization and rate of new investment, as distinct from normal operations, maintenance, and
replacement.

In a large number of cases, public enterprises operate at loss because they are required to perform
services, which are uneconomic even though in the public interest, or to sell products or provide
services at a price below their cost. In such circumstances government subsidies are inevitable; the
government must make periodic appropriations or grants to sustain the enterprise. These processes
involve the treasury/budget and planning agencies because of their concerns with the size and
justifications of subsidies, though they are not directly related to the operations of public
enterprises.

The underlying assumption of public enterprises is that they will use money effectively and
efficiently to achieve stated purposes provided that they have autonomy of financial management.
The realization of this assumption requires the kind of accounting system that will show not only
cash expenditures but also allowances for interest, depreciation, and all other elements of cost
assignable to each function. The kind of accounting system, which is not usually found in
traditional bureaucracies but in public enterprises, is often called "cost" or "management"
accounting. Public enterprises are, therefore, usually exempted from the requirements of
government accounting but are required to install a commercial type of system. In addition, public
enterprises are most commonly exempted from the regular government audit system including pre-
audit.

All these reflect financial management issues in public enterprises, which in most cases require
government blessing or decision. Generally, adoption of an appropriate financial management
system is a very critical decisional issue and will largely determine the success or failure of public
enterprises. In other words, good financial management system including optimal use of financial
autonomy on the part of enterprises and appropriate level of control on the part of the government,
adoption of relevant accounting and audit systems are critical financial management issues.

C) Personnel Management Issues

Control of its own personnel system is another distinguishing administrative feature of public
enterprises from other customary government agencies, which goes along with the relative
financial independence. The primary purpose or reason of putting a public enterprise in charge of
its own personnel; i.e. to give it the right to hire and fire, promote and demote, and to exercises all
other personnel management/administration activities is to give it the capacity to perform the
functions for which it is to be held accountable. There are additional reasons for granting autonomy
in personnel matters to public enterprises. One of such reasons is to permit the establishment of
salary scales and other conditions of employment competitive to the scale and amenities in private
industries, and higher than those usually prevailing in government services. Such conditions are
particularly relevant because public enterprises typically require specialized personnel, industrial
engineers, and business managers, which are not often found in significant numbers in traditional
government employment.

In practice, however, only few public enterprises have been able to sustain their independence in
personnel matters. The public enterprise sector, by and large in developing countries, has not acted
as vigorously, imaginatively, or effectively as it might have done in setting up personnel systems
justifiable by public standards. The main reasons for most of them to fail in exercising autonomy
in personnel matters are abuses, which are both internal and external such as:

 Internal weakness to create their own distinctive systems having personnel standards and
procedures, not only sufficient to their needs but also that can be explained and justified to
the skeptical public,
 An apparently inevitable external bureaucratic and political pressures,
 Poor judgment in making appointments,
 Too permissive supervision with respect to assignments and tenures

Such abuses in the personnel systems of public enterprises have brought about external
intervention in their personnel policies and actions. These external interventions in personnel
autonomy are a threat for enterprises from the beginning. For this reason, some countries have
made to establish central industrial management pools to serve the public enterprise sector. It is
common now to find countries setting up "public enterprise commissions", comparable to "public
service commission" of the civil service, to regulate the personnel practice of public enterprises,
and even to pass upon personnel appointments.

Another kind of government intrusion into the personnel independence of its public enterprises is
the imposition upon them certain standards or conditions of employment, such as provision of
housing and health services, allowing the participation of workers' councils. These impositions
have social, doctrinal, political, and exemplary objectives, which all have a direct bearing not only
in the autonomy but also in the performance of public enterprises as discussed in Chapter seven in
details. In general, those three major issues discussed above represent the points of relationships
of the public enterprise with a number of government agencies, which distinguish their
management characteristics.

3.5 ACCOUNTABILITY AND CONTROL OF PUBLIC ENTERPRISES

A distinction has to be made between control and accountability in order to understand well what
they imply in the context of public enterprises management and operation. Accountability and
control in public enterprises have conceptual and practical differences and have their own
purposes, and they involve a number of issues that will be discussed as follows.
A) CONTROL

"Control" is an active function, a purposeful activity that involve directing, restraining, and
stimulating a person or an organization to a certain action or end (Prakash et al 1997:367). In short,
control over management encompasses certain activities undertaken with a view of compelling to
conform to pre-arranged plans. It is thus, the measurement and correction of activities of
subordinates to ensure the accomplishment of plans. Since one element of the "public dimension"
of a public enterprise, which was discussed in chapter two (2.2) earlier, is "public control", the
government exercises control over its entities. The question that needs clear answer is that, how
tight or loose should be the degree or extent of control? Too much control will reduce public
enterprises to the status of a government department, defeating the very purpose of for which they
were created, and too little control will place the state-owned industries outside the democratic
regime.

The United Nations identified the following as the purposes of control over public enterprises.
 Promotion of efficiency: Control is geared towards promoting and maximizing the
efficiency of public enterprises.
 Implementation of government policies and targets: It enables the government to
ascertain that its development policies and targets as regards to output, profit or rewards
have been achieved or implemented.
 To ensure financial responsibility: To ensure whether scarce public funds have been
utilized in accordance with the intended purpose and in the best interest of the enterprise
 and the public. Thus control facilitates accountability of management to some higher public
authority so that the misuse of funds may be precluded and appeased, if not totally avoided.
 To ensure achievement of social objectives: On top of the commercial objectives, public
enterprises are expected to achieve or facilitate achievement of social goals as defined by
the government. Hence, control enables the government to ensure the achievement of social
objectives assigned to public enterprises.
 To restrain undue power of management: Most of the public enterprises are big both
physically and financially. Consequently, mangers in the public sector have more powers
and influence in their respective organizations. Thus, if uncontrolled, they may misuse such
power to unnecessarily advance their personal interests.
 To take corrective measures before things get worse: effective control enables to take
an up-to-date corrective measures before mistakes could cause an irreversible or adverse
effects in the operation of public enterprises.

There are various agencies that are empowered to exercise control over the public enterprises.
Their nature, composition and functions differ from country to country on account of political and
ideological orientations. Besides, the extent of power vested in each agency also differs
substantially by virtue of political and ideological differences and legal tradition prevailing in
different countries. Therefore, there is no uniformity as regards to the ways of exercising such
controls. Nevertheless, the international experiences suggest the following as the common and
main agencies of control over public enterprises in different aspects.

(i) Parliament: Basically, in any democratic society, the function of control

and ensuring the accountability of public enterprises has been assigned to parliament,
which is the legal representative of the public. The parliament uses different methods
so as to exercise control over public enterprises such as: parliamentary questions,
discussions, debates regarding related matters, and through parliamentary committee
for in-depth examination of the working of the public enterprises.

(II) Minister: The minister refers to the supervisory body whose roles and areas of interventions
on the affairs of public enterprises are discussed in Chapter Four (Section 4.2) below. This is the
common way of controlling the operation of public enterprises. In general, a minister can exercise
control through a number of combination methods
(III) Auditor General: In many countries audit control is vested in an auditor general. The power
of auditor general varies from country to country depending on the legal frameworks. Basically,
the audit control by Auditor-General covers the following: Audit against provision of funds, audit
against regularity, audit against sanctions to expenditure, audit against propriety, efficiency Audit

(vi) Special agencies of control: Countries may form special agencies to perform control over
their enterprises, directly or indirectly. These special agencies could be consumers' councils,
advisory committees, public relation, press, published information, and experts' committees and
review etc.

B) Accountability

"Accountability" means to give an account of one's action and to report on the achievements and
failures together with explanations on their declared objectives. According to Dele Olowu (1993),
accountability is the requirement that those who hold public trust should account for the use of that
trust to citizens or their representatives. Accountability signifies the superiority of the public desire
(choice) over private interests, and indicates a state of being obliged to render full and truthful
reports to a superior level of authority concerning one's activities and actions. In other words,
accountability in the case of our subject is the provision of genuine reports of actions to the people
or legally authorized body by public enterprises. Finally, accountability suggests answerability and
requires clarity about on what matters and for whom an organization is supposed to be accountable.
Therefore, for accountability to be effective there must be an enforcing mechanism, to have a
watchdog organization responsible for carrying out conformance and performance auditing.

The autonomy given, or suggested to be given as a matter of principle, to public enterprises

immediately raises the question of accountability. Since a public enterprise is established as an
instrument to execute government policy and program, it must be accountable and thus subject to
some kind of monitoring and some degree of control. It is the tug of war between the degree of
autonomy on the one hand, and accountability and degree of control or supervision on the other
that creates the major management issues regarding the public enterprise sector. The pulling and
hauling in this conflict between autonomy and accountability produces a variety of solutions in the
balance of management. Report requirement from public enterprises is one aspect of exercising
accountability. A complete report provides the parliament and the public with information to use
their political judgments about the success and relative value of the enterprise. Such reports avoid
the suspicion aroused by the mystery of secrecy and silence.

It is generally recognized that when the government gives power to a public enterprise to operate
outside its minute legislative, financial and executive control, it should have certain safeguards. A
study conducted by the United Nations recommends the following guiding principles of
government and public enterprise regarding the practice of control and accountability:

(i) The field of activity and functions of public corporations should be clearly defined for any
act of acceptable level of control and accountability to exist
(ii) The government should retain powers of supervision, including the right to audit, inspect
and criticize, the right to appoint, and with good reasons, remove directors
(iii) Government's power should be broad but relevant to its function; though informality has its
own dangers, the nature of government control need not be wholly formal and informal
relationship cannot be completely avoided and is even beneficial
(iv) The enterprise should be held strictly accountable for their performance in relation to the
goals set by the government, and there should be an appropriate mechanism for evaluation
of their performance. In view of this, enterprises are required to make complete annual
reports accessible to the government, the press and the public