Chapter Eight

Problems and Remedial

Measures of Public
Enterprises
8.1 Major Problems
• Empirical studies on performance
of public enterprises showed that
their failure is greater than their
achievements.
• This especially holds true for almost
all African countries.
• African public enterprises are making
persistent losses, producing insufficient
quantity or poor quality of products, while
draining the scarce financial and human
resources.
• The main organizational and managerial
problems that explain the discouraging
performance records of public enterprises
include;
(i) Lack of Initiative and Operational Autonomy:
• Successive conduct of public enterprises requires
sufficient autonomy and a great deal of initiative.
• This was hardly achieved for enterprises under
the government ownership because of;
Reluctance of the government to give sufficient
autonomy.
Preferring to adopt close monitoring and giving
frequent guidance,
Lack of confidence and uncertainty of tenure.
Absence or little recognition & encouragement.
 (ii) Low Labour Productivity:
• It has been argued that labor
productivity is generally weak in the
public sector.
• Public enterprises are not in a position
to provide all fringe benefits, fat salary
and benefit packages, welfare
services.
• Thus, employees' morale had been low.
(iii) Overstaffing:
• Almost every Sub-Saharan African
country has serious problem of
overstaffing in public enterprises.
• Most public enterprises in Sub-
Saharan Africa seem to be
overstaffed with administrators
and clerical workers.
 Main reasons for overstaffing problems;
Lack of scientific manpower planning.
Failure to lay-down appropriate working
standards .
The tendency to use "safe play" principles.
The motive of the government to use PEs
for social security system.
Unlawful practices to favor people in
employing.
(iv) Lack of Skilled Managers and Problems of
Training:
• Trained manpower is a critical factor in
economic development.
• Getting skilled and well educated
managers has been the biggest
challenge for many developing
countries.
Reasons for lack of qualified and
experienced managers
• Hastily implemented localization or
Africanization manpower policy.
• Inappropriate recruitment policies.
• Lack of training institutes.
(v) Low Morale of Managers and Employees:
• They have serious problems of motivation in
their managers and employees.
The main contention is that;
 Managers do not have financial stakes in the
PEs.
 They know that there is absolutely no
mechanism for rewarding.
 Even if there are some forms of reward
systems, they are not commensurate with
the level of performance.
 (Vi) Chronic Brain Drain or Flight of Scarce
Talent:
• Migration of qualified personnel to Europe
and North America.
The major factors for brain-drain include;
 Lack of proper incentive systems.
 Dissatisfaction with the political systems.
 Unfair governmental practices.
 Lack of opportunity for further education
and training
 (Vii) Bad Labor Union Tradition:
• Many labor union leaders have
received little or no formal training
in their vocation.
• Workers are still without clear idea
of the privileges and obligations of
organized labor.
• Very few unions take the concern to
assess the efficiency and productivity
of the workforce as a basis for
demanding higher pay and better
working conditions.
• This has not only led to financial loses
but also sometimes threatened
industrial peace.
 (Viii) Weak Overseeing (Supervising) Capacity:

• In Sub-Saharan Africa, it is a common

experience to see politically appointed
boards.
• Politically appointed board members
could feel too much freedom or too
much constraint to take bold decisions
on important matters.
The most often exhibited pattern is,
a. The management of public enterprises had
been antagonized or frustrated by a board that
tended towards too much complacency or
ignorance of entrepreneurial management.
b. On the other extreme, there existed a situation
where, board members were very weak or had
very little knowledge of management and
tended to rely too heavily on management
guidance.
 8.2 Remedial Measures
8.2.1 Organization and Management Reform
• No country in the world has invented a
perfect way of managing its public
enterprises.
• Therefore, any suggestion to solve the
management and personnel related
problems should necessarily be adapted to
the social, cultural and economic
characteristics of the country concerned.
Organization and Management Reform suggestions include;

 Radical change in management approach in

the public enterprises: efficiency-oriented
approach, market-oriented approach, and
future-oriented approach.
 Clear demarcation of authorities of the
three main actors in the operations of
public enterprises: namely, government
(supervising agency), the governing board,
and the chief executive.
 Holding managers accountable for the
performance of the enterprises they
manage .
 Basic wages of employees should be
linked with productivity.
 Institutionalization of training programs
to improve managerial competence.
 Mobility of management personnel
between public enterprises should
not be discouraged.
 Political interference in industrial
disputes and the leadership of trade
unions should be avoided.
 Participation of the private sector in
joint ownership, financing, operation
and management of public enterprises
should be encouraged.
 It is necessary to minimize political
pressure and partisan influence in their
policies and programs;
 8.2.2 Privatization (Ownership Reform)
• privatization is the sale of government
owned corporations to private investors
and the contracting out of formerly
governmental functions to private agents.
• It is the transfer of assets and service
functions from the public to the private
hands.
 Forms of Transfer
a. Direct transfer: refers to a complete
transfer of public ownership (both assets
and the management) to the private
sector.
b. Indirect transfer: is privatization of the
management aspect, most appropriately
known as "management contracting"
where the assets remaining under the
ownership of the public.
Objectives of indirect transfer or
"Management contracting“;
a. To relieve administrative burdens of
the government.
b. To ensure administrative efficiency.
The widely articulated rationales for the movement
toward privatization have largely focused on the
perception of;
• Waste,
• Lethargy (sluggishness),
• Inefficiency,
• Misappropriation, and
• Poor quality of products
• Bureaucratic bottlenecks and
• Rigidly applied procedures in PEs.
• privatization is not a sufficient condition to
overwhelm (overcome) the outdated
bureaucracy, rather is a necessary condition.
• It is a means to an end, not an end by itself.
• Therefore, in order to achieve the end
objectives, privatization requires active
encouragement and strong support from
the government.
 Table-1: Pros and Cons of Privatization Proponents
Arguments in Support Arguments Against
1. Reduction in public sector 1. Rapid price scramble for goods
spending (in form of subsidy, and services (consumers will
loan debts or default of loans, now pay fully for goods &
and unpaid taxes) services)
2. Promotion of macro - economic 2. Break up of public sector
efficiency (competition, influenced networking and
innovation and quality cross subsidization
management methods) 3. The emergence of money bags
3. Promotion of consumer which may be difficult to
satisfaction (value for money and control by the government.
freedom of choice on purchases) 4. Reduced job opportunities.
4. Appropriate pricing mechanism
8.2.3 Forms of Privatization
• In its broadest sense, privatization refers
to the transfer of ownership or functions
(management, operation and financing),
previously performed by government or
public authorities to the private sector.
• This means, privatization encompasses
many things apart from transferring
ownership rights:
a. Management contract: Transfer of
management control over public
enterprises to private managers.
b. Service contract: Contracting out services
usually those previously reserved for or
supplied by public enterprises.
c. Lease or concession contracts: Transfer
of operational activities to private
entrepreneurs.
d. Joint ventures: Involving private sector
in operation, management, and financing
of the activities of public enterprises.
• There are three major strategies or
forms of privatizing public enterprises;
 Table 2: Privatization Strategies
Strategies of Privatization Modalities
1. Privatization by
Divestment
A) Private placement
B) Public sale

1.1 Privatization by Sale C) Management buyout

D) Employee buyout

E) Users or Customers buyout

Outright sale of assets to the

1.2 Privatization by
public where there is no buyer
Liquidation
for the ailing public enterprise
A) Donation to employees
1.3 Privatization by Donation B) Donation to users or customers
C) Donation to the public
Strategies of Privatization Modalities
A. Contract
B. Franchise
2. Privatization by
C. Grant
Delegation
D. Voucher

3. Privatization by A. Withdrawal
Displacement B. Deregulation
(Adapted from Savas: 1989)
 I. Privatization by Divestment
• Divestment means shedding off an
enterprise asset.
• The enterprise or asset is either sold or
given away as an ongoing business, or an
enterprise may be liquidated (i. e. closed
down and the remaining assets sold).
• In many countries, the term
'denationalization' is frequently used to
mean divestment.
 a. Privatization by Sale:
This can be carried out in five ways:
• Selling the enterprise (or assets) to a single buyer in a
negotiated sale: Ethiopian Privatization Program.
• Selling to the public by issuing and selling shares: Great
Britain to sell the British Telecommunication, jaguar,
Britoil, British Gas, Cable and Wireless, and other state
owned enterprises.
• Selling the enterprise to the mangers, called
management buyout.
• Selling the enterprise to the employees, called employee
buy-out
• Selling the enterprise (or assets) to its users or its
customers.
 Privatization can be made in two ways:
• Complete privatization: the disposal of the
enterprise is total, both in terms of
ownership and management.
• Partial privatization: the disposal can be
carried out in stages, where the
government sells only apportion of its
holdings at any one time.
 B) Privatization by liquidation
• Divestment can be carried out by
liquidating a poorly performing
enterprise i.e. selling its assets;
• If no buyer can be found for it as a
going concern and
• If the prospects are dim for turning it
around to achieve profitability.
C) Privatization by Donation
• Public Enterprises or assets can be given
away, for example to employees, to users or
customers, or the public at large.
• An instance of giving away enterprise to the
employees took place in the united
kingdom when the English Channel
hovercraft ferry service formerly owned by
the British Rail, was given to its
management.
• Another instance of giving away (or
donation) of public enterprise took place in
Canada when the British Columbia
Resources investment Corporation was
given away to the public by issuing shares.
• A somewhat similar action was considered
in Israel for Bezique, the state owned
telecommunication monopoly.
II. Privatization by Delegation
• Is privatization strategy where the
government delegates to the private sector,
part or all of the functions or activities such as
management, operation financing and
producing goods or services.
• However, as with any delegation of authority,
government retains the responsibility to
oversee the result, hence its ongoing role.
• Contract, franchise, grant, voucher, or
mandate carries out delegation.
A) Delegation by Contract
• The responsibility of operating, financing and
managing public enterprises may be entrusted
either to the public manager or any private
party through different contractual
agreement.
• Activities to be carried out could be
management, operation, regulation,
production of goods and services, and
financing.
• Accordingly, we do have the following forms of
contractual mechanism:
Functions to be contracted Type of contract

Management Management contract

Regulation Regulatory contract

Operation Lease and concession

Production of goods and

Service contract
provision of services
 B) Delegation by Franchise
• Under a franchise, government awards a
private organization the right, often the
exclusive right, to sell a service or product
to the public.
• The private firm pays the government a fee,
usually on annual scheme.
• Two forms of franchising exist.
1. A concession: One involves the use of public
domain airwaves, airspace, streets, underground
space etc.
• For example, broadcasters, airlines, bus and taxi
companies and utilities (electricity, gas, water
and telephone) use the public domain in the
course of carrying out their commercial activities.
• In this model, the government retains ultimate
ownership of either the physical assets or the
right to supply, but grants exploitation rights to a
concessionaire.
• This means, the private operator (concessionaire)
manages the public facility, operates it as its own
commercial risk, and accepts investment
obligations, whether to build a new facility or to
expand or rehabilitate an existing facility.
• Thus a concession contract embodies all
characteristics of a lease, but with the contractor
having the additional responsibility for financing
certain specified extension or replacement to
fixed assets.
2. lease agreement: in which tangible
government-owned property, is used by a
private renter to engage in commercial
activities.
• Leasing involves a private contractor paying
the public owner for exclusive right to
operate facilities for specified period, and
bearing full commercial risks.
• Under a lease contract, a private firm
operates and maintains the public
enterprise as its own commercial risk, with
income directly derived from tariffs.
• Thus, leasing requires the government to
commit to tariffs that cover at least
operating and maintenance costs, and give
the operator incentives to ensure tariffs are
collected and operating costs are
minimized.
 C) Delegation by Grant
• Awarding grant can be by delegation.
• Instead of government itself carrying out an
activity, it arranges for a private entity to do
the work and provide a subsidy.
• Customary grants are given for mass transit,
low-income housing, maritime shipping,
agriculture and research activities,
D) Delegation by Voucher
• Is issuing voucher to eligible
recipients of formerly state run
services.
• Vouchers are used for food,
housing, education, health, day
care and transportation.
• Recipients use the vouchers to purchase
these services in the marketplace where
they have to pay the difference if their
purchase exceeds the value of the vouchers
they received.
• If one compares grants with vouchers,
grants subsidize producers, whereas
vouchers subsidize eligible consumers.
 III. Privatization by Displacement
• As opposed to the first two methods,
displacement is somewhat a passive
process that leads to the government being
displaced gradually by the private sector,
withering away of the state.
 Displacement Withdrawal
• Government can deliberately pull out
or withdraw its activities simply by
shutting down a failing enterprise, or it
can accommodate private sector
expansion into that field.
• It may restrict or shrink the size and
resources of the private sector to grow
and out-pace their public counterparts.
 Displacement by Deregulation
• This modality is sometimes referred to
de-monopolization.
• It enables the private sector to enter
into the sectors previously restricted for
public domain or public enterprise.
• Examples include postal services,
telecommunications, and agricultural
and marketing boards.
 THE END
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