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 #: 5 – 6 (March 15 – 26)
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 II. THE CONCEPT OF PUBLIC ENTERPRISE

Overview:
Many countries have turned over substantial and even predominant responsibility
for developing and managing their economy to new kinds of public agencies.
These new kinds of agencies constitute the public enterprise sector. Particularly,
one of the most significant features of the Post World War is the exponential
growth of public enterprises. The trend of such growth is more pronounced in
developing countries where organized private sector is limited and consequently
the major burden of industrialization has fallen on the shoulders of the public
sector. While this is the general scenario, the share of public enterprises varies from
country to country depending upon ideological preferences, historical, social
and economic circumstances. However, it is clear that even in the most "liberal"
and private enterprise-oriented systems, public enterprises not only exist but also
play crucial roles (Fernandes, 1986:2). All those points that justify the need for
defining the term "public enterprise" would lead us to overview the following lists
of working/purposive and conceptual definitions provided by different authors or
institutions.

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 I. LEARNING OUTCOMES
At the end of this Chapter, you are expected to:
1. define Public Enterprise;
2. enumerate and define different public dimensions;
3. analyze the reasons for public ownership of enterprise; and
4. determine different objectives of Public Enterprise.

II. TOPICS
Lesson 1: Public Enterprise Definition
Subtopic 1: Characteristics
Lesson 2: The Public Dimensions
Subtopic 1: Enterprise Dimensions
Lesson 3: Reasons for Public Ownership of Enterprises
Lesson 4: Objectives and Roles of Public Enterprises

III. REFERENCES

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

IV. COURSE CONTENT

TOPIC I. Public Enterprise Definition

There is no internationally accepted definition of a public enterprise. Each country

is thus able to establish its own definition of the term. Public enterprise may be
held to include a wide spectrum of institutions ranging from semi-government or
purely regulatory agencies to industrial and commercial undertakings. A variety
of terminologies are used when referring public enterprises. The use of a number
of terminologies to describe these institutions has been the sources of confusion.
The terms that are used interchangeably may include public corporations, public
enterprises, public undertakings, public industries, state owned enterprises, state
enterprises, government enterprises, government companies, nationalized
industries (used in UK), parastatal organizations (used in African countries), and so
forth.

George Gant (1979:104) described public enterprises as "government

organizations established for the purpose of engaging in defined commercial or
business types of economic activities, although they are occasionally established
for non-business purposes (such as scientific research foundations or
technological institutions), to escape the shackles of the existing bureaucracy".
The definition given by the expert group and used on the training systems and
curriculum development for public enterprise management, (Common Wealth
Secretariat, 1981:VI), could be reads as:

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 "Any commercial, financial, industrial, agricultural, infrastructural, or
promotional undertaking owned by a public authority either wholly or
through majority shareholding, which is engaged in the sale of goods and
services and whose affairs are capable of being recorded in balance
sheets and profit and loss accounts. Such undertakings may have diverse
legal and corporate forms, such as departmental undertakings, public
corporation, statutory agencies established by acts of Parliament, or joint-
stock companies registered under the company law".

Mathur (1999:17) acknowledges the definition given by Friedman as the most

practical one and quoted him as saying:

"Public enterprise is an institution operating a service of economic or social

character on behalf of the government but as an independent legal entity,
largely autonomous in its management, though responsible to the public
through government and parliament and subject to some direction by the
government, equipped on the other hand with independent and separate
fund of its own..."

The definition emphasizes the fact that public enterprises are engaged in an
activity of commercial nature on behalf of the government. It is this engagement
of the government in activities of commercial nature that gives public enterprises
special characteristics as distinguished from the traditional conception of
governmental functions. President Roosevelt described a public enterprise in the
most precise manner, as it is "an institution clothed with the power of the
government but possessed of the initiative and flexibility of private enterprise".

THE CHARACTERISTICS OF PUBLIC ENTERPRISES

Primarily, public enterprises manifest direct involvement of the government in the
economic sphere, and assume special responsibilities to the government. In other
words, they represent government's active intervention in economic
development by engaging themselves in business activities, which are beyond
the provision of guidelines and the creation of an encouraging environment to
the private sector. Hence, they are distinguished from other conventional
government organizations by their functions of conducting economic and
commercial activities.

The characteristics of public enterprises are highly influenced by several factors

like ideology, politics, history, level of economic development etc. For instance,
in countries that operate socialist type economies, the general characteristic of
public enterprises is to stand against the private sector and the trend appears to
elimination or substantial reduction of the private sector. In some of these
countries, governments have embarked on nationalization or public ownership of
vital areas of production. On the other hand, in countries, which operate a mixed
economy, public enterprises appear to be concentrated in the traditional and
well-established fields of public utilities as well as the so-called "commanding
heights" of the economy, leaving a substantial proportion of activities in other
fields to private entrepreneurs.

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The core of the concept "public enterprise" suggests an organization, which has
two dimensions or characteristics: the enterprise dimension and the public
dimension. If one of these dimensions is missing, the body cannot be described as
a "public enterprise". The implications of each dimension will be examined in the
following manner.

COMPARATIVE WRITING. Using the definitions mentioned earlier, determine the

differences of Public Enterprises and Private businesses. Limit your answer to 250
words. Use a separate sheet for your essay.

TOPIC II. THE PUBLIC DIMENSION

There are four basic elements in this dimension; i.e. public ownership, public
purpose, public control, and public accountability.

(a) Public Ownership: the assumption is that ownership vests in a public authority,
which could be central government, state government, or municipal
government. While there is no ambiguity when 100 percent of the ownership is
vested in a public authority, it has got also an increasing acceptance that if the
public authority owns the majority shares (51 or above percent) the enterprise
would be classified as public.

(b) Public Purpose: in establishing a public enterprise, the government has in mind
the attainment of some public policy goals. The aim and purpose of the
organization should be fulfillment of public interest, it should be meant for
achieving public interest. In addition to the corporate objectives implicit in its
enterprise dimension, the nature and content of the public goals, which the
enterprise is presumed to achieve, should be identified. The net benefits of the
activities undertaken by the enterprise do not go to the enrichment of a private
group of individuals, rather are directed toward fulfilling public purposes. But, it is
clear that private groups and individuals will have their own shares from the net
benefits of a public enterprise being part of the general public.

(c) Public Control: the government as the owner is likely to exercise managerial
controls over the enterprise it created or over which it has the majority share. The
substance and scope of control, however, has to be free from ambiguity. The
specific areas of control for which an enterprise will require government approval
and the legitimate body that will exercise control on behalf of the government
need to be clearly stipulated.

(d) Public Accountability: a public enterprise has to be accountable in some way

to a legitimate organ representing the public. The question that entails on what
matters and to whom the public enterprise is accountable will depend on the
precision of goals which have been set for the enterprise, the agreed upon criteria
of evaluation, and clarity of who the evaluators are or to which agency is an
enterprise reporting. All proceedings and records of activities of the organization
must be available for public (government) scrutiny when demanded. Indeed, it is
customary that performance reports of public enterprises are regularly submitted
to the government.

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THE ENTERPRISE DIMENSION
The enterprise dimension implies the notion of a business firm. The following points
determine the enterprise character in general:

(a) The organization is engaged in the production of goods or provision of services

(b) The goods and services so produced are marketed at a price
(c) The revenues so earned are adequate at least to cover costs
(d) The activity is based on the entrepreneurial idea of investment and return

These being the general characteristics that describe the enterprise dimension, it
also suggests three concepts or manifestations, which are core so to speak as
"enterprise":

(i) Financial viability: This implies conscious effort on the part of an enterprise to
operate in entrepreneurship idea to raise net revenue. To do so, the organization
must continually engage itself in innovative endeavors as contrary to being
complacent with routine operations and regular level of returns. It must
continually explore opportunities for the benefit of both the organization and its
stakeholders. In theory this would imply net revenue maximization, but in practice
several qualifications do exist and revenue maximization may not happen true. In
other words, such net revenue is sought only when it doesn't encourage powerful
competitive threats, doesn't provoke labor unrest, doesn't cause consumer
protests, and doesn't arouse public antipathy (opposition) towards the enterprise.
Thus, a public enterprise aims at "optimum satisfaction return" as distinct from a
private enterprise that invariably has a tendency for net revenue maximization.

(ii) The cost-price equation: The enterprise concept goes strictly beyond financial
viability though concerned with the way financial viability is achieved. Financial
viability is realized from sales activity, but the concept attaches significance to
the relationship between prices and costs. Therefore, extreme caution is needed
before a disproportionate excess of price over cost in the case of a given output
is practiced, as it is open to be challenged by consumers.

(iii) Commercial accounting: The organization regularly maintains a set of

commercial accounts that indicate its financial progress or status, but basically
two major accounting documents are needed; i.e. a balance sheet, which shows
at a given time, the assets and liabilities of the enterprise; and a profit and loss
account, which defines or indicates the inflow of income and the outflow of
expenditure resulted from surplus or from deficit of a defined period respectively.

The schema shown in Figure-1 below synthesizes the two dimensions of a public
enterprise. It is the public dimension, which differentiates public enterprises from
private enterprises, and it is the enterprise dimension, which differentiates it from
other governmental agencies. In other words, if there is no public dimension, there
seems little rationale for creating public enterprises, and if there is no enterprise
dimension there would be little or no rationale to give it the name of "enterprise".

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Figure 1. Public Enterprise Model

PUBLIC ENTERPRISE

The Public Dimension

The Enterprise Dimension
Public Ownership
 Producing and Marketing of Tradable
Public Purpose Goods and/or Services
 Financial Viability
Public Control  Cost-Price Equation
 Commercial Accounting
Public Accountability

TOPIC III. REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES

As Gant (1979) pointed out, the principal reason for the emergence of the public
enterprise sector in a country is the government's decision to intervene directly
and actively in the economy in order to achieve the objectives of its
development plan. Most frequently, decision on the creation of public enterprises
is based on the analysis and findings that show the institutional needs for
development, which the government believes the private sector will not meet, at
least by itself. In other words, the rationale for setting up public enterprises is that
they are better instruments for promoting developmental goals.

Nevertheless, it would be difficult to generalize the motives for the creation of

public enterprises in precise terms since the reasons may practically vary to
encompass political, economic or social drives, whilst others have mixed and
even conflicting objectives combining social welfare and economic motives. The
degree and extent of government involvement in economic ventures through
public enterprises is generally determined by ideological considerations, historical
factors and the state of economic development.

Some countries, notably socialist countries, visualize a new role of the state as an
agent for change, for social transformation and economic development. Hence,
they believed that the economic functions of production and distribution should
substantially be managed in the public sector. In contrast, other countries prefer
to remain away from engaging, or are loath (reluctant) to engage, in any direct
economic activity unless they are compelled to do so by some temporary
weaknesses or shortcomings envisaged in the private sector (Mathur, 1999:8).
Generally, there are many shades of belief and reasons that vary from country to
country with regard to the creation of public enterprises. The justifications for state
intervention in industrial and commercial activities and the use of public
enterprises as a model of planned development strategy could be summarized
as follows:

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 (i) The inability or unwillingness of the private enterprise to be involved in the
production of certain goods and service that are not rewarding in view of
financial profitability, but which are considered socially desirable in view of
the state; or the inability of the private enterprise to engage in ventures with
long term gestation periods, expecting long-term benefits over investment,

(ii) Strong need of the government to intervene in those sectors that have
decisive influence on the structure of the economy, and are considered to
be basic and strategic to national development. In view of the fact that
there is a need to guide economic development in the light of national
priorities, the private sector alone should not be allowed to venture in
sectors that are found to be crucial to over-all development.

(iii) The pressure of international competition in the home or external market

that would inevitably yield negative consequences like closure of infant
private industries, monopolistic trends by big companies or industries, and
the resultant prices escalation upon consumers.

Thus, over the years, the state had endeavored to intervene into, and/or control,
some sectors of the economy to bridge the gaps that the private sector failed to
fulfill, and to lessen the negative consequences resulted from external pressure.
Consequently, the beliefs or ideas that surround the argument are:

 Government ownership and control is essential in certain key sectors to

ensure that the country's economy partakes of high returns on investment
in such sectors
 Government intervention is required to ensure the economic survival of a
sector, organization or industry of strategic importance, especially on which
sufficient private commitment to take the risk is not available
 The ownership and control of basic industries are essential pre-requisites to
national economic planning and development
 Certain services to the public constitute national, local or natural
monopolies and, therefore, require considerable regulation in order to
ensure acceptable levels of service, prices and safety
 The most equitable distribution of income is dependent upon common
ownership of some particular means of production, distribution and
exchange, which in turn could be achieved through the means of public
enterprises.

Generally speaking, therefore, public enterprises exist primarily to represent the

government's interventionist objectives in the economy because of the
aforementioned reasons. They exist as distinctive institutions with the
management capability to conduct business activities effectively and efficiently.
Although economic motives are important in explaining the reasons for setting
public enterprises, these alone are not adequate. Political and social
expediencies are indeed other justifications. Therefore, the motives for public
ownership of enterprises that were mentioned in the preceding discussions may
be conveniently categorized under three headings: economic, social and
political/ideological (Barber, 1983).

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A. ECONOMIC
In many countries, mainly the developing ones, the inspiration for public
enterprises emanated from the desire to achieve rapid economic development
and to make frontal attack on poverty (Mathur, 1999:10). The desire to achieve
success in the economic sphere would be possible through public ownership, and
this model of economic development is backed by practical and imaginative
reasons such as:

(i) The "commanding heights" argument postulates that certain key

industries, especially those connected with the processing of natural
resources, are so vital to the operation of the national economy and are of
strategic importance. To leave such economically key industries in private
hands might jeopardize the system. Therefore, the "commanding heights"
idea has been a major justification for public sector investment in many
countries.

(ii) Control of monopoly power- it is accepted that monopoly firms are able
to exert undesirable pressure on the society, thus they need to be
controlled. So, public ownership may be considered as the ultimate form of
control. It has become extremely important today that essential
infrastructural services such as public and road transport, railways,
electricity, water, etc. are state-owned even in industrialized countries.

So, whatever the reasons and motivations are, government intervention in the
economy is a general practice today all over the world, with in fact varying
degrees.

B. SOCIAL
Public enterprises are also established with social objectives and the decision
criterion for establishment is social cost-benefit consideration, not simply
economic cost-profitability like that of the private sector. For example, a state
railway company may operate "uneconomically", but continue to exist because
closure would impose many other "social costs" on the communities such as
shortage in the means of transportation and associated cost escalation. Another
social motive of the government in creating public enterprises is social security or
social welfare. Many governments have regarded employment generation as a
motive for establishing public enterprises. Developing countries, in particular have
entrusted public industries with special responsibilities in terms of contribution to
improve income distribution. Employment generation is one aspect of the equity
measure of the government besides to other direct forms of social welfare or
income distributions schemes assured through the means of public enterprises.

C. POLITICAL/IDEOLOGICAL
An important motive for the creation of public enterprises in this regard is the
ideology of socialism, born largely out of the inadequacy of the capitalist system.
The Great Depression of 1929 had seriously exposed the deficiencies of the
capitalist system, which assumes free play of the market forces. Keynesian
economics had also provided a sound theoretical basis for state intervention in
creating effective demand and generating employment.

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However, the failure of socialist economies in almost all countries and the success
of the privatization drive have led many commentators to question the very
reason of existence of public enterprises today. The issue has got blurred with the
ideological debate since the retreat from the socialist ideology is beyond
propensity, and rather is a real practice this time. Galbraith (1990) commented in
that "while socialism in economic terms worked well in the initial stage, it has failed
in today's context because of its inability to adjust to the new world of the
consumer society". This entails that the ideological motive of public ownership has
become an issue of contest and the thing of the past for many commentators.

On the other hand, regardless of the ideological consideration, the essentials of

public ownership are still valid and justifiable. In an era of globalization and
liberalization, although state-owned enterprises may not provide the
commanding heights of the economy, their importance in national economic
activity cannot be underrated. For this reason, economies of a number of
countries such as China, Korea and Taiwan opted not to give top priority to
privatization, but to allow the private sector to develop around the public sector
(Mathur, 1999:15). In summary, most developing countries suffer from acute lack
of capital, entrepreneurial skills and regional imbalances. The immensity of the
socioeconomic problems of these countries makes state intervention inevitable
and in fact desirable. Therefore, the state becomes a vital partner in the
promotion of industrial enterprises to ensure public control over certain sectors of
the economy.

REFLECTIVE WRITING. MIST is a great example of a Public Enterprise, determine the

Economic, Social, and Political reasons for establishing the school. Limit your
answer to 250 words and write it on a separate sheet.

TOPIC IV. OBJECTIVES AND ROLES OF PUBLIC ENTERPRISES

There are immense objectives, which lead governments to engage actively in the
economy through the means of public enterprises such as; to gain control of the
economic monopoly, to ensure equitable distribution of wealth, to capture profits
for investments or development programs, to manage foreign trade, to create
yardstick of performance for the private sector and so on. Some of the explicit
objectives of public enterprises assigned by the government as a means of
achieving macro-level objectives may fall under those three major reasons for
public ownership (economic, social, and political) mentioned above, and may
include among others, the following:

(a) To generate revenue to the government through various means such as

dividends, interest on loans, taxes etc.
(b) To save scarce foreign exchange or broaden foreign exchange base
either by exporting foreign exchange earning goods and services or by
substituting imported products.
(c) To reduce dependence of the economy on a narrow range of activities
domestically, and on foreign importation

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 (d) To create an even distribution of income and wealth among individuals
and groups by preventing the concentration of economic wealth in the
hands of the few
(e) To develop and provide infrastructure services that will foster the
proliferation of the private sector and accelerate the pace of national
economic development.
(f) To ensure balanced development among different sectors of the
economy and reduce regional disparities through a fair dispersal of
industries in various geographical areas of a given country
(g) To create job opportunities for citizens or to reduce the level of
unemployment, and provide various welfare benefits such as housing,
medical services, transport, and other social services in order to serve as a
model for private entrepreneurs in the sphere of labor management
relations and thereby maintain stable social security system
(h) To safeguard the interest of consumers by offering a basket of essential
goods and services at a fairly low prices to low-income groups.
(i) To stimulate research and development, which may lead to the building
of indigenous technology and optimum self-reliance
(j) To capture the advantages of increased participation by citizens in the
ownership and management of the productive enterprises
(k) To serve as a regulatory agent of the government in ensuring
compliance to law by organizations within its area of jurisdiction. Examples
include the National Bank of Ethiopia that monitors and controls the
activities of private banks;

A. Financial and Commercial Objectives

As Fernandez (1986:52) noted, the early history of public enterprises in developing
countries reveals a cloud of uncertainty and ambiguity about their financial
goals. The idea of "profit" was associated with private enterprises. The goals of
public enterprises were mainly seen in terms of the nation-building posture or
attitude. Profitability in purely financial accounting terms seemed an irrelevant
thing. Public enterprises were considered to be pioneers of social and economic
changes and the engines of growth. Although this has been the initial intent
behind the establishment of public enterprises, financial and commercial
soundness became an important consideration eventually. The case for financial
stability, commercial viability and adequate return on investment rests on the
following compulsions.

(i) Public enterprise's investment is generally based on feasibility studies and

project reports.
(ii) Since one of the sources of funding of public enterprises could be from
borrowing, they will obviously be required for debt-servicing, and this in turn
is possible only if they are financially viable by generating surplus

Therefore, the creation of public enterprises should be associated with the

declaration of intent that they are expected to be financially viable, appraised
in terms of their capacity to yield a reasonable rate of return on total capital
employed.

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B. Production and Productivity Objectives
Production planning is an integrated managerial discipline, which takes into
account productive capability or installed capacity, availability of inputs and
market situations. What is suggested in line with this is that the determination of
production goals and strategies of production should be essentially an integral
managerial exercise. The focus should be on productivity goals rather than
production targets, a shift from a static concept of absolute levels of production
to a more dynamic concept of productive use of assets and resources.

This in turn implies "capacity utilization", to mean, the major productivity goal
should be to step up the utilization of capacity (for example machine) until it
reaches the optimum level. Another and equally important aspect of productivity
is "consumption coefficients"- the ratio of usage of raw materials to outputs. "Labor
productivity" is a far more sensitive area of setting productivity goals, which will
depend on many other factors such as training, work norm, and so on. "Total
factor productivity" is the most rational and sensible measure of productivity. The
productivity of machines, materials, workforce, and money is a highly integrated
network-each of which influencing the other. Because of this, sophisticated
methodologies have been designed to calculate "total factor productivity".
Multiple inputs and outputs can be weighed at factor costs so as to determine
whether a public enterprise has met its productivity objectives or not.

C. Marketing and Service Objectives

The real effectiveness of the enterprise can also be assessed in light of its
performance vis-à-vis its main constituency- customers, consumers or clients.
Designing marketing and service goals can be better understood by determining
the marketing position of each enterprise.

D. Developmental and Social Objectives

Achievement of financial viability and generation of surplus and thereby
contributing to resource mobilization is by itself a major developmental
responsibility. Besides, the productive use of assets and the optimized use of
resources is a matter of both economic and social concern of public enterprises.
However, the accomplishment of social objectives is an obscure (unclear) and
often misunderstood subject. Public enterprises are expected to be, for example,
model employers, to take long-term developmental views of research by
investing in such areas, to support the environment, and so on. Consumer
satisfaction is also considered as the discharge of an important social obligation.
The conclusion one might arrive at could be that public enterprises, which are
financially successful, are good performers in terms of achieving development
and social objectives.

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