Introduction
Public enterprise was for a long time an important part of the public sector in most developed or developing countries (Farazmand, 1996), but, with privatization, the size and importance of the sector is declining. It now seems in some danger of dis- appearing altogether as countries have rapidly moved away from government pro- duction through public enterprise. There are two reasons for looking at public enterprise as part of public sector management. First, the sector is particularly important for arguments about the scope of government activity and the debate and outcome of privatization of public enterprise has implications for the public sector as a whole. Secondly, public enterprises pose particular management prob- lems even compared to the rest of the public sector, most noticeably the control and accountability of government organizations aiming to make money.
Public enterprises were the first target of those aiming to reduce the size of the public sector in the 1980s. Even though major public enterprises such as the post office still exist in many Western countries, including the United States, there seems little doubt that the idea of government-owned organizations selling goods and services to the public has passed its heyday. Although the public enterprise sector was large in many countries its activities formed only a minor part of political discourse. Starting in the early 1980s it became a focus of polit- ical controversy, with its very existence in question. One of the key, and quite unresolvable, political questions concerns the allowable limit of government activity. Matters of ideology about the overall role of government became bound up with the ownership of public enterprise. As public enterprises operated at the boundary of public and private sectors in mixed economies, arguments about them were often about the desirable role of government itself. The answer in the debate was overwhelming, in developed and developing countries alike, that governments should dispose of their public enterprises: and they did. The most significant of the early programmes of privatization was in the United Kingdom.
Between 1979 and 1993 nationalized industries in that country fell from 11 per cent of GDP to 2 per cent, and from 1.8 million employees in 1980 it fell to less than 400 000 in 1994 (Kamarck, 2000, p. 240). The privatization movement
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then spread to other countries, to the extent that, from the early 1980s to 1993, more than 7000 enterprises had been privatized (Farazmand, 1996, p. 18).
Public enterprises always had particular management problems, including accountability, regulation, social and industrial policies, investment policy, and financial controls. Of all these, control and accountability are particular prob- lems for public enterprises, which are deliberately set up to be relatively inde- pendent of direct political control. Setting control at a satisfactory level has been a perennial problem both for governments and their enterprises. If control is too tight, there is no advantage in having them set up as entities with a sig- nificant degree of independence. If government control is too loose, an enter- prise may not be accountable to its owners, the public, raising a question as to why it is in government hands at all. Indeed, one of the arguments for privat- ization is that public enterprises cannot be effectively controlled and their accountability is inherently inferior to that of private companies.
Public enterprises are a noteworthy part of the public sector. They may shrink so far as to become nothing more than an interesting diversion in the his- tory of governmental institutions. They may, though much less likely, gain a new lease of life. Perhaps all activities that can be carried out by the private sec- tor, should be. Even with widespread privatization, public enterprise is still an important part of the public sector in many countries and many of the arguments about reducing public enterprise also apply to the public sector in general.
Reasons for establishing public enterprise
Governments have established public enterprises for a variety of reasons. These can include: inadequate private supply of goods and services; rescuing private firms if their closure is against the public interest; improving competition;
reducing social costs such as environmental externalities; even to protect national sovereignty in some way. Hood notes that the Japanese tobacco and salt monopolies were established to pay for the war with Russia in 1905 and that mail services were set up as government monopolies to facilitate spying on correspondence (Hood, 1994, p. 37). Renault was nationalized by the French government after World War II because of wartime collaboration by its then owners. Some developing countries prefer having public enterprise to having foreign ownership of important services. Farazmand argues recognizable pub- lic enterprises existed as long ago as the Persian Empire, in the fourth and fifth centuries BC and these were established partly for national prestige purposes (1996, pp. 2–3). There are many other reasons; indeed, so many, that govern- ment ownership is the only point in common.
Rees (1984, p. 2) argues that there are four reasons for the existence of public enterprise:
● To ‘correct’ market failure.
● To alter the structure of pay-offs in an economy.
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● To facilitate centralized long-term economic planning.
● To change the nature of the economy, from capitalist to socialist.
The first point refers to services, which are desired, but will not be adequately provided by the market. Market failure can occur for reasons of natural monop- oly, restriction of competition in some other way, externalities or spill-over effects on others and where the goods produced are to some degree public goods (Chapter 4). To have these industries in public hands may be ‘a way of retaining the cost advantage of a sole seller while preventing the resource misal- location which would result from a profit-seeking monopoly’ (Rees, 1984, p. 3).
The second point – the structure of pay-offs – means altering the benefits received by particular individuals or groups. Beneficiaries could include the employees, consumers or government. One way of altering pay-offs is the extensive cross-subsidization prevalent in public enterprise pricing. Rural elec- tricity users may receive services at uneconomical rates, while other consumers are charged more than the cost to provide that service. If rural electricity serv- ices were provided privately, consumers would either pay more, or the com- pany might decide that providing the service was simply too expensive. Also, some critics argue that government ownership leads to ‘featherbedding’, pro- viding terms and conditions for employees above those which could be obtained elsewhere, including the employment of more staff than may be needed. In other words the pay-offs are being directed to the enterprise’s own employees.
The third point – centralized long-term planning – is a motivation used in some countries. Government ownership of electricity and rail in France enabled the provision of services ahead of demand as part of the planning process for the nation, especially in regard to the government’s attempts to decentralize the economy. Related to this is a general developmental role of public enterprise, in particular the public utility sector. In some sparsely settled countries like Australia and Canada, utilities were established in government hands from the beginning, due to the inability of private providers to make an economic return. This was not market failure because of natural monopoly problems, but for developmental ones: that is, markets were not capable of pro- viding the necessary infrastructure. No one other than the government had the resources to carry out the development of key services (Dwivedi, 1996). The choice was either to have the government provide services or for them not to be provided to consumers at all.
The fourth point – to change the economy from capitalist to socialist – has been a major factor in some countries. In the United Kingdom in the post-war period, railways, steel and coal were nationalized so that the commanding heights of the economy were in government hands. Public enterprise had been regarded as a form of ‘soft’ socialism, perhaps a transitionary stage on the way to full socialism. If important industries were in government hands as public enterprises, this would facilitate the transition to a socialist state.
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Public Enterprise 97 In sum, there has been no single consistent governmental aim for using pub- lic enterprise. There have been a set of diverse reasons beyond mere profit- making. Public enterprises have always had objectives other than to make money. Of course, a government has the power to involve itself in any part of society, which must include creating its own enterprises.
Kinds of public enterprise
A public enterprise is a particular kind of statutory authority: one that sells goods and services to the public on a large scale, with the financial returns accruing in the first instance to the authority itself. Most public enterprises are in the non-budget sector, and operate with substantial independence. Public enterprises provide many services including, in some countries, utilities such as telecommunications, electricity, gas supplies, water and sewerage; transport, such as rail, airlines, shipping services and urban public transport; financial services, notably banks and insurance companies; and agricultural marketing.
Some countries have government-owned oil companies, motor vehicle compa- nies, tobacco and alcohol companies. Indeed, it is hard to imagine a particular product or service that has not been government-owned in at least one country at one time. The only point in common of all these is their government owner- ship. As they differ widely from each other, and face quite different environ- ments, some kind of taxonomy needs to be developed.
Public utilities
Public utilities provide services – water, sewerage, electricity, gas, and telecommunications – considered essential for the economy as a whole. These are usually provided as services with connections to households from a net- work. This makes for two unusual features. First, the household connection means there is a real, or at least a tendency towards, ‘natural monopoly’. Once a network is established, it becomes continually cheaper to add extra con- sumers. Competition is constrained, as the cost of providing service to a new customer for a new entrant to the industry, faced with the cost of establishing a network, should be higher than the rate that could be charged by the incum- bent. For example, with wire-based technology, competition in the local tele- phone network or in electricity distribution would mean an extra set of cables being laid in each street and electricity poles on both sides of the road. Since the initial expense would be too great, a new entrant at this level is most unlikely and there is, therefore, a tendency to monopoly provision.
Secondly, the essential nature of public utilities means the services they sup- ply are politically sensitive, with great disruption to the private economy and households resulting if supplies are interrupted. Water and sewerage connec- tions are matters of public health as well as natural monopolies; modern life
would seem intolerable without electricity or gas. A telecommunications net- work is similarly important, especially for business. All utilities are important, however. If the service provided by utilities is inadequate in some way, or priced ‘unfairly’, it can quickly become a political issue regardless of owner- ship of the industry.
As a result of political sensitivity and the tendency to natural monopoly, many governments historically have favoured outright ownership of public util- ities. As will be seen later, various arguments exist against the concept of natural monopoly, and of governments owning utilities for this reason.
Privatization has occurred in areas of natural monopoly and this is likely to continue. However, for political reasons, no government could totally dissoci- ate itself from public utilities, although it could use instruments other than ownership. Even if utilities were sold to private enterprise, governments would be likely to maintain fairly tight control through regulation.
Land transport and postal service
Land transport encompasses the various public transport systems within and between cities and the postal service is still, almost everywhere, provided by government. At first glance these seem unlikely partners in taxonomy, but they do share some characteristics. Both are essential services like public utilities, but, unlike them, they face competition. This is usually competition from related industries, although direct competition can occur. In the United States, for example, the privately owned UPS and Federal Express compete with the US Post Office and have a greater share of the parcel market than does the pub- lic enterprise. The letter mail is an essential service, but, while ordinary letter delivery may have tendencies towards natural monopoly, it faces competition from direct mail, courier services, fax and electronic mail. The competition in public transport comes from private transport, such as freight competition from trucks, while public passenger trains and buses compete with private cars, air- lines and private buses. Public transport services could be considered as much an essential service as the postal service and governments do find it politically difficult to cut any part of the public transport system.
Both public transport and postal services have a propensity for poor finan- cial returns. This has led to a run-down in systems, as capital spending is delayed and unions fight to retain the working conditions of an earlier age. If prices are raised or services cut, governments face substantial political costs.
Even if fewer citizens use public transport, they still seem to want the service continued and if changes are not made, continuing losses impose greater pres- sure on already tight budgets. Public transport seems unlikely to be particularly profitable, so that while private buyers have been found in such countries as Japan and Australia, there are continuing problems. Rail privatization in the United Kingdom has been controversial and the model of a separate company, 98 Public Management and Administration
Railtrack, running the track and making arrangements with separate operating companies has been fraught with problems.
Enterprises in competitive environments
These are government-owned trading enterprises which compete directly with private companies and in the same market. This category includes banks, insur- ance companies, airlines, oil companies, to name but a few. Not surprisingly, this form of public enterprise is the one most examined in any discussion of how to scale down the public sector. The list of public enterprises in competi- tive environments has been considerably reduced by privatization. The ques- tion is, if they are profitable and operate no differently from competitors, why should they be government-owned? On the other hand, if they are profitable and well managed, why shouldn’t the government keep them and use the prof- its in some socially productive way? Governments have involved themselves with enterprises in competitive environments for many reasons: when a com- pany failed in the marketplace; to stimulate competition; to maintain control of a strategic industry or for other reasons discussed earlier. However, the 1980s and 1990s saw clear expression around the world that this strategy was no longer in favour.
Regulatory authorities
This group is certainly part of the public enterprise sector according to the def- inition used. Such bodies are government-owned and controlled, and finance their activities by the sale of commodities. They exist in some countries by use of the government’s legal powers, such as to compulsorily acquire commodi- ties, particularly rural commodities for further sale, or to require the purchase of insurance for motor vehicles. The use of compulsory acquisition or compul- sory purchase is what distinguishes this group of enterprises, as their main asset is the coercive power of government.
All the above categories show strong linkages between government owner- ship and government regulation. Regulation is an important characteristic of public enterprise. Public utilities may have a tendency to natural monopoly in most of their operations, but this was most often reinforced by a legislative monopoly as well. Part of the renewed political interest in public enterprise has been a re-assessment of the nature and effects of the regulatory environment.
The privatization debate
The fundamental questions about public enterprise are whether or not govern- ments should be involved in enterprise at all, and the circumstances in which Public Enterprise 99
government ownership should be retained or discontinued. After the election of the Thatcher government in the United Kingdom in 1979, there was an intense debate over the question of privatization, and the 1980s saw an extensive and continuing programme of sale of public enterprises. The debate did not stop there and the apparent success of the United Kingdom programme was fol- lowed by other countries that saw privatization as a way of concentrating on core activities and a handy means of raising revenue. Privatization of public enterprise has become a worldwide movement with, first, developed countries and, secondly, developing countries selling all kinds of enterprises. International agencies like the World Bank and the International Monetary Fund encouraged privatization as a part of any programme of assistance.
The word ‘privatization’ can mean many things. As the name suggests, it can mean returning publicly owned assets to the private sector, usually ‘where con- trol of an activity is passed from the public sector to the private sector by means of an issue of shares’ (Ohashi and Roth, 1980, p. xviii). This view is too nar- row. It makes more sense to see privatization as the reduction of government involvement in general: as a reduction in production, but also a reduction in provision, subsidies or regulation, or indeed any combination of the four instru- ments. Steel and Heald (1984, p. 13) argue that privatization can be carried out through: charging; contracting-out; denationalization and load-shedding; or liberalization. An even broader view is that of Jackson and Price (1994, p. 5) who argue that the menu of activities which make up a definition of privatiza- tion includes: the sale of public assets; deregulation; opening up state mono- polies to greater competition; contracting out; the private provision of public services; joint capital projects using public and private finance; and reducing subsidies or introducing user charges.
Most of the argument about public enterprise is about selling enterprises – reducing production by de-nationalization – but the other features are also cru- cial. There is often an interconnection between selling assets and reducing the regulatory environment. Liberalization, by means of reducing regulation, is a critical part of privatization, while contracting out and charging are occurring right across the public sector.
There are any number of reasons advanced for the privatization of public enterprise, ranging from budgetary considerations to management differences, accountability problems and notions of the ‘correct’ role of government. These reasons are examined below, although the problem of accountability is dealt with later.
The main arguments are: first, economic arguments; secondly, arguments about management and efficiency; and thirdly, ideological conceptions of what the role of government in society should be. These overlap to a great extent.
Advocates see privatization of some functions now within government as ben- efiting the economy as a whole. Opponents argue that the retention of public enterprise will provide economic benefits to the whole society, particularly to the disadvantaged.
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